Trade wars do enough harm but the Sino-US dispute continues to escalateby George Magnus / July 23, 2018 / Leave a comment
Beidaihe, a famous Chinese summer seaside resort, popular with tourists, is situated in north eastern Hebei province, about 300km east of Beijing. China watchers know it, though, because every year around the beginning of August, it hosts a top brass Chinese Communist Party meeting to discuss key policies. Soon it will soon kick off without fanfare, but we can be pretty sure that Donald Trump’s trade war is going to dominate talks, especially as on both sides of the Sino-US divide, warnings are being sounded of a currency war too. This would give world financial markets a bad case of the shakes.
The Chinese currency, designated in markets as CNY, has been falling for quite some time though within the limits laid down by the People’s Bank of China. Measured against the US dollar at 6.78 yesterday, it is worth 7.5 per cent less than its recent high point in late March. That point represented a nearly 10 per cent gain from the all-time low of CNY 6.96 in late 2016—bringing to an end an 18 month period of serious currency and stock market instability. The CNY is lower now in trade weighted terms than it was at the height of the 2015-16 crisis, but it is the US dollar rate that really matters.
To some extent, the fall in China’s currency mirrors the rise in the US dollar’s general appreciation against most currencies, in the wake of the US economy’s performance and the expectations of rising US interest rates. And so on one view, what’s happened to the CNY isn’t a major problem. But this isn’t all that’s been going on.
On the home front, the People’s Bank of China and other regulatory agencies have been incrementally softening their polices as evidence comes in that the financial clampdown started in 2017 is kicking in. Official GDP data don’t corroborate it but important real-time data for real estate transactions, investment and retail sales speak to a slowing economy, defaults in Chinese bond markets are rising and the stock market is reflecting economic worry.
Accordingly, the central bank has injected large volumes of liquidity by lowering banks’ reserve requirement ratios three times this year, and operated directly and in size to boost funding for loans in June and again early this week. It has encouraged banks…