Both leaders accept that a truce was called in the China-US tariff war during their meeting at the G20 in Buenos Aires. Could a weakening yuan reignite it?
The spin-meisters around Donald Trump and Xi Jinping are still speaking different languages about trade. This lost-in-translation dynamic belies claims something big happened in Buenos Aires.
US President Trump’s people claim Chinese President Xi pledged to “reduce and remove” tariffs on goods, including American-made vehicles, at the Group of 20 meeting in Argentina last weekend. Xi’s team insists that America did the bowing, by agreeing to increase market access for China....MUCH MORE
Most intriguing, perhaps, is how Team Trump members seem to be on different wavelengths. Listening to Larry Kudlow, Trump’s top economic advisor, you get the impression détente with Beijing is a done deal, whereas US Treasury Secretary Steve Mnuchin gives out the message that the process is just beginning.
Given the uncertainty, it’s best to focus on what may decide whether the ceasefire is real or a mere lull in a broader trade war: the yuan.
By this measure, Trump must be feeling quite good about his dinner with Xi. Monday, the first trading day since Buenos Aires, saw the biggest one-day jump in the yuan since early 2016. That must be music to the ears of a protectionist US leader who has long claimed Beijing’s exchange-rate policies are “killing us.”
Can Trump’s post-Argentina high be sustained? It’s doubtful, given events on the ground in China. Thanks largely to Trump’s tariffs on $250 billion of Chinese goods and threats of more to come, exports, industrial production, purchasing manager’s orders and fixed-asset investment are experiencing downshifts.
Present dangers
Those headwinds pose clear and present dangers to Xi’s stated goal of recalibrating growth engines and curbing bubbles in debt, credit and property.
“China faces a Faustian choice between growth or deleveraging,” Standard & Poor’s argues. “Planned stimulus to boost output and business sentiment in China could undermine the country’s deleveraging push.” That, S&P concluded, “leaves policymakers with a tough choice between missing targets on growth or on reducing financial risks.”
The toughest choice of all, though, may be taking a sliding exchange rate off the table. Here, too, Xi faces a test of his 2013 pledge to let market forces play a “decisive role” in China.
If not for his boss, free-market folks like Kudlow would surely counsel at laissez-faire approach. Traders, after all, have every reason to look at China’s debt-heavy, highly imbalanced and slowing economy and sell yuan. Yet two problems complicate letting markets drive the yuan lower....
