The Chinese yuan (RMB) now has breached 7 per U.S. dollar (USD). After this recent depreciation of RMB against the USD, U.S. Department of the Treasury issued a statement on August 6 morning (Beijing time) that identified China as a currency manipulator. This is a historic moment that has not happened in the White House since Clinton's administration. In a press release, the Department of the Treasury has said that the statement was issued by Treasury Secretary Steven Mnuchin under the auspices of President Donald Trump. Mnuchin will then work with the International Monetary Fund (IMF) to eliminate the unfair competitive advantage caused by China's latest actions. The U.S. Treasury believes that the background of these actions and the unreliability of Chinese market are the main cause of RMB depreciation to gain an unfair competitive advantage in international trade.
Although China and its currency do not meet the technical standards recognized by the U.S. Treasury as currency manipulators, these standards are always subjected to policy objectives under the Trump administration. Just like what ANBOUND has predicted, the trade dispute between the U.S. and China follows the "Trilogy of China-U.S. Friction" which involves trade, enterprise, and finance. It started with tariff disputes to currency friction and exchange rate, which will possibly lead to full-scale financial war.
Regardless of whether it's due to market behavior or the actions of the People's Bank of China, the depreciation of RMB is beneficial to Chinese export enterprises to ease trade pressure. However, it is a mistake for the Trump administration to think that currency depreciation will lead to an increase in exports. In fact, this has minimal contribution to China's economy, and it is no longer in China's policy options. However, President Trump's policy is to keep the dollar weak in favor of manufacturing returns and strong competition for U.S. exports. Hence, the depreciation of RMB may have a significant effect on the increase in tariff. Therefore, the United States will certainly take corresponding measures to list China as a currency manipulator as an inevitable move to suppress China.
According to the U.S. regulations on currency manipulators, China is not afraid of existing tariff measures regardless of the penalties imposed by the United States on currency manipulators. However, China's domestic market may have underestimated the impact of the U.S.'s allegations as a currency manipulator. ANBOUND has pointed out that a currency war will happen between China and the United States once the U.S. lists China as a currency manipulator. The United States may take full advantage of its position in the international financial sector to block the RMB.
Specifically, when a country is listed as a currency manipulator, the U.S. government will introduce more sanctions on a particular country. In addition to restricting U.S. companies' investment in China, the U.S. may also introduce other policies including more punitive tariffs. Firstly, the U.S. Treasury will initiate negotiations with the country to urge it to change its approach. If currency manipulation is still ongoing after a year, the U.S. President can take the following actions: (1) Prohibit any project in the country from obtaining financing by the U.S. Overseas Private Investment Corporation; (2) Exclude the country from any procurements by the U.S. government; (3) Call on the International Monetary Fund (IMF) to strongly supervise the country; (4) Instruct the U.S. Trade Representative to assess whether to enter a trade agreement with the country, or to initiate and participate in trade agreement negotiations to consider the country's currency manipulation.
Moreover, based on the U.S. government's series of measures since the trade war, President Trump will not adhere to the limitations of his own regulations. He may use this incident as an excuse to escalate the tensions of U.S.-China trade war. This will result in actions such as the U.S.'s direct intervention of the dollar currency, further increase in tariffs, financial sanctions against China and the implementation of the economic cold war. All these actions will gradually increase trade and economic friction. If the U.S.-China trade war extends to sanctions that are aimed at the financial and capital markets, it is likely that the Chinese assets will be frozen and the world trade of certain commodities will be banned. The United States has two major financial systems that control trade payments and tax transactions: (1) Global financial management system and (2) Payment and settlement system. As a result, the U.S. Treasury can implement financial sanctions through the Office of Foreign Assets Control (OFAC). If China is included in the sanctions by the United States, it will fall into a series of economic blockade. In this regard, China needs to be fully prepared to deal with the possible escalation of a trade war.
The negative effects brought by the currency and financial war on the financial markets of the two countries are more serious than that on the real economy. Firstly, trade frictions and economic slowdowns are interrelated, and they will cause serious economic damage to the capital market. Whether it is the financial market or the physical industry, the United States and global capital have huge investments in China. Financial warfare will have a great impact on the U.S. financial industry and enterprises. This conclusion can be drawn from the recent turmoil in the U.S. and global capital markets. The currency and financial war are also very harmful to the Chinese market, especially the depreciation of the RMB exchange rate. If the loss of currency control becomes an expectation, the market will inevitably "overreact", resulting in a revaluation of the capital and real estate market. Once the bubble bursts, it will cause long-term damage to the Chinese economy and financial markets. It is precise because of these negative effects that the financial war is unbearable for both China and the United States. President Trump may continue to ramp up the pressure for the Fed to cut interest rates. On the other hand, China will utilize currency depreciation and other measures to cope with the pressure on the capital market. Undoubtedly, both parties will try their best to control the negative effects of the process. Moreover, the ups and downs of the financial markets will affect the negotiation between the two countries.
Final analysis conclusion:
The U.S.-China trade war has extended to currency and financial wars. The Trump administration's suppression of China has not been executed logically. As a result, after listing China as a currency manipulator, the U.S. will continue a series of measures to escalate trade friction. Hence, China needs to prepare and respond ahead of time to different scenarios and possibilities.
