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Aug 5, 2019
Trade War: China Hits Back at Trump by Weakening Yuan, Halting Crop Imports
Malcolm Scott, Kevin Hamlin and Tian Chen
7-8 minutes
China responded to Donald Trump’s tariff threat with another escalation of the trade war on Monday, letting the yuan tumble to the weakest level in more than a decade and asking state-owned companies to suspend imports of U.S. agricultural products.
The moves are likely to further antagonize Trump, who has criticized Beijing for managing its currency unfairly and failing to keep promises to buy more U.S. crops.
Stocks and emerging-market currencies sank on concern a
prolonged conflict between the superpowers will weigh on global economic
growth, while haven assets including the Japanese yen, U.S. Treasuries
and gold climbed. Investors increased bets on Federal Reserve interest-rate cuts.
"It’s among the worst-case scenarios," said Michael Every,
head of Asia financial markets research at Rabobank in Hong Kong. "First
markets sell off, then Trump wakes up and this all gets far, far
worse."
The White House didn’t immediately respond to a request for comment.
Trump last week proposed adding 10% tariffs on another $300
billion in Chinese imports from Sept. 1, abruptly ramping up the trade
war between the world’s largest economies shortly after the two sides
had restarted talks. Chinese bureaucrats were stunned by Trump’s
announcement, according to officials who’ve been involved in the
negotiations.
The threat of more tariffs came just as Chinese
President Xi Jinping and other senior members of the Communist Party
gathered for a secretive summer getaway in Beidaihe, a seaside town
about a three-hour drive from Beijing. Xi had already faced pressure for
weeks to take a harder stance on trade -- particularly after the U.S.
blacklisted telecom equipment giant Huawei Technologies Co.
Editorials in state-run newspapers
suggested Xi will reject any deal that either retains punitive tariffs
or forces China to make concessions on issues like state-run enterprises
that could weaken the party’s grip on power.
The harder line underlines a growing feeling in Beijing that
Trump can’t be trusted to cut a deal, and that China would be better off
waiting to see if a Democratic presidential candidate -- many of whom
have criticized the use of tariffs -- takes office. The halt in
agricultural purchases could hurt Trump in politically sensitive states
ahead of the 2020 election.
The MSCI Asia Pacific Index headed for
its biggest decline since March on Monday, with shares slumping more
than 2% in markets from Tokyo to Hong Kong and Seoul. Equities in
Shanghai saw a more modest drop amid speculation that state-linked funds
may act to prop up the market, while U.S. equity-index futures dropped
1.1%.
The yuan tumbled 1.3% to 7.0324 a dollar at 2:42 p.m. Hong
Kong time, after the People’s Bank of China set its daily reference rate
at a weaker level than 6.9 for the first time since December. The
offshore yuan sank as much as 1.9% to a record low.
"Breaking
seven is due to a mix of factors: an escalation of trade war, the
softening of China’s economy and a willingness for the PBOC to tolerate
higher volatility for the yuan," said Larry Hu, head of China economics
at Macquarie Securities Ltd. in Hong Kong. "The PBOC has entered
uncharted waters, so it has to manage expectations carefully."
The central bank attributed
the yuan move to protectionism and expectations of additional tariffs
on Chinese goods, while saying it can still maintain a steady currency.
By linking today’s devaluation with the renewed tariff
threat, the PBOC "has effectively weaponized the exchange rate," said
Julian Evans-Pritchard at Capital Economics in Singapore. "The fact that
they have now stopped defending 7 against the dollar suggests that they
have all but abandoned hopes for a trade deal."
What Bloomberg’s Economists Say...
"China
appears to be posturing for worse to come in the trade war. Letting the
yuan weaken past 7 against the dollar suggests it’s looking to buffer
the economy from a more severe trade shock." -- David Qu, Qian Wan and Ye Xie
Allowing
the yuan to weaken is not without risk for China. A mid-2015
devaluation spurred capital outflows and destabilized global markets,
though tighter capital controls this time around should help prevent
another exodus.
A cheaper currency also risks triggering yet more
reprisals from the U.S. president, who has frequently warned that
tariffs could go much higher. At a rally in Cincinnati last week he
boasted of "taxing the hell out of China" until there’s a deal.
Tariff Man Returns
President Donald Trump announced tariffs on additional $300 billion in Chinese imports
Source: Bloomberg
The biggest damage from the trade war is the hit to
business activity and confidence that comes from increased uncertainty,
rather than the tariffs themselves, according to Wang Tao, China
economist at UBS Group AG. For that reason, the weaker yuan may do
little to offset the blow, she said.
China’s crop imports from the U.S. are another weapon at
Beijing’s disposal. The country’s state-run agricultural firms have now
stopped buying American farm goods, and are waiting to see how trade
talks progress, people familiar with the situation said, declining to be
identified as they’re not authorized to speak to the media. Corn and
soybean futures fell on the news.
When he announced the trade
truce last month, Trump spoke at length about how China would be buying
more farm goods from “great patriots” in the Midwest -- even though no
details of any purchases have been announced by either side. Officials
in Beijing privately said afterward that China made no promises to buy
more agriculture goods before a final deal is struck.
China’s commerce ministry didn’t respond to a fax seeking comment.
"China
is giving up on its softer diplomatic strategy and is no longer willing
to be Trump’s punching bag," said Chua Hak Bin, an economist at Maybank
Kim Eng Research Pte. "Trump’s tariffs threats are backfiring and
triggering a full-scale trade war." — With assistance by Steven Yang, Isis Almeida, Shuping Niu, Yinan Zhao, Miao Han, and Daniel Ten Kate Source: Bloomberg
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