ON Monday, the People’s Bank of China (PBoC) answered US President Donald Trump’s latest cannon shot with a nuclear bomb in the ongoing trade war between the world’s two biggest economies, devaluing the yuan in retaliation for Trump’s announcement of a new round of punitive tariffs on $300 billion in Chinese goods.
The trade war has now become a currency war, and any pretense that other countries — especially this one, and others in this part of the world — are not going to be gravely wounded in the crossfire is foolishness of the highest order.
The way in which the PBoC manages China’s currency is by setting a daily midpoint price, and intervening with its foreign reserves as necessary. On Monday, the PBoC set the rate at 6.9225 yuan to the dollar, the lowest since December 2018. The yuan immediately lost 1.4 percent in the day’s trade; not as much as the two percent decline following China’s last overt devaluation in 2015, but dragging the currency below the key seven yuan to one dollar barrier for the first time since 2008 (the onshore and offshore yuan prices closed at 7.031 and 7.069, respectively).
Most analysts concluded that the devaluation was a counter to Cheeto Mussolini’s decision to apply an additional 10 percent tariff from September 1 on the remaining $300 billion of Chinese goods not covered by an earlier 25 percent tariff, and that it signaled that the PBoC would no longer defend the seven yuan to a dollar boundary. In a semi-official statement later, the PBoC helpfully confirmed that this was exactly what was going on, blaming Trump for forcing China’s hand. A different official later gave some indication of the probable scale of the devaluation, saying that the bank saw the yuan stabilizing “at about 7.2 or 7.3” to the dollar.
The devaluation with respect to trade benefits Chinese exporters by effectively reducing the price of Chinese imports on the American side of the equation, reducing the impact of the additional 10 percent tariff. It hurts China in two ways: It makes imports more expensive, which puts pressure on Chinese consumers and businesses, and it could increase capital outflows. The Chinese government is apparently willing to absorb that punishment, however, because the effect on US exporters would be much worse; it makes American goods even more expensive in China, lowering demand for them.
To add an extra twist to the knife, the government followed up the currency devaluation with a “request” to state companies to halt the importation of US agricultural goods. The timing of that move is exquisite. The peak harvest season for commodities such as corn, wheat and soybeans will happen in about a month, which means that now would be the peak time for import contracts. China has cut off the market at just the time when Americans exporters would be expecting to earn most of their money for the year.
The negative impact China’s currency devaluation has on the Philippines and other Asian countries will be felt mainly in currency fluctuations. Regional currencies, which are all practically if not officially tied to the US dollar, will have to weaken to stay level with the yuan. Here’s an example using simple numbers: If the yuan is 7.0 to $1, and the peso is 50 to $1, then the corresponding exchange between the yuan and the peso is about P7.14 to one yuan. If the yuan falls to 7.1 to $1, however, that makes the peso-yuan ratio about P7.04, a drop of about 1.42 percent, which would weaken the peso with respect to the US dollar to P50.71. Since China is a bigger export market for the Philippines than the US, that’s bad news for Philippine exporters and for the country’s trade deficit. The weakening of the peso would also be aggravated by some market movement back to the USD as traders cash in; the central bank would eventually be obliged to intervene to stabilize the peso, spending some of the country’s foreign reserves to do so.
Keep in mind this will be happening in every country with a significant trade relationship with China, which at this point includes most of the world. It might not result in a global recession as some analysts have already predicted, but if it goes on long enough it could, especially if an unexpected shock occurs.
Although it is a matter of rumor right now, there are fears that shock may be imminent. On Sunday, HSBC fired its CEO John Flint after just 18 months on the job. The official reason given was the sort of polite gobbledygook that is usually issued in such instances — ‘taking the bank in a new direction’, or some such nonsense — but the real reason, according to the buzz in the underworld, is that the Bank of England demanded Flint’s head after learning that HSBC has extended massive loans to the PBoC to help the latter prop up the yuan all this time.
The number being tossed around is $400 billion, which would be far more than HSBC could manage on its own, so it is thought other banks are involved as well; UBS has been mentioned, as well as the juvenile delinquents of the banking world, Deutsche Bank. As of yesterday (Wednesday) morning, opinion was sharply divided; some analysts are already convinced this has happened, while others argue that it doesn’t quite make sense from the suspect banks’ point of view.
If it is true — and reason suggests that it is, although it may not be on the scale it is thought to be — the yuan devaluation is a very bad thing, because the lenders will get less of their own money (euros, pounds, or dollars) back for the amount of yuan they are holding. HSBC in particular is in no position to absorb a big loss; along with Flint’s dismissal, its board approved a cost-cutting plan that could eliminate as many as 4,700 jobs.
ben.kritz@manilatimes.net
Twitter: @benkritz