|Morning Briefing Tuesday, August 6, 2019|
To limit weakness in the yuan, the People’s Bank of China pegged the daily currency fixing at stronger-than-expected levels and announced the planned sale of yuan-denominated bonds in Hong Kong. The moves came hours after the U.S. labeled the country a currency manipulator.
China’s decision to add currency to the weapons it can use in the ongoing trade war with the U.S. is being seen as the strongest response from Beijing. Investors are concerned that the latest escalation means a trade deal cannot be reached and risks of a global recession are now higher than they were. Frank Lavin, U.S. ambassador to Singapore from 2001 to 2005, said there’s been “a deterioration in trust and communication” between Washington and Beijing.
In retaliation to President Donald Trump’s new 10% tariffs on Chinese exports to the U.S., China reacted on expected lines and decided not to purchase agricultural productsfrom the U.S. China also isn’t ruling out new tariffs against U.S. agricultural products purchased after Aug. 3.
The Trump administration’s decision to formally label China a currency manipulator escalated the rapidly deteriorating relationship between the world’s two largest economies. Chinese media downplayed the move and stuck to the government’s lineon yuan weakening and that the decision was normal and stressed the economic benefit of some flexibility in the currency.
The currency manipulator charge provides few new tools to the Trump administrationthat have not already been deployed in two years of trade negotiation with Beijing. If the bilateral trade negotiations concludes without an agreement then the president can impose various penalties such as banning Overseas Private Investment Corp financing in that country or excluding it from U.S. government procurement contracts.
Stephen Roach, a senior fellow at Yale University, termed the decision to label China a currency manipulator an “empty threat.” He said, “But if the U.S. does escalate further on the tariff front, or try other sanctions, then as we saw overnight, there will once again be intensification of pressure coming back from the Chinese.” Roach added, “They [China] have plenty of options to consider as the recent move in the bilateral exchange rate demonstrates.”
Chris Krueger of Cowen called China’s decision to devalue its currency as “massive,” adding that “on a scale of 1-10, it’s an 11.” “While there were measures that could have been chosen with larger direct effects on supply chains, the announcements from Beijing represent a direct shot at the White House and seem designed for maximum political impact,” Krueger said.
Hedge fund manager and Hayman Capital Management founder Kyle Bass said thatChina’s currency would plunge in the absence of state support. “If they were to ever free-float their currency, I think it would drop 30% or 40%,” Bass said of China and its currency. Here is a look at why global equity-market tumbled after the yuan breached a level long described by market watchers as a “line in the sand.”