• Conflicting headlines over the weekend
  • Trump impeachment causes Chinese strategy
  • Tariffs still a major sticking point

Over the weekend, there was a call between US Treasury Secretary Stephen Mnuchin and the Vice Premier of China which was initially described as “very constructive”. However, it has since been released that several government officials in China feel very “pessimistic” about a trade deal going forward.

Sticking points

There are numerous sticking points when it comes to a US-China trade deal, and most of the issues aren’t fixable. However, in the meantime, one of the biggest issues that China has is that they want tariffs rolled back before moving into the so-called “Phase 1” part of the deal.

However, President Trump has no intentions of rolling back tariffs just to get to that point. Because of this, the Chinese have become much more negative lately.

The strategy

China’s strategy going forward will be to simply wait out Donald Trump, as he has a lot of moving pieces in the United States. Ironically, while both the Republicans and the Democrats agree on the China issue, it’s the impeachment conversation that is one of the biggest drags on the idea of getting this situation taken care of.

the Chinese are going to be dragging their feet on this deal

The Chinese seem very comfortable waiting to see how the impeachment situation turns out, and then they have the election look forward to. In other words, the Chinese are going to be dragging their feet on this deal, because there is no reason for them to do anything else.

That being said, this cannot go on forever as it has certainly caused issues on the Chinese mainland. If that keeps up, the Chinese are going to have a serious problem, as one of the deals between the Chinese Communist Party and its people is that they were going to improve their lives. If they can’t do that, they will lose power. Simply look at Hong Kong for inspiration.

Ultimately, a trade deal probably isn’t on the horizon, and eventually, the stock markets and everybody else will start to notice this. It’s quite amazing that they have not, so what this suggests is that the trade war isn’t really as important as a lot of people make it out to be.

Stock markets continue to rally based on liquidity measures, more than anything else. Central banks around the world continue to loosen monetary policy and even do things such as buy stocks, as in the case of the Swiss National Bank. This indicates that the markets are seeing a “risk-on rally” in the face of signs that are very positive.

As for the Chinese strategy, the impeachment isn’t going to happen. While articles may be drafted in the House of Representatives, by the time they reach the Senate they will be “dead on arrival”. As far as the presidential election is concerned, it still very much favors the re-election of Donald Trump.

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  • Yuan experiences biggest loss in 25 years
  • Beijing considers measures to mitigate the issues caused by U.S. – China trade war

Biggest loss recorded

Since the beginning of August, the Yuan has dropped by 3.9%, making it the most significant loss since 1994, when the country adopted the current exchange rate regime.

The decline was sparked by increasing tensions between the United States and China in trade negotiations. Further indications that the economy is slowing down along with strong expectations that additional easing will take place have also added pressure to the yuan.

Dariusz Kowalczyk of Credit Agricole stated that the situation will continue to deteriorate for China and the world if there is no clear sign of progress in the negotiations. According to Kowalczyk, the yuan could weaken to as much as 7.3 to the U.S. dollar.

Tuesday saw the People’s Bank of China set the yuan’s daily reference rate at a level that’s higher than expected for the fifth day in a row. If the yuan doesn’t strengthen, it could result in capital outflow and further weakness, which could lead to instability.

Yuan drops to a new 11-year low against the USD

Friday saw the Chinese government and President Donald Trump volley threats of more tariffs at each other. This led to the yuan dropping to a new 11-year low at the beginning of the week.

According to strategists from the Bank of America Merrill Lynch, the People’s Bank of China might allow the currency to weaken further to counteract the tariffs. It is believed the yuan could be allowed to drop to 7.5 by the end of 2019.

Tuesday saw the yuan trading at 7.1621 to the U.S. dollar, equating to a decline of 0.14%.

CFETS RMB Index hits a new 4-year low

The yuan hasn’t just weakened against the U.S. dollar, though. The CFETS RMB Index, which measures the yuan against 24 currencies from China’s main trading partners, dropped to 91.1. This is the lowest the index has been at since 2015 when it was first introduced.

Beijing indicates possible economic stimulus measures

China is feeling the effects of the trade tensions, considering their recent announcement. Beijing’s State Council stated it might implement a series of measures to boost the economy and mitigate the damage caused by the U.S. – China trade war.

One such measure is to lift restrictions on car sales that some local governments have implemented. The goal is to increase demands for new vehicles, especially considering that sales have fallen in this sector over the last year.

Other measures include renovating commercial pedestrian streets, providing more help to stadiums and shopping malls, and converting old factories into commercial complexes. They are also considering allowing restaurants and shops to stay open longer, as well as providing more help to consumers to purchase smart home appliances and electric cars on credit.

The goal is to boost growth, which declined to 6.2% per year in Q2 of 2019. However, experts feel more stimulus will be required if the situation between the U.S. and China does not improve.

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