A Currency War Too, Between the U.S. and China?

By Kim Catechis, Head of Investment Strategy at Martin Currie

The U.S. Treasury Department has designated China as a currency manipulator, for the first time since 1994. This is another escalation in the deterioration of the relationship between Beijing and Washington, with all the risks that implies. We may have crossed the line into “currency war.”

It sounds serious, but it is essentially meaningless theatre for investors, as the Trump Administration seeks to pile on pressure by prejudicing sentiment.

Yet for those who invested in the A-share market ahead of the G20 conference expecting a resolution (or a truce) between Beijing and Washington, DC, this is bad news. It’s also bad for expectations of global economic growth, which affects all markets – including U.S. equities.

The U.S. Treasury has become more politicised, and judging by its threats to raise another 10% of tariffs on Chinese imports, the Trump administration wants to play “hardball.” The currency manipulation designation provides political cover for the next round of tariffs, which will hurt U.S. consumers: prices for children’s toys, furniture and electronic goods are expected to rise.

It is telling that U.S. officials chose to act under the 1988 Omnibus Trade and Competitiveness Act, which requires only a “material” current account surplus and a “significant” bilateral trade surplus. By contrast, the 2015 Amendment stipulates three criteria, and China only meets one.

This technically triggers a renegotiation of existing trade agreements and potentially a request for a review of China’s currency by the International Monetary Fund (IMF). Yet the renegotiation of trade relations is ongoing, and China is already under the IMF Article IV surveillance process.

If facts mattered, this might not be happening. Over the last three years, Chinese authorities have intervened to keep the CNY from devaluing, because they want to avoid capital flight. That also helped the U.S. Dollar. It seems that, once the latest U.S. threat of incremental tariffs came through, breaking the truce struck at the G20, Beijing decided to stop being helpful.

The official CNY fixing was set at 6.9683, higher than investors expected. To China, that demonstrates restraint. But Beijing is losing patience, increasingly angry at President Donald J. Trump and his threats. Restraint may prove difficult to maintain with further provocations.

Perversely, the biggest driver of Chinese currency devaluation appears to be President Trump, by virtue of his persistent and explicit efforts to derail the Chinese economy. And confrontation with China may be the only issue that enjoys bipartisan support across the U.S. Congress.

So investors should dig in for the long haul!


Kim Catechis is Head of Investment Strategy at Martin Currie, a subsidiary of Legg Mason. Catechis' opinions are not meant to be viewed as investment advice or a solicitation for investment.

Kim Catechis

Head of Investment Strategy 
Martin Currie

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