Ambrose Evans-Pritchard: China playing with fire in battle with Trump
By Ambrose Evans-Pritchard
The Telegraph, London
via the Sydney Morning Herald
Friday, August 3, 2018
China's currency slide is moving from benign neglect to something more deliberate. Whether or not you deem it currency warfare, it is playing with political and financial fire.
The yuan has weakened by 9 per cent against the US dollar since mid-April. This is the steepest fall for the micro-managed exchange rate for a quarter century.
This week's blowoff to Y6.84 has been a move too far for Washington. The retort is a cannon shot across the bows. The Trump administration is now threatening to more than double punitive tariffs on a further $US200 billion ($270 billion) of Chinese goods, lifting the rate from 10 percent to 25 percent. It smacks of an embargo.
The weak yuan is no longer just a strong US dollar story. The currency has been tumbling against the other big world currencies, the euro and the yen.
China's leaders have breached their pledge to hold the country's currency basket "generally stable". The People's Bank (PBOC) commands $US3.1 trillion of foreign exchange reserves. And it has chosen not to use this firepower to stabilise the yuan.
What we do not yet know is why Beijing has taken this fateful step. Is it in order to undercut Donald Trump's earlier round of trade tariffs, triggered in early July on the first $US34 billion of Chinese goods? Or because the authorities are losing control, caught between a rock and a hard place as defaults rise and the economy flirts with a hard landing?
Perhaps it is both. Either spells trouble.
"It is a strange mix of a trade war and currency war, and is on the verge of becoming a very unstable situation. It is the biggest topic for global markets right now," said Jens Nordvig, from Exante, in New York. ...
China is in a bind. Its 35-year phase of catch-up growth is exhausted. It is no longer a particularly dynamic economy. The "middle income trap" looms and it is grappling with a post-bubble hangover. Now it faces Trump.
Du Wanhua, a grand justice at the People's Supreme Court, wrote an extraordinary piece for China's judicial newspaper last week saying the country must prepare for mass insolvency.
"It's hard to predict how this trade war will develop and to what extent. But one thing is sure: if the US imposes tariffs on Chinese imports following an order of $US60 billion, $US200 billion, or even $US500 billion, many Chinese companies will go bankrupt," he said.
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