Trade War 2.0 between China and the United States will stimulate further currency manipulation out of China to partially offset the 10% tariffs on Chinese goods imposed by the new administration.
Now, with China imposing $14 billion on trade taxes on goods, it is likely that a series of tit-for-tat retaliation has begun.
Read RSM’s insights on the regime change taking place in the global economy.
The relative yield differentials between the U.S. and China point to the possibility that China will engineer a gradual, but large, depreciation in the yuan this year.
Those differentials, in contrast to the current rate of the CNY/USD, imply that a move toward eight yuan to the dollar, or roughly a 10% depreciation, could be in the offing.
The greater risk is that currency depreciations like this spill over into other economies, resulting in a much broader trade conflict and global financial strain.
In our estimation, that scenario might be optimistic given the deep differences between the U.S. and China.
One difference between Trade War 1.0 and Trade War 2.0 is that China is in the early stages of deleveraging from its significant long-term debt, which has slowed China’s growth. Nominal growth in the U.S. has outperformed China over the past three years.
In the current clash of the titans, the U.S. is intent on limiting access to its domestic consumer market. The U.S. long ago significantly restricted access to sophisticated technology that has any linkage to national security.
Hopes of a near-term compromise between the two economic powers appear naive at best.
