- Ongoing differences on the topic of trade between US and China, despite multiple meetings between high level officials from both sides
- As trade imbalance worsens, China has even less incentive to support the yuan
- While China’s relations with the US sees some risk, improved relations with Japan should comfort yuan investors
- US dollar continued to slip with decreased Treasury bond yields
- Trade talks continue between US and China this week
- Asian stocks on the rise with the new week
- In light of tough demands on China from US President Trump, China seems to be preparing for a weaker yuan, in preparation of a potential trade war.
- Meanwhile, the USD is at the highest level year to date, which is a dramatic shift from the weakening trend since early 2017.
- The yuan can continue to weaken and the latest guidance from the central bank is at the lowest level since January 2018.
- The weakening yuan will prepare China for a potential trade war and USD gained after the US Federal Reserve kept interest rates unchanged.
- The yuan dropped against the USD for the third week in a row largely because of rising USD value, even as China’s economy has been stronger than expected with manufacturing industry metrics beating expectations.
- Despite senior level trade meetings between US and China, “differences are still big,” according to China’s official statement on the meetings.
- The US’s window is closing on public comment regarding tariffs on Chinese products. China has indicated it will not just sit back. There will be more clarity on the proposed tariffs in the next few weeks.
- Naturally the disputes on trade have hurt China’s trade. Exports shrank this month by 2.7 percent month over month, and the trade balance dipped to negative from previously being positive. However China will not devalue its currency to recuperate losses from the tariffs.
- In the midst of trade disputes with the US, China is cozying up to Japan as the two countries’ relationship continues to strengthen. China’s Premier Li Keqiang will visit Japan.
- China’s Foreign Minister Wang Yi visited Tokyo for the most important bilateral economic panel, which was previously on hold for eight years. As the stability in China-Japan relations grows, it will help stabilize the yuan.
- US President Trump tweeted that he will work with China to find a way to allow Chinese telecoms equipment maker ZTE to get back into business. The US has imposed a ban on companies working with ZTE as punishment for ZTE’s shipping equipment to Iran.
- China’s foreign reserves fell more than anticipated as USD increased in value, and at the same time China seems to worry less about capital fleeing the country.
- Capital fleeing the country was of great concern in early 2017, however stronger capital controls and declining USD allowed the yuan to rise since then, and improve economic outlooks and investor confidence.
- Signals from the Chinese government suggest less concern about capital outflows, while giving foreign investors increased access to the Chinese equities, bonds and commodities markets, further bolstering the yuan.
Source: Reuters, Bloomberg 2018
© SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license.
This article is intended for US audiences only.
The views expressed in this article are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.