At some point US had to take on China: Donald Trump

Friday, 09 Aug, 2019

White House chief economic adviser Larry Kudlow on August 6 said President Donald Trump is flexible on tariffs depending on the progress of trade talks with China.

"In pulling the yuan higher, it is not only looking to manage any decline, but also looking to contain any damage in terms of confidence in their stewardship of the Chinese currency and economy", said Michael Hewson, chief market analyst at CMC Markets.

The central bank warned that Washington's "wayward unilateralism" could produce fresh market turmoil and "seriously" undermine the worldwide financial order.

As reported earlier, the US Secretary of Treasury is going to apply tothe International Monetary Fund for elimination of "unfair advantages created by China".

In response to this new 10% tariff, on August 5 the Chinese government devalued its currency to below the 7-1 ratio it held with the United States dollar, the first time it has dipped below this mark since 2008.

The US Treasury's move follows a sharp fall in the value of the Chinese yuan against the Dollar. That would allow the yuan to slide to below 7.1 to the dollar while staying within the trading band.

Julian Evans-Pritchard, a senior China economist at Capital Economics, said: 'The People's Bank of China has effectively weaponized the exchange rate'. Washington was forced to make the currency designation given a 10 per cent drop in China's currency since April a year ago, he said, adding that other members of the Group of Seven industrialised countries supported the action.

China posted GDP growth at 6.2 percent in the second-quarter, its slowest pace in 27 years. This came following a series of trade negotiations that press officers in the Trump administration described as "productive", but Trump tweeted that China had reneged on promises to purchase certain American agricultural products (without specifying what those might have been).

As a result, investors poured money into safe assets such as government bonds, and the yield on U.S. Treasury debt fell to its lowest level since 2016. Compare that to the S&P 500 which has only dropped 5% from its high.

Monday's decision comes amid an ongoing trade war between the world's two largest economies - as Beijing let the yuan fall to a more than ten-year low against the USA dollar after Trump announced his intent to ramp up tariffs on Chinese goods. Markets were on track to recover some of the losses on Tuesday.

Washington's designation of China as a currency manipulator is likely to have a negative impact on South Korean exporters.

The real economy side is predicted to face an increasing downward pressure as well.

China's central bank said Tuesday it is "resolutely opposed" to such a label, and the bank's governor Yi Gang has long vowed it would not engage in a competitive devaluation.

He added, "The Chinese economy is crumbling".

The latest US move came less than three weeks after the International Monetary Fund (IMF) said the yuan's value was in line with China's economic fundamentals, while the USA dollar was overvalued by 6% to 12%. He said China's action was not "manipulation" but rather a decision by the PBOC not to intervene. Officials are now steering against the idea that the yuan will continue to fall and the charge by the USA administration that it's deliberately manipulating the currency.

Agricultural exports to China fell $1.3 billion during the first half of the year, Duvall said adding that the organization fears it will lose access to a market that was estimated to be worth nearly $20 billion to farmers in 2017.