China: Ready for trade war and currency battle – Nordea Markets

After months of on-and-off negotiations, the long-dragged trade war between China and the US is about to kick off, points out the research team at Nordea Markets. 

Key Quotes

“The two countries are scheduled to impose 25% tariffs on USD 34bn of imports from each other on Friday 6 July, with an additional USD 16bn following soon after. Moreover, Trump threatens to levy 10% tariff on an additional USD 200bn of Chinese imports and yet another USD 200bn if China retaliates. That brings the total amount of Chinese goods potentially subject to higher tariffs to USD 450bn – about 90% of China’s total exports to the US and 3.2% of China’s GDP.”

The currently confirmed tariff of 25% on USD 34bn of goods implies a net export loss of less than 0.2% of GDP. Given the likelihood of Chinese companies directing their exports to other markets and the authorities stimulating domestic demand to replace the exports lost, the final impact on the Chinese economy is likely even smaller than estimated here.”

“The current tariff war between China and the US is really the beginning of a long-term rivalry about technological advance.

“Our baseline scenario is that the Chinese economy can absorb the negative impacts from a trade war with the US. The economy has become much less export dependent since 2008. Gross exports account for 20% of GDP, compared to 45% for investment and 39% for household consumption. If the trade blow becomes too large, the authorities will likely stimulate domestic demand to mitigate the net growth impact.”

“As we expected, 6.70 proved to be an important threshold for the PBoC when it comes to USD/CNY and triggered verbal intervention on Tuesday by several senior officials, including Governor Yi Gang. The PBoC pledged not to weaponise the currency in the trade war and to maintain currency stability. Both USD/CNY and USD/CNH came down after the statements.”

“There is a high chance that depreciation pressure on the CNY returns in the coming weeks if trade tensions between China and the US escalate into levying tariffs on more goods. However, we expect the PBoC to maintain a defence level of 6.70 for USD/CNY.

“We expect USD/CNY to trend down in 3-6 months as the trade war concern gradually recedes and the USD rally has run its course.”

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