Bloomberg reports Hawkish Fed, Weak Yuan Signal More Trouble Ahead for Emerging Markets.
If you thought the first half of the year was rocky for emerging market economies, brace for turbulence ahead with dollar strength and a weaker Chinese currency set to keep investors on edge.
The yuan has slid six percent against the dollar since June and analysts say if further losses materialize, accompanied by rising Treasury yields and greenback, that will be a volatile mix. Investors will be tempted to pull capital out of emerging economies across the board; policy makers around the region will be forced to raise rates in response. Already, India’s central bank governor Urjit Patel has warned of the risk of a brewing currency war.
In a note dated Aug. 1, Deutsche Bank AG said it expects the yuan to trade at 6.95 and 7.40 against the dollar by the end of 2018 and 2019 respectively, compared with a previous forecast of 6.80 and 7.20. It was around 6.83 on Thursday afternoon in Hong Kong.
Currency Manipulation Setup
That does not address the question asked, but it explains the setup nicely. And if the Yuan weakens substantially, Trump would press “currency manipulation” charges.
One way China could avoid those charges is if it floated the yuan. I suspect it would collapse, but we are all guessing.
What Would it Take to Counteract Tariffs?
That question came up in a series of Tweets today.
The 5% fall in trade-weighted RMB may be enough to offset the 25% tariff on $50 bn Chinese imports and the 10% tariff on an additional $200 bn. But if that additional tariff is 25%, the RMB will have to weaken a lot further. That escalation would require $/CNY at 7.20 or above. pic.twitter.com/feRvCCRI80
— Robin Brooks (@robin_j_brooks) August 2, 2018
I asked: Robin, what is the math here. How do you figure? 7.20 is only another 4-5% away? Thanks Mish.
Chart From Robin
https://twitter.com/matchpenalty1/status/1025101296301424641
I understand what Robin is saying but I fail to understand the math. Regardless, lets assume it is true.
Look at the Deutsche Bank prediction of 7.40. That was for the end of 2019 but once again, everyone is guessing.
With that, let’s review the three ways I mentioned that China could strike back.
Three Ways China Can Retaliate
- Let the Yuan slide 25% negating the tariffs.
- Further limit US firms ability to do deals in China
- Halt Rare Earth Exports. Rare earths are 17 minerals used to make cell phones, hybrid cars, weapons, flat-screen TVs, magnets, mercury-vapor lights, and camera lenses.
Option one has capital flight risks for China of course. But US tariffs pose numerous risks to the US and global economy as well.
Option two is a given.
Option three is rarely discussed, but China has at least 80% of the global market.
For further discussion, especially of the Rare Earth angle, please see US Trade Policy: Not Only are We Stupid, We are Hypocrites
Winning Ain’t Easy
Winning ain’t easy when everybody loses.
Mike “Mish” Shedlock
The problem with so much wealth staying at the top is there is only so much they will spend in times of decline. The world will be unrecognizable in a few years. A catharsis is necessary and coming.
As long as the dollar is the defacto reserve currency of the world, China and others will be an export driven economy. I expect tears for all in 2019 when the economy catches up with reality.
Would a sinking yuan clear out some of the Chinese real estate investors on the US west coast? Many local politicians complain about the need for more affordable housing. You can’t preach the virtues of Globalization and cry about housing being too expensive. I’m not blaming the Chinese solely for the run up on housing, but it’s adding to the other investor segments like Wall Street Hedge funds and AirBnB properties that have removed many SFR units for primary occupancy use.
Mish – GDPnow hit 5%. What say ye?
They could always start practising fair trade.
“Fair” is open to interpretation. “Free” can’t have it easy unless there are some defined ideas of what is acceptable safety in food etc.
Fair an Free is it, if we can all agree what that means. The definitions will be twisted to unfair advantage to some, probably the EU.
The jist of the matter. Even the rise of Trump is related to this.
There may be nothing we can do outside of brace ourselves and stop fighting the last war that is already lost. The retreat of globalisation in full swing.
“Those curious about the current trade war and ongoing currency wars…again, these are all about a fight for what is now a shrinking global pie of consumers among those with the ability to consume.”
The Chinese can NOT devalue Yuan 25% without internal problems because many Chinese are already having problems surviving with the wages being paid and with China importing large amounts of food.
Partially related, well worth a read. When population rolls back and gets older there’s a scramble for trade. Link below with graphs. I reckon this is at the heart of trade sentiment.
“Those curious what the financial bubbles of ’01, ’08, and present are about…it’s the interest rate reaction and debt inducement tied to changing demographics and population growth. Those curious about the current trade war and ongoing currency wars…again, these are all about a fight for what is now a shrinking global pie of consumers among those with the ability to consume. The benefits of globalization have run their course and a rear guard action is now underway to maintain access to the shrinking first and second tier economies of the world. This changing landscape must be part of the strategy for those seeking to maintain hard earned savings and wealth in a totally different environment than has previously existed in modern history.”
Some advisors say that the Chinese oligarchs big fear is capital outflow — and a declining Yuan would be likely to cause such an outflow.
For decades, China has had a privileged position in trade. (You could call it winning a one-sided trade war, if you wanted). They are not going to give up that privileged position and move towards genuine free trade voluntarily. All this ground-thumping is simply to move the Chinese leadership to the point at which they decide it is in their best interests to start negotiating. The prospect of a declining Yuan may be an important element in getting the Chinese oligarchs to the negotiating table. This is a long game.
There is NO free movement of Capital with China.
China has currency controls to stop funds leaving and Chinese have tried to get around these through Crypto Currencies (most of the Crypto boom is evasion of Capital controls by China) and Chinese even went on trips to Macau to “gamble” with their intention to actually move funds out of Yuan and out of China and China was forced to start controlling this phenomenon in Macau.
Real estate investment abroad by Chinese was another way to get money out of China but apparently permits for these have been tightened which led to drop in foreign buyers for US real estate.
All very good points, ML1. Still, we need to remember that Chinese people are very smart. Many of the individuals with capital to protect are Communist Party members — with connections. It is a good guess that Chinese people will find creative ways to evade government controls on capital flight, at least to some appreciable extent. Will the Chinese oligarchs want to take that risk?
At some point, those oligarchs are likely to decide it is worth trying to negotiate.
Bet against it. A million to Yuan.