China has hit back against the Trump administration with a drastic
exchange rate devaluation, almost guaranteeing a superpower showdown and a
lurch towards full trade war.
The yuan blew through the symbolic line of seven to the dollar for the
first time since the global financial crisis, with the offshore rate in Hong
Kong spiking to 7.07 in moves that stunned seasoned traders.
The calculated action by the People's Bank (PBoC) threatens to unleash a wave
of deflation across the world and risks pushing East Asia and much of Europe
into recession. It is certain to provoke a ferocious response from the White
House.
Capital Economics said Beijing has taken the fateful step of
"weaponising" its exchange rate and is digging in for a long
struggle: "The fact that they have now stopped defending 7.00 against
the dollar suggests that they have all but abandoned hopes for a trade deal
with the U.S."
Commerzbank said China's decision to engineer such a sudden move in its
tightly managed currency has far-reaching implications for the whole
international system. "It looks like a tsunami is coming."
The shock waves were felt instantly through the nexus of global bond,
equity, and commodity prices. It triggered a flight to safe-haven currencies
such as the Japanese yen and the Swiss franc, an effect compounded by the
thin liquidity conditions of August trading.
Yields on 10-year German Bunds plummeted to minus 0.53 percent, taking
much of the eurozone sovereign bond market further into uncharted terrain.
The euro Stoxx 50 index of equities has fallen 5 percent since late last
week.
While the Chinese government says 7 is an arbitrary level of no
macro-economic significance, it has intervened repeatedly in the past to
prevent this psychological threshold being threatened.
In case there was any doubt over the motive of today's action, the PBoC
issued a statement linking the new rate to "unilateralism and trade
protectionism measures and the imposition of tariff increases on China."
Despite not naming the U.S., it clearly meant Mr. Trump's latest threat to
impose 10 percent tariffs on all remaining Chinese goods in early September.
The PBoC vowed to keep the currency "fundamentally stable" but
it is walking a fine line. Capital controls are tighter than they were during
the currency scare of 2015-2016 -- when China was losing $100 billion of
foreign exchange reserves a month -- but money is still leaking out.
Confidence is increasingly fragile.
"The worry is that a break beyond 7 could send the Chinese currency
into a vicious circle in which selling leads to more selling," said Ke
Baili from Caixin.
Kyle Bass, a long-time China bear at Hayman Capital, said a "mass
exodus" of capital is already underway as political protest in Hong Kong
reaches crisis point and China's debt-driven growth model reaches the limits.
"The collapse has just begun," he tweeted.
Most analysts say the move by the PBoC is a deliberate choice, but that is
hardly more reassuring for investors. It means that the Chinese Communist
Party is willing to risk a full-blown conflict with Washington on every
economic front. Beijing has simultaneously ordered state bodies to halt
purchases of all farm products from the U.S.
This escalation comes at a highly sensitive moment. A meeting at the White
House in late July actively discussed using the U.S. Treasury's Exchange
Stabilization Fund to buy foreign currencies and drive down the dollar as a
matter of policy -- an extraordinary moment in the history of the world's
paramount reserve currency. It is no surprise that gold has surged to a
five-year high of $1,470.
The White House discussion was kicked into touch but the issue did not go
away. It is now back as a red-hot theme. Mr. Trump's trade guru, Peter
Navarro, said over the weekend that currency manipulation by China is one of
its "seven deadly sins."
Capital Economics said the Chinese appear intent on neutralising Mr.
Trump's tariffs by letting the currency slide pari passu, implying a
devaluation of up to 10 percent. This means a parallel yuan devaluation
against the rest of the world. It effectively exports trade stress to third
countries and risks pushing much of East Asia into a deeper downturn.
The eurozone is also in the front line. Hans Redeker from Morgan Stanley
said the euro is developing a new characteristic: it tends to strengthen
during bouts of global stress. This reflects its role as surplus
"funding currency" for worldwide capital flows.
In other words, the euro is starting to behave like the Japanese yen.
Currency strength causes pro-cyclical tightening and deflationary pressures
whenever there is trouble. This will cause deep alarm in Frankfurt.
... For the remainder of the commentary:
https://www.telegraph.co.uk/business/2019/08/...-begins-chin...
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