China’s Currency, Stocks Rise After Yuan Levy, New Trade Threats

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China’s yuan rose Monday morning and equities in Hong Kong and Shanghai rebounded, after authorities late Friday announced a measure to support the yuan, while the trade dispute with the U.S. continued to boil.

The yuan was up 0.17 percent at 6.8170 per dollar as of 10:15 a.m., after the People’s Bank of China set the daily reference rate at 6.8513, the weakest since May last year, though in line with analyst expectations. Hong Kong’s Hang Seng Index, which fell every day last week, rose 1.4 percent and the Shanghai Composite Index added 0.5 percent, erasing a 0.9 percent early loss.

While initial reaction to Friday’s measures seemed positive, analysts were guarded in their views. “The market is still in a weak trend with no incremental money flowing in, so even if stocks rebound after dropping to near previous low, the gains won’t last long,” said Shen Zhengyang, Shanghai-based strategist with Northeast Securities Co.

On Friday evening:

  • The PBOC said it will impose a reserve requirement of 20 percent on some trading of foreign-exchange forward contracts. That will effectively make it more expensive to short the yuan, which fell on Friday to the lowest since May 2017
  • And about an hour later, officials released a list of $60 billion in U.S. goods that Beijing intends to hit with tariffs, in retaliation for Trump’s plan to impose duties on $200 billion in Chinese imports.

The timing of the announcements seemed coordinated to avoid kneejerk declines in China’s currency from the tariff proposal, according to Deutsche Bank AG. Imposing a levy on forward trades is a tactic that the central bank used to stabilize the yuan against the dollar in the aftermath of its shock devaluation in 2015. China’s currency and stocks are both among the world’s worst performers over the past three months.

“The yuan kept falling when China did this last time in 2015, so I don’t think the PBOC’s move will significantly change the market tone,” Hao Hong, chief strategist at Bocom International Holdings Co., said by phone. “The trade war is nowhere near its end and China’s economy is slowing down, so why would the trend reverse?”

The Ministry of Finance said that duties ranging from 5 percent to 25 percent will be levied on more than 5,000 categories of American imports if the U.S. delivers its proposed taxes on another $200 billion of Chinese goods. The list targets everything from planes and computers to wigs and textiles, with the highest tariff applying to more than 2,400 products such as meat, wheat, wine and liquefied natural gas.

The Shots Fired So Far In the U.S. – China Trade War

The scale of the conflict is growing, based on imposed and threatened tariffs

Source: U.S. Census Bureau, U.S. and Chinese announcements

The effective additional tariff rate is about 13 percent, which is much less than a proportional retaliation, Goldman Sachs Group Inc. economists wrote in a note. “Nevertheless, this measure still marks a step up in US-China trade tensions.”

“The news headlines from Friday will have some negative impact on share market sentiment,” said Dai Ming, Shanghai-based fund manager with Hengsheng Asset Management Co., who added that he doesn’t expect Chinese equities to recover until there’s evidence that the trade dispute is being resolved. “The stock market isn’t the government’s priority.”

China’s stock woes have caught the attention of U.S. President Donald Trump, who tweeted about the market’s underperformance versus U.S. shares on Saturday and told a rally in Ohio that the declines are weakening that nation’s bargaining power in the trade war. And White House economic adviser Larry Kudlow suggested Friday that China is letting its currency fall to offset losses from the trade war, though he added that the decline is partly due to weak economic fundamentals.

Read more about Trump’s comments here



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