If a temporary trade agreement between China and the US can be signed later this month, and includes a trade-off of US tariff reduction and a stronger CNY-USD exchange rate, that should boost the renminbi and Chinese stock prices in the short run. However, such an addendum is just a possibility at this point.
The renminbi strengthened against the USD dollar, to below 7 RMB per USD on 5 November amid positive market sentiment on the prospect of a Sino-US trade truce before closing back at around 7/USD. At the time of writing (6 November), both China’s offshore and onshore yuan were trading at around 6.996 RMB per USD. The break to below 7/USD was the first since 5 August, when the renminbi weakened, crossing that psychologically important exchange rate and setting off accusations of currency manipulation.
New trade war dynamics
While it may be too early to know whether the renminbi can hold on to a level at below 7/USD, there are new recent factors that could influence the dynamics of the trade war (see table 1). These have brightened the short-term outlook for China’s currency and stock market.
Table 1: Sino-US negotiations: possible influencing factorsStage II of trade war in progress
Recent news has vindicated my view that
- the Sino-US conflict has moved into a second stage after China’s leadership agreed to drag out the arm-wrestling by rotating its tactics between being aggressive and being open to negotiating, even at the cost of further pain to the domestic economy
- Beijing would up the ante after each round of failed negotiations to make settlement tougher.
Media reports say that China is seeking the roll-back of US tariffs on as much as USD 360 billion worth of Chinese exports to the US, and that in the recent rounds of negotiations, Washington had watered down its stiff demands for structural reforms and compliance monitoring mechanisms.
Risks beyond 2020
Technology competition lies at the heart of the Sino-US conflict and it is unlikely that an interim agreement this month will resolve this. Beyond the US presidential elections in 2020, both the trade war and global growth risks may rise again. If Mr. Trump wins a second term, he may be less concerned about the US economy and the stock market and may instead focus on continuing to hit China by upping his wager on the trade war to advance his legacy as “the man who tamed China”.
If there is a new US president, he/she may not necessarily be any less hawkish. Both Democrats and Republicans have fundamentally changed their foreign policy stance, shifting from pre-Trump constructive engagement with China to strategic competition to contain China’s influence.
Meanwhile, China may de-prioritise its economic growth objective should it achieve the Communist Party’s goal of doubling real GDP in 2020 from its 2010 level. It may then revert back to its debt reduction and structural reform agenda.
 See “Chi Time: Sino-US Trade War Risk – Reality Check”, 10 October 2019, and “Chi Flash: Sino-US Strategic Trade Recalculations Push CNY-USD Beyond 7. What Next?” 5 August 2019
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