CHINAMacroReporter

U.S.-China trade dispute: Will China Weaponize the RMB and U.S. Treasury bonds?

U.S.-China trade war: collateral damageConsider the soy bean. 'China is threatened retaliatory tariffs on U.S. soybeans. The U.S. is one of the largest producers of soybeans. If China's not going to buy them, we're going to have an excess capacity.'' So, last week, we saw a soybean selloff.''But there was a complete dislocation in whole soybean supply chains. Downstream products, like soybean oil, didn't move at all in the same way.'
by

Bob Savage | Track.com

|

CHINADebate

April 10, 2018
U.S.-China trade dispute: Will China Weaponize the RMB and U.S. Treasury bonds?

1. Will China Weaponize the RMB and U.S. Treasury bonds?

Bob Savage of TRACK says: 'In its talks about tariffs with the U.S., China appears to be discussing - in addition to, of course, to preventing other U.S. goods from coming in - two retaliatory measures to persuade the U.S., "You don't want us to do this,"':

  1. 'Devaluing the RMB'
  2. 'Selling U.S. Treasuries.'

1. Devalue the RMB. Devaluation is 'one quick way of making up for how tariffs hurt you.'

  • 'But, that currency movement could be very ugly if the Chinese wanted it to be.'
  • 'If China destabilized its currency, this would wreak havoc on the order of inflation and cause even more market volatility.
  • 'In the end, 'the aims of the U.S. tariffs would backfire.'

But, for China it would also create, 'plenty of new problems, so China would not to want to do that.' Devaluation would:

  • 'Promote the idea that there's an outflow of capital.'
  • Panic markets. 'Destabilizing the RMB could panic some of the money that has been found a home for the rich Chinese in their stock market, or in their property market, or even in the nascent bonds market.'
  • Cause a round of devaluations. 'If China's devaluing its currency, other countries are going to have to devalue their currency.'
  • And, 'destabilizing the currency reverses a lot of the goodwill that Xi is trying to promote with the rest of the world.'

2. Selling U.S. Treasuries. 'As we know, China is one of the largest holders of the U.S. Treasuries [see the chart, above].

  • 'And, in China, there has been open discussion, even before the proposed tariffs, as to, "Why are they investing in those Treasuries?"'
  • Some argue, 'Treasuries are not really doing a lot for China other than being a placeholder for U.S. dollars.'
  • 'One Chinese government adviser this week even talked about selling Treasuries and investing more in 'One Belt One Road' or in other ways that help the rest of the world.'

Higher U.S. interest rates. 'If China sold even a tenth of its bonds, interest rates on the benchmark U.S. Treasury 10-year bond could inch beyond the 3% level.'

  • With the annual U.S. budget deficit about to top $1 trillion and the Fed pulling back, this would create a bearish bond market, pushing U.S. borrowing costs higher.

But, as rates sharply increased, the value of China's remaining Treasuries would, in turn, tank, and China would lose billions.

2. Markets whipsawed...consider the soybean 

Image

Both China and the U.S. are clear about they want from their respective trade agendas. Bob Savage of TRACK says:

  • For China, 'more U.S. exports of intellectual property wrapped around technology.'
  • For the U.S., 'a much smaller trade deficit with China, spurred potentially by selling them more cars, maybe a little bit more commodities, and a lot more junk, like U.S. movies or other intellectual property. And, we would love to have Fidelity, or BlackRock, and Goldman have offices all over China.'

'Those things are going to take a lot of time.'

  • 'In the interim the markets are moving up and down on every release about whether the trade discussion is going well or not.'

Consider the soy bean. 'China is threatened retaliatory tariffs on U.S. soybeans. The U.S. is one of the largest producers of soybeans. If China's not going to buy them, we're going to have an excess capacity.'

  • 'So, last week, we saw a soybean selloff.'

'But there was a complete dislocation in whole soybean supply chains. Downstream products, like soybean oil, didn't move at all in the same way.'

  • Why? 'Because the talks are going on and off so quickly. One day we're talking to each other, and the next day we're threatening each other.'
  • 'So the truth is, you have an order for soybean oil, it doesn't matter:  you have to deliver it, and you can't short that stuff.'
  • 'The fact is, to fill the orders, you're going to need soybeans to make soybean oil, so all you're doing is creating windfall opportunities for these processors to take some of these commodities and play off of them.'
  • 'Eventually, the net result is going to be inflation.'

'This highlights the problems with a market that's speculating on the success and failure of the bravado of two big countries talking loudly to each other about what they want in their trade agendas.'

3. U.S.-China trade war: collateral damage

Bob Savage of TRACK: 'My favorite saying relating to the trade dispute is an African proverb, "When elephants fight, it's the grass that suffers."'

  • 'When powerful nations are conflicted, the weak ones suffer the most, so it goes for the market reactions to the US and China rumpus over trade.'
  • 'The countries that are going to be hurt most by a prolonged U.S.-China discussion about trade, leading perhaps to even more minor skirmishes over tariffs and tit-for-tat actions are emerging Asia and many of the allies of the United States.'

'So, the rest of the world is looking less sure and less happy over the fight. There are unintended consequences to this U.S.-China squabble because trade reflects the integration of global businesses into a complex supply chain.'

'German carmakers are an example of losing out.'

'Germany exports cars to China, but most of them are German-branded cars made in the United States.''So, Germany would be hurt almost immediately if China slaps tariffs on U.S. autos.'

Image

'The two biggest losers are Canada and Mexico thanks to NAFTA.'

More losers: 'Korea and Japan are deeply integrated into the manufacturing processes in China of high-end consumer products like smartphones.'

  • 'They export, for example, integrated circuits that go into products like smartphones.'
  • 'China then assembles the imported parts into finished products.'
  • 'And, these products are shipped to the U.S. as 'Made in China.' 

'This is the outcome of bilateral trade disputes in globalized world economy.'

  • 'We're far more developed than the mercantile world of the 15th and 16th centuries.
  • 'And that's why economists are up in arms - we're well beyond this.'

4. Beyond trade

Image
‍'Those who cannot remember the past are condemned to repeat it.' George Santayana.  

'Economists have been arguing against trade wars since the 1930s.

  • 'The fear of a further rise in protectionism is a clear downside risk to global growth and an upside risk for inflation.'
  • 'We may be forcing the Federal Open Market Committee (FOMC) to respond to U.S. loose fiscal policy and tighter labor markets with rate hikes that also reflect a splintering of the global trade rules set after World War II.'

'This rumpus isn’t a child’s game even though it appears to have a tit-for-tat quality to it.'

  • 'Beyond trade fears remain real economic doubts as the push for growth to drive up inflation hasn’t been convincing in places where demographics, technology and excess capacity hold (Japan, Europe, and some Asian Emerging Markets like Korea).

'The other geopolitical stories have taken a backseat to the headlines but perhaps will show up in markets again with...

  • 'Hungary re-electing nationalist Orban as PM – highlighting the ongoing splintering of EU politics.'
  • 'Syria continuing with gas attacks – highlighting the inability of the world to control war crimes or bring peace with a corrupt leader.'
  • 'Hamas continuing with protests in Gaza.'
  • 'Germany suffering another terror act as a van plows into a crowd in Munster..'

'Perhaps the most important story from last week and for the week ahead is in the fear for markets – it’s reflected in US stocks, not in bonds or foreign exchange (FX).'

  • 'The lack of FX reaction to the ongoing political noise is notable but understandable in the context of 2016-2017 when central bankers successfully counteracted political events like Brexit or even the election of Trump.'
  • 'Whether that continues maybe the key to understanding risk events for the rest of April and for 2Q.'

'It requires a great imagination to hope that this all ends well. I'm not sure it will. But, until then there are two things that we're going to have':

  1. 'Increased volatility in currencies, especially in emerging markets' and 
  2. 'Increased nervousness over interest rates.' 

5. Sort of surprising U.S. & China trade numbers

Image
‍Source: Reuters

Bob Savage of TRACK: 'The trade war theme is still far more in the front of traders and investors fears than some larger conflagration in Syria.' 

'U.S. total trade deficit up $57.6bn – worse than the $56.5bn expected.'

  • 'But, China's trade surplus with the US fell to $15.43 billion, below the $20.96 billion level of February.

'The China trade data today was the big release with exports lower and imports holding.'

  • 'China March trade flips to deficit of $4.98bn after surplus of $33.75bn – worse than +$27.2bn expected – first deficit in 13-months.'
  • 'Imports up 14.4% year-on-year;  exports fell 2.7% over the same period.'
  • 'Most of this can be linked to the noise of the Chinese New Year.
  • 'But not all. 'China is in the midst of its own transformation from investment led growth to domestic consumer focus.  This isn't about trade tariffs but the needs of the Chinese people.'  

More

CHINAMacroReporter

February 14, 2021
How to Keep U.S.-Chinese Confrontation From Ending in Calamity
'The two countries need to consider something akin to the procedures and mechanisms that the United States and the Soviet Union put in place to govern their relations after the Cuban missile crisis—but in this case, without first going through the near-death experience of a barely avoided war.'
keep reading
February 14, 2021
The United States, China, and Taiwan: A Strategy to Prevent War
‘We believe that a crisis is building over Taiwan and that it is becoming the most dangerous flashpoint in the world for a possible war that involved the United States of America, China, and probably other major powers.'
keep reading
February 13, 2021
Why China Will Go Green - Really
‘To Communist Party leaders, greenery increasingly aligns with their economic and political interests. China, a populous country that is cruelly lacking in clean water and arable farmland, and which hates having to rely so heavily on imported energy, has a selfish interest in embracing what President Xi Jinping calls “ecological civilisation”.’
keep reading
April 15, 2021
'TSMC faces pressure to choose a side in US-China tech war'
‘Taiwan Semiconductor Manufacturing Company (TSMC) has maintained its historic position of neutrality, reflected in the company’s strategy of “being everyone’s foundry”.’
keep reading
April 14, 2021
The Belt & Road in the Post-Pandemic World
In this issue of China Macro Commentary, I have focused just on the ‘Digital Silk Road’ and how it supports the business expansion of Chinese tech companies, and on BRI ‘connectivity’ projects: ports (China is involved in 93 around the world) and on the growing China-Europe freight trains traffic (This wasn't covered sufficiently in the Report, so I included a recent article from the Wall Street Journal), plus on the U.S.'s failure to meet the BRI challenge.
keep reading
April 13, 2021
'2021 Annual Threat Assessment of the U.S. Intelligence Community'
‘China increasingly is a near-peer competitor, challenging the United States in multiple arenas—especially economically, militarily, and technologically—and is pushing to change global norms.’
keep reading
April 13, 2021
In Battle With U.S. for Global Sway, China Showers Money on Europe’s Neglected Areas
‘The number of freight trains running between China and Europe topped 12,400 last year, 50% higher than in 2019 and seven times that of 2016, according to Chinese authorities.’
keep reading
April 11, 2021
'Why manufacturing matters to economic superpowers'
‘Whether such reshoring matters for national economies depends very much on the industry.’
keep reading
April 11, 2021
China in Jamie Dimon's Letter to Shareholders
‘China does not have a straight road to becoming the dominant economic power’.
keep reading
April 11, 2021
'Alibaba’s rivals on alert after China’s regulators hand out record fine'
“Everyone with a clear mind won't self-regulate, you just pretend that you do. Who will pay for the loss if you lost your competitive advantage because you self-regulated and others didn't?”
keep reading
April 10, 2021
Alibaba: 'Promote the healthy and sustainable development of the platform economy'
‘From the perspective of the long-term and healthy development of the platform economy, regulation by law and support for development are not contradictory, but are complementary and mutually reinforcing.'
keep reading
April 9, 2021
'The Best Explanation of Biden’s Economic Thinking I’ve Heard'
‘When President Biden’s thinking about the infrastructure investments necessary, a lot of it is in contraposition to what he is seeing China doing in terms of strategic investments.’
keep reading
April 8, 2021
Liu Ge: Competing with China a farfetched guise for US’ infrastructure plan
‘Historically speaking, it seems the only way for the US government to make costly public investments was to create an adversary that is presumed to threaten its security.’
keep reading
April 8, 2021
'Antony Blinken interview: The secretary of state offers a window into Biden's foreign policy decisions'
‘ “Our goal is not to contain China, hold China back, keep it down,” Blinken underlined.’
keep reading
April 8, 2021
'US adds Chinese supercomputing companies to export blacklist'
‘The Biden administration took its first trade action against China on Thursday, adding seven Chinese supercomputing developers to an export blacklist for assisting Chinese military efforts in a move that will likely further escalate frosty tensions between the world's two largest economies.’
keep reading
April 7, 2021
'Remarks by President Biden on the American Jobs Plan'
‘Look, do we think the rest of world is waiting around? Take a look. Do you think China is waiting around to invest in this digital infrastructure or in research and development?’
keep reading
April 7, 2021
China: 'Power Trader'
‘The theory of power trade better explains China’s economic and trade policies than does the theory of free trade or protectionism,’
keep reading
April 6, 2021
'Train Wreck: Ultimately companies have to choose.’
MUST READ: Bill Reinsch succinctly but brilliantly summarizes the situations in China and the U.S. and between the two.
keep reading
April 6, 2021
'Buy American!': Pushing U.S. Companies to Onshore Supply Chains
The debate about how to deal with China commercially ‘has moved in two directions: running faster—improving our innovation capabilities in critical technologies to better compete with China—and slowing China down by restricting its access to U.S. technology.’
keep reading
April 4, 2021
'Why Defending Taiwan is in the U.S. National Interest'
‘As long as Washington assesses that American security is best served by defending forward—an approach that has served the United States well over the past 70 years—Taiwan’s de facto independence will remain a key US interest and driver of American policy in Asia.’
keep reading
April 4, 2021
'Why China Is Going All "Wolf Warrior," All the Time'
‘All this is to say that, living in Beijing as I do, I think the current approach is predictable and consistent with everything else we are seeing in China in the New Era.’
keep reading
April 3, 2021
'With Swarms of Ships, Beijing Tightens Its Grip on South China Sea'
‘Not long ago, China asserted its claims on the South China Sea by building and fortifying artificial islands in waters also claimed by Vietnam, the Philippines and Malaysia.’
keep reading
April 2, 2021
'Genesis Celebrates Launch In China With Dazzling, World Record-breaking Drone Show Over Shanghai's Iconic Skyline'
'The spectacular visuals were coordinated to present the world of Genesis, delivering an audacious storytelling concept while also breaking the Guinness World Records for "The Most Unmanned Aerial Vehicles (UAVs) airborne simultaneously".’
keep reading
April 2, 2021
Mo' Infrastructure, Mo' Problems Copy
‘China’s reliance on building roads, railways and airports to support growth has caused a spike in debt, with some of that money funneled into unnecessary infrastructure and uneconomic boondoggle developments.’
keep reading
April 2, 2021
How Does the U.S. Compare to China?
Two reports from Bloomberg – ‘Biden Starts Infrastructure Bet With U.S. Far Behind China’ and ‘Biden’s Biggest-Ever Investment Plan for U.S. Still Trails China’ – highlight a few of the differences.
keep reading
April 2, 2021
USTR | '2021 National Trade Estimate Report on FOREIGN TRADE BARRIERS'
‘Made in China 2025 seeks to build up Chinese companies in the ten targeted, strategic sectors at the expense of, and to the detriment of, foreign industries and their technologies through a multi-step process over ten years.’
keep reading
April 2, 2021
‘2021 Report Card for America’s Infrastructure’
‘The 2021 Report Card for America’s Infrastructure reveals we’ve made some incremental progress toward restoring our nation’s infrastructure.’ ‘For the first time in 20 years, our infrastructure is out of the D range. America's Infrastructure Scores a C-.’
keep reading
April 2, 2021
'US to make it easier for diplomats to meet Taiwanese officials'
'Plan to loosen restrictions on contacts with Taipei threatens to provoke China.'
keep reading
April 2, 2021
Biden Starts Infrastructure Bet With U.S. Far Behind China
Even though he didn’t rely solely on the China challenge to justify his new American Jobs Plan; devoted to infrastructure and more, President Biden certainly he had China in his sights. Because as Jonathan Hillman, a senior fellow at the Center for Strategic and International Studies, wrote“The United States is entering what could be a decades-long competition in which economic and technological power will matter just as much, if not more, than military might.” “Starting this race with decaying infrastructure is like lining up for a marathon with a broken ankle.”
keep reading
April 2, 2021
President Biden Lays Out His ‘American Jobs’ Plan
‘It has become a cliché in U.S. policy circles that the best China policy is to invest in core U.S. capabilities: education, infrastructure, and research and development,’ writes Evan Medeiros of Georgetown University in ‘How to Craft a Durable China Strategy,’ in Foreign Affairs.
keep reading
April 2, 2021
'China’s Dangerous Double Game in North Korea'
‘Beijing’s North Korea policy is primarily motivated by a desire to counter U.S. power in the Asia-Pacific region and increase Chinese influence on the Korean Peninsula.
keep reading
April 2, 2021
'Japan’s Suga to Be the First Foreign Leader to Meet With Biden'
‘Japan walks a narrow line as it seeks to maintain close ties with its only military ally, the U.S., while avoiding damage to economic ties with its biggest trade partner, China.
keep reading
April 1, 2021
'Convicted in Hong Kong'
‘Everyone in the former British colony understands the message being sent from Hong Kong’s new masters in Beijing:’
keep reading
April 1, 2021
'U.S. dollar at risk as China races ahead on digital yuan'
‘So why should America care about any of this?’
keep reading
April 1, 2021
PRC Foreign Ministry Response to the USTR's 'National Trade Estimate Report'
‘The accusations and slanders made by the US against China's industrial policies are groundless.’
keep reading
March 31, 2021
'Consumer boycotts warn of trouble ahead for Western firms in China'
‘Western executives in China cannot shake an unsettling fear that this time is different.’‘Their lucrative Chinese operations are at rising risk of tumbling into the political chasm that has opened between the West and China.’
keep reading
March 31, 2021
'How the Pandemic is Changing the Belt & Road Initiative'
‘The building of roads, railways, ports, and power plants is giving way to a BRI centered on technology—primarily telecommunications, connectivity, health care, and financial services.’
keep reading

Heading

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.