Posted on 08/09/2019 7:33:14 PM PDT by SeekAndFind
President Donald Trump announced last week that the United States will impose 10 percent tariffs on $300 billion of Chinese imports beginning Sept. 1. At the beginning of this week, China retaliated by ordering state enterprises not to purchase U.S. agricultural goods and letting the Chinese yuan fall below the psychologically important rate of 7 yuan against $1.
The world hasn’t seen the yuan devalued to this level since 2008. China denies that the devaluation of its currency was a deliberate retaliatory step against Trump’s tariff threat. But no one believes it.
Stock markets worldwide experienced significant losses in reaction to China’s retaliation. The Dow Jones Industrial Average dropped more than 900 points during Monday’s trading hours. According to MarketWatch.com, the U.S. major stock markets’ indices ended the day with “the S&P 500 off 6% from its record close set on July 26, while the Nasdaq is off 7.3% from its all-time closing high set the same day and the Dow has pulled back 6% from its July 15 record finish.”
The steep sell-off reflects investors’ concern that the escalating U.S.-China trade war means more uncertainty ahead, and investors hate uncertainty more than anything. What China did this week is its strongest counteraction so far in its ongoing trade war with the United States. It might have achieved the desired effect of causing panic among U.S. investors and businesses, but its action will end up hurting China more than it hurts the United States
Devaluing a country’s currency in such a subjective way is a double-edged sword. It’s true that currency devaluation will make Chinese exports cheaper and more competitive, while making U.S. goods more expensive and less competitive. Exports of goods and services make up 20 percent of China’s gross domestic product but only 12 percent of U.S. GDP. So the harm it will do to U.S. exports is limited.
When a country devalues its currency, it will inevitably face capital flight risk. That’s exactly what happened to China back in 2015. It is well known that China controls the value of its currency by setting a daily exchange rate for the yuan versus the U.S. dollar.
In August 2015, the People’s Bank of China (PBOC) arbitrarily devalued the yuan several days in a row. PBOC explained the move was to liberate yuan’s management and bring its value more in line with the market. But many economists point out that economic data in the previous months showed China’s economic growth had slowed down and exports fell. So the bank intentionally weakened China’s currency to boost exports and economic growth.
But to the PBOC’s surprise, its yuan devaluation also caused stock markets worldwide to fall, and both domestic and international investors lost confidence in the Chinese economy. Nervous investors began to pull their capital out of China. To stem capital flight, China implemented extreme capital control measures, including:
But heavy capital controls only inspired people and businesses to find creative ways to move capital out of China, including creating fake invoices, false trade records, and customs forms. One Chinese national reportedly “used the US$50,000 annual foreign exchange purchase quotas of 84 people to remit US$4.35 million to his own accounts in Australia and Hong Kong.”
This is why, despite the strict capital control, China still saw more than U.S. $500 billion capital outflow in 2015. Capital flight out of China continued in 2016, mainly due to the concern of currency devaluation and Chinese President Xi Jinping’s aggressive anti-graft campaign.
Capital flight is a huge problem in China because it reduces the country’s tax base and thus reduces the government’s revenue. It negatively affects the Chinese government’s ability to cover domestic and foreign expenditures.
No wonder China reportedly has spent U.S. $1 trillion in foreign reserves to fight capital flight since 2015. But this week’s devaluation of the yuan stirred up fresh concerns that China may see another massive capital flight, which harms China more than anyone else.
Devaluation not only causes capital flight, but also worsens China’s debt problem. China’s official debt to GDP ratio is at 47.6 percent. But few believe that’s true. The Bank for International Settlements records China’s debt to GDP ratio at 255.7 percent and corporate debt to GDP ratio at 160.3 percent. The Institute of International Finance estimates China’s debt to GDP at 300 percent.
Last year, S&P Global Rating issued a warning to China about its growing debt problem. Devaluation of the yuan will amplify the debt burden of U.S. dollar-denominated debt and add to the risk of defaults by overleveraged Chinese corporations and local governments.
Besides risks of capital flight and its debt burden, China’s deliberate devaluation of its currency will cause more retaliation from the United States. Through a tweet, Trump called China’s action a “currency manipulation” and demanded a response from the Federal Reserve.
U.S. Treasury Secretary Steven Mnuchin followed the president’s tweet by officially designating China as a currency manipulator, stating the U.S. will work with the International Monetary Fund to “eliminate any unfair competitive advantage gained by China.” Many previous administrations made noise about officially designating China a “currency manipulator,” but shied away from it since 1994. Such a designation will justify any further retaliation against China by the Trump administration.
Even China recognizes the many downsides of devaluating its currency. On Tuesday, the People’s Bank of China took steps to prevent the yuan from devaluating too much, too soon. What we learned from China’s latest retaliation is this: China has little interest in compromising and meeting the U.S. demand on thorny trade-related issues such as forced technology transfer.
The several rounds of trade negotiations between the United States and China from last year to this year appear more like China’s delay tactic. What is China waiting for? Xi is a president for life, and he doesn’t face reelection. As the head of an authoritarian state, Xi has little trouble silencing any dissent.
But Trump has to face an election. China is willing to endure economic pain to certain level as long as it can inflict sufficient pain on the U.S. economy and possibly influence the outcome of the U.S. election in 2020. Xi is probably waiting Trump out so he can negotiate with someone new in the White House.
The economy has been a bright spot in Trump’s first term. Monday’s stock market sell-offs show that even though China is hurting more than the United States in this ongoing trade war, China still has tools to harm the U.S. economy and public psyche. Stock market performance doesn’t necessarily correspond to the underlying health of our economy, but a steep sell-off does harm the general public’s perception of and confidence in the U.S. economy.
In the past, Trump avoided bringing up China’s human rights violation and flattered Xi openly on social media, probably hoping to bring China to a trade deal he wants. So far, that approach hasn’t yielded any desired outcome.
When the proposed tariffs on Chinese goods go into effect on Sept. 1, American consumers and businesses will suffer. If Trump wants to win in 2020, he needs to do a better job convincing the American people what he hopes to achieve though the trade war and why the economic price American businesses and people are about to pay is worth it.
I think the control of foreign investment, is the bigger issue not in the headline, but mentioned in the article.
But both are important.
President Trump, there are lots, and lots, and lots of other places in the world to buy things from.
America needs to STOP building up China.
In any way.
That includes all the crap everyone buys every day.
Stop that. All of that.
Great article!
China is overextended, they can’t support their debts without growth.
One thing for sure if it would last for any prolonged period of time.
Regime aside currently the majority of Chinese population idolize the United States.
It would change to radical anti American soon based on combination of factors.
Did she read the first part of her own article? China is absorbing the price increases. It's a wash for the China buying consumer, and a $30 billion win for the government. With that we can build the Great Wall of America, a 3,000 mile man-made construction visible from orbit.
This article highlights some of the real dangers of of a hard landing for the Chinese economy - crashes in their currency, stock markets,housing prices; debt defaults, bank failures, dogs and cats living together - you name it.
They have a real house of cards, that they have built. A steady fire hose of cash from their trade balance and their central bank, as well as their Federal Government spending mountains of cash on stimulative infrastructure projects; has allowed a generation of fraudsters to overgrow in their economy, without ever being stressed and periodically trimmed out. Those in the heights of their communist Party among the worst of them.
They seem desperate to maintain their positive current account (trade balance). I think it is because they really need the money. People talk about them having a lot of money - $3 trillion in foreign reserves, $1 trillion of that in Treasuries - but it pales before the real scale of their hidden debt (probably ten times that).
There are so many ways that their system could crack, its not funny.
“a $30 billion win for the government.”
The September package of tariffs (10% on $300 Billion) would be $30 billion in revenue over a year, if volumes stay constant, but they will likely change.
In addition to that package of tariffs, an even bigger one that started in June is also running - 25% on $250 Billion. There were also some earlier, smaller new tariffs on China as well, and some pretty large ones targeted at some small niches as well (like 229% on kitchen cabinets). I expect this big package of 10% tariffs will go up to 25% at some point (maybe January 1st) as well.
The net result will likely be one boom year for tariff revenues (way over $30 Billion, way more than enough for a complete border wall), and volumes of goods plummeting from China, causing tariff revenue to drop in turn.
They aren’t devaluing on purpose, they are running out of the ability to kite the Yuan.
Their collapse gets closer every day.
Cost of food in China up 30%, imported or not.
Vietnam has devalued its currency for decades and they are stuck in a rut where 25,000 dong equals one dollar.
There you go again, living in a Communist dictatorship country telling Americans what they should be doing.
Dude I am American.
Voted for Trump too. Was one of his very earliest supporters here on FR.
So put a sock in it. Respectfully.
:)
You live in a Communist country and you tell Americans what they should be doing. That makes you a hypocrite. Dude.
I don’t tell anyone what to do.
I do have an opinion, or two.
:)
China cannot afford a race to the bottom by devaluaing their currency each time we increase the tariffs.
They also have no place to sell U.S. Treasuries in any amount to make a difference and they can only sell them at a discount. So, each time they sell they devalue their holdings at the same time.
Winning.
" all the crap everyone buys every day. Stop that. All of that."
I do have an opinion, or two.
Since you claim to be an American...Do you believe in the freedom to join any political party you want? Do you believe in a free press? Do you believe in the right of the people to bare arms? Why don't you go on a Vietnamese chat board and express those opinions.
“There are so many ways that their system could crack, its not funny.”
You get it.
Here’s the thing; since China is a Marxist run country their system WILL CRACK.
It’s not an “if”, it’s a “when”.
When the 2nd largest economy in the world’s wheels fall of it will be a bad time for the rest of the world. The more dependent the world is on Chinese goods when that happens the worse it will be. The time to become less dependent is now.
I don’t “claim to” be American.
I am American.
Have a good day.
You were trying to say “bear arms”, I am sure.
:)
When they collapse it will be big.
Chinese Ghost Cities.
The country’s ambitious plans for urban growth have led to more than 50 abandoned cities whose empty buildings paint a dystopian landscape.
https://allthatsinteresting.com/chinese-ghost-cities
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