Three reasons why China may be confident in going toe-to-toe with Trump.
- Beijing would have the high ground in any currency war. The evidence so far in the trade war is that it has inadvertently boosted foreign demand for Treasuries — the world’s biggest, most liquid market for risk-free assets, and with yield advantage compared to alternatives, such as Bunds and JGBs. Foreign ownership of Treasuries are at record highs. This in turn has buoyed the Dollar, which is near 2019 highs in the broad trade-weighted measure and up by between 2% and 5% against the Euro, Yen, Yuan, Canadian Dollar and Sterling on the year-to-date. The intervention option for Trump would likely be ineffective, as it would go against the grain of the Dollar’s natural safe haven carry advantage and the still relatively strong growth outlook of the US economy. Fed rate cuts may not be too effective in weakening the Dollar, either, in times of investor risk aversion, while the Fed would have serious global competition in any who-can-ease-the-most comparison. While the US has labelled China a currency manipulator, Beijing can not unreasonably maintain that losses have been market driven given its slowing economy (now growing at its slowest pace in three decades).
- The impact of China’s retaliatory tariffs on US goods will start to bite, potentially having political consequences for Trump. US warehouses are now at near full capacity from businesses that stored goods to beat tariffs, while the new tariffs on Chinese goods, scheduled to start on September 1, orient on consumer goods (existing tariffs having been centred on industrial goods).
- Beijing will be viewing Trump’s position as being compromised by the 2020 presidential election, perhaps betting that Trump will at some point step down (while declaring victory, of course) to give Wall Street and the economy a pre-election boost.
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