Driving the Day
1. CNY breaks 7 – and it’s not a big deal
On Monday, China’s central bank (PBoC) allowed the currency to break through the 7/USD level for the first time since 2008.
The weakness continued into Wednesday – with the morning fixing set at 6.9996/USD and the close price coming in at 7.0414/USD.
Some context: As everyone knows, the currency is weakening in response to the latest round of tariffs that US President Trump announced on Friday (see entry #3).
And the fallout has continued: In response to the CNY’s depreciation on Monday, the US Treasury labelled China a currency manipulator.
On Tuesday, the Chinese side hit back, with official media saying the manipulation label was (Xinhua 2):
- “based on groundless and ridiculous accusations…[and] betrays [America’s] ill-intention to scapegoat the currency issue in its escalating conflicts with China.”
We’d have to agree on that score (see next entry).
Get smart: The PBoC is not actively devaluing the currency as a gambit in the trade war.
It’s simply allowing the natural market reaction to increased tariffs to manifest. In fact, the PBoC is actively intervening to slow the pace of depreciation.
Get smarter: The PBoC has been signaling for months that it would not defend the 7/USD level if external pressures (read: the trade war) intensified. So no one should be surprised here.
Driving the Day, Cont’d.
2.More on the CNY
We’re seeing news reports saying that the “currency manipulator” designation is a new escalation in the trade war.
But in reality, the designation is both ridiculous and pointless.
- Ridiculous because it accuses China of keeping the currency artificially weak – when authorities are actually doing the opposite.
- Pointless because the mechanism technically requires the US to begin talks with the manipulator country, before it can apply bilateral punishments like tariffs – and that ship has sailed.
But the big question remains: Where does the currency go from here?
In a statement by PBoC Governor Yi Gang released on Monday – alongside an accompanying QA – officials expressed confidence that everything is under control (PBoC):
- “The People’s Bank of China has the experience, confidence, and ability to keep the RMB exchange rate basically stable at a reasonable and balanced level.”
Get smart: Regular Tip Sheet readers will know that we don’t always buy statements like this from financial officials. Often the “nothing to see here line” is clearly an effort to instill market confidence where there is none.
But on the currency front, the PBoC is still very much in control.
What to watch: We do expect some further depreciation – but likely only to the mid-7s range (see May 17 Tip Sheet).
3. Trump promises more tariffs
Last Friday, US president Donald Trump vowed via tweet to slap an additional 10% tariff on another USD 300 billion worth of Chinese exports.
He said the tariffs would go into effect on September 1 – and they would cover most of the remainingChinese exports that are currently not taxed.
Some context: Trump and Xi Jinping had previously agreed to suspend all new tariffs when they met at the G20 summit back in June.
More context: Trade talks betweenUS and Chinese negotiators officially resumed on July 31, and apparently they didn’t make much progress.
China has responded by suspending the purchase of American agricultural products and various officials have criticized the move as counterproductive.
Here’s Commerce Minster Zhong Shan(CNBC):
- “This is a serious violation of the meeting between the heads of state of China and the United States.”
Get Smart: Trump’s unpredictable leadership style doesn’t gel with the extended dialogue that will need to take place to end the trade war.
Get Smarter: China’s leadership is tired of getting Charlie Brown’d by the Trump administration. It’s increasingly likely that Xi and co. will decide that good faith gestures – or even negotiations in general – are no longer in China’s best interest.
4.No end in sight for Hong Kong unrest
In the past week, anti-government protests in Hong Kong have continued to escalate.
Here’s a roundup of recent developments:
- Over the weekend, police fought running battles with protesters who thronged city streets and blocked public transportation.
- On Monday, a general strike was called which affected some 20 business sectors and crippled transportation in the city, including the Hong Kong airport where more than 200 flights were delayed or cancelled.
- Monday evening saw violent clashes between protesters and men armed with wooden poles in the North Point neighborhood.
Beijing is none too happy.
On Tuesday, a spokesman for the Hong Kong and Macau Affairs Office of the State Council condemned the protests in strong language (People’s Daily):
- “What awaits the mob in the future will be the heavy blow of the sword of the law and the indelible mark of shame.”
He also expressed the central government’s full support for Carrie Lam’s administration and faith that the Hong Kong police could contain the situation.
Get Smart: Beijing is in a tough spot. The unrest is beginning to worry China’s leadership, but rough handling of the situation will only harden Hong Kong sentiment against the mainland.
Get smarter: Chinese authorities are starting to lose patience with the situation, making interventionever more likely.
BBC:Hong Kong protests: Police and protesters fight running battles
SCMP:Mob with poles battles protesters in Hong Kong
SCMP:Hundreds of flights cancelled leaving travellers facing chaos as citywide strike action hits Hong Kong International Airport
5.Shanghai Free Trade Zone expands
Yesterday, the State Council unveiled a plan to expand the Shanghai FTZ to include the neighboring Lingang development zone.
Some context: The new area covers 119.5 square kilometers, effectively doubling the geographic size of the Shanghai FTZ.
Situated near the Yangshan Deep Water Port and Pudong International Airport, the area is already home to hundreds of businesses, including Tesla’s China manufacturing facility.
The new area should presage some market openings for certain sectors:
- Foreign investment in telecommunication, insurance, securities, education, and healthcare is slated to have more leeway in the zone.
- Qualified business can apply for licenses to import crude oil.
A few high-tech sectors will also get tax incentives (Xinhua):
- “Income tax shall be levied at a reduced rate of 15 percent within five years from establishment for qualified enterprises engaged in manufacturing and RD in key fields including integrated circuits, artificial intelligence, biomedicine and civil aviation.”
But investors in those spaces may want to think twice before piling in.
- Those same sectors will also pilot the security review process for cross-border data transfer.
Get smart: FTZs are still better at offering preferential policies than they are at building a welcoming business environment that is up to international standards. The latter is what foreign businesses really need.
Xinhua:China issues overall plan for new area of Shanghai FTZ
6.The caring and cuddly Xi Jinping
Lots of folks may think they know a lot about Xi Jinping, the statesman.
But what about Xi Jinping, the person?
Today’s People’s Daily has us covered, running a piece on its social media accountabout Xi’s love story with first lady Peng Liyuan.
Some context: Today is the Qixi Festival – aka China’s Valentine’s Day.
A few examples of Xi’s romantic side:
- After separating for months after their wedding in 1987, Xi welcomed Peng home with a bundle of flowers hidden behind his back. (awwww)
- In an interview in 2004, Xi said he makes sure to talk to Peng on the phone every day even when the two are apart. (cute)
- In 2014 during a state visit, the pair shared a swing in India. (okay)
- When serving as the Party Secretary of Ningde, Xi asked Peng to take the bus when visiting him, instead of sending a government vehicle. (Now we get it)
This piece reads less like a love story than a what-to-do – and what-not-to-do – list for fellow comrades.
Get smart: China’s leaders are chilling at the beach in Beidaihe. That means there’s not a lot of political news to report.
Get smarter: Party media continues goingall out to burnishXi’s image as a man of thepeople.