U.S. financial markets are closed today for Memorial Day. (Can’t help but think of my Dad who climbed telephone poles to string wire during World War II. “While they shot at me,” he would say with a mixture of surprise and outrage. I’m sure you have someone(s) to remember today.)
Going into the weekend, the fear was that China would use the long U.S. market holiday to announce new measures of retaliation in the U.S.-China trade war.
So far, nothing concrete has materialized.
But the rhetorical war hasn’t taken a break.
From his state visit to Japan, President Donald Trump has said that the U.S. isn’t ready to make a trade deal with China. “I think they probably wish they made the deal that they had on the table before they tried to renegotiate it,” Trump said Monday at a press conference in Tokyo with Japanese Prime Minister Shinzo Abe. “They would like to make a deal. We’re not ready to make a deal.” Trump said American tariffs on Chinese goods “could go up very, very substantially, very easily.”
From their side, the Chinese denied that U.S. tariffs were hurting the Chinese economy. Higher tariffs will have a “very limited” impact, and would hurt the United States about as much, according to Guo Shuqing, head of China’s banking and insurance regulator. A commentary published by the official Xinhua News Agency accused the U.S. of “scapegoating” China for its trade imbalance. “The United States is attempting to squeeze an unequal trade deal out of China, using measures such as tariff hikes and targeting its tech companies.”
China’s financial regulators also warned currency traders against shorting the yuan. The offshore yuan has dropped about 2.6% in May and is on the verge of breaking through the important 7 yuan to the dollar exchange rate. China advised traders against shorting the yuan, after a recent slide took the currency to the brink of the critical 7 per dollar level. Guo Shuqing, head of China’s banking and insurance regulator, said in a speech that speculators “shorting the yuan will inevitably suffer from a huge loss.”
If the yuan “po qi”–or cracks seven to the dollar–it would negate much of the effect of U.S. tariffs, although it would need to weaken well past seven to the dollar to balance all the effects of higher U.S. tariffs. (The Chinese currency is down about 8% year over year.) It traded at near a six-month low of 6.919 to the dollar last week.
But while a weaker yuan would balance some of the effects of higher U.S. tariffs, it would also lead to renewed currency flight from China. (The country slapped on tough capital controls in 2016 to halt capital outflows then.) It would make imports more expensive in China adding to the sentiment among Chinese consumers that the weakening of the yuan had made them poorer. And it would exacerbate trade tensions with the United States (can it get worse?) because U.S. politicians would see the weakening of the yuan as the kind of currency manipulation that they rail about.
The next big event in the U.S.-China trade war will be the G20 meeting of world leaders in Osaka, Japan on June 28 and June 29. There’s been off-again, on-again talk that President Trump will meet with Chinese President Xi Jinping at the conference. Earlier, when everyone was more optimistic, the thought was that the two presidents would wrap up an agreement at that face-to-face meeting. Now that both sides are indicating that they’re in no hurry to conclude an agreement, it’s not even certain that the two leaders will talk. I’d expect that the approach of the meeting will increase volatility in the financial markets because of heightened uncertainty. Some of that volatility could well be to the upside if Trump and Xi make nice and issue positive statements–even if they contain no concrete news.
