A lot has gone on with China this last week.
2. Yesterday, China’s central bank allowed the Yuan to weaken to more than 7 RMB per dollar. CNBC nicely describes the significance of this:
The Chinese authorities have not let the currency weaken past the 7 yuan-per-dollar threshold since the global financial crisis. In fact, they have in previous years — such as in 2016 — burned a substantial portion of their foreign reserves to defend the currency from breaching that mark.
It’s for that reason that currency experts have long viewed that mark as a psychological important level. Breaching 7 yuan per dollar is a crucial development partly because investors don’t know how much more weakness the PBOC [People’s Bank of China] is willing to tolerate, so they could sell their investments in China to curb losses — and thereby trigger significant capital outflows from the country.
3. The Chinese government also yesterday instructed Chinese state-owned companies to stop buying U.S. agricultural products. This will likely mean non state-owned Chinese companies will greatly reduce their buying of ag products from the United States as well.
4. The United States Treasury then labeled China a “currency manipulator.” The last time Treasury designated any country as a currency manipulator was in the early 1990s, when China was named. Labelling China as a currency manipulator means the U.S. will likely lead to the United States requesting the International Monetary Fund (IMF) take steps to curb any unfair competitive advantages created by China’s currency manipulation.
What will the results be from all of the above and what should your company do about it?
This post will address the anticipated results.A subsequent post will lay out what you should do about it.
I predict the following over the next few months:
1. The 10% List 4 tariffs will go into effect on September 1.
2. There is about a 50-50 chance most (if not all) tariffs against China will rise from 10% to 25% within the next couple of months.
3. China will stop buying U.S. agricultural products directly from the United States, but I expect it will continue to receive large quantities of US ag products via third countries. China is very concerned about food inflation and though it will do what it can to stop buying US ag products, I do not see those purchases truly ending. If China switches from buying X ag product from the United States and starts buying X ag product from Brazil, we should expect Y country that was buying X ag product from Brazil to start buying more X ag product from the United States.
4. The RMB will slowly weaken, but I doubt it will go as high as 7.5 RMB per dollar within the next six months. I do not see this weakening of the RMB as a big deal for the United States beyond reduce the price of products purchased from China. See Who Pays the Tariffs on China Imports? President Trump vs. CNN and What YOU Can do NOW to Reduce Your China Prices.
5. I do not see the IMF penalizing China for currency manipulation and if it does, I do not see those penalties moving the needle on anything.
6. China will retaliate against the United States in any way it can while remaining careful not to damage its own economy too much by doing so. China will reduce its purchases of goods from the United States. China will favor domestic companies (and perhaps companies from other countries as well) over U.S. companies. China will step up enforcement of its laws as against foreign — especially U.S. — companies. See How to Do Business in China Without Going to Prison and The Five Keys to China Company Compliance. Though this new wave of tightening enforcement will be tougher than any that has proceeded it, smart, well-run U.S. companies will survive it.
7. Companies (U.S. and otherwise) that manufacture their products in China for export to the United States will continue to move their manufacturing out of China, if they can. See How to Move Your Manufacturing from China AND Protect Your IP.
8. Most economists will continue to insist that the trade war will end soon because it is bad for the economies of China and the United States and the rest of the world. Those whose livelihoods depend entirely on China will make the same prediction. My law firm’s international lawyers will continue to insist there is no resolution in sight. See When Will the US-China Trade War End? It’s the New Normal. ‘
What do you see happening?