Date: July 9, 2018
Here’s How a Trade War Between the U.S. and China Could Get Ugly
The first shot of the U.S.-China trade war went off without much of a reaction from investors. The calm may be short lived. For months, financial markets have been bracing for President Donald Trump to follow through with threats of tariffs against China. So it came as little surprise when the U.S. implemented duties on $34 billion in Chinese imports on Friday, as planned, and Beijing retaliated proportionately. Economists feel they have a good handle on the direct impact of higher duties. Tariffs raise the price of imported goods, in turn inflating costs for businesses. Those companies can fully absorb the increased cost, or pass some or all of it onto consumers. The bottom line: someone pays, prices rise, demand is hurt. The Trump administration is currently reviewing another round of tariffs on $16 billion in Chinese goods. If the U.S. stops at duties on $50 billion in imports, and China does likewise, the hit to both countries’ economies will be modest, Bloomberg Economics projects. Call that the neat-and-tidy trade war: both countries come to their senses, and financial markets bend but don’t break. However, Trump said last week that he may expand tariffs to more than $500 billion in Chinese goods, to basically cover all imports from the Asian nation into the U.S. Economists say they can’t fully measure the indirect impact that could occur as the trade war escalates. A decline in U.S. financial markets could be one such element. Factor in a significant slump in equities prices, with the knock-on effect of falling wealth, and the likely hit to U.S. growth widens to 0.4 percentage point, according to Bloomberg Economics.
The Bank of England Is On Course for an August Rate Hike
Bank of England policy makers are adjusting to an upheaval at the statistics office at the very point when they need as much clarity as possible to help decide whether to raise interest rates next month. The U.K. is this week shaking up the way it reports growth, publishing monthly updates and delaying its usual quarterly figures. The new process comes after most policy makers said they were waiting to see how the economy evolved before hiking rates again — a move investors and economists now expect to come in August. While the new system means that BOE officials won’t have an estimate for second quarter growth when they next meet, Governor Mark Carney said last week that he’s “serene” about the change. That may be in part because the BOE has previously questioned the accuracy of Office for National Statistics estimates, relying instead on its own analysis. Investors are currently pricing in about an 80 percent probability of a rate hike on Aug. 2. Asked last week whether the BOE would have enough information to make a decision next month, Carney said “the short answer is yes.” But while the BOE may feel it has a handle on the data, the unpredictability of politics is another factor. Prime Minister Theresa May has been plunged into a major crisis after Brexit Secretary David Davis resigned late on Sunday. Still, markets were largely unperturbed by the latest development, with sterling up 0.4 percent to $1.3341 as of 10:06 a.m. London time. In a report Monday the British Chambers of Commerce highlighted Brexit as a key factor behind sluggish growth in the U.K. economy. The report also flagged tougher trading conditions for consumer-facing industries thanks to subdued spending.
China’s Foreign Reserves Hold Steady in June as Trade War Loomed
China’s foreign currency holdings held steady in June, with a slight month-on-month increase, as the yuan slumped and the nation came closer to the trade war that has now begun with the U.S. Reserves rose $1.51 billion to $3.112 trillion last month, the People’s Bank of China said Monday. That was more than the $3.102 trillion estimate in Bloomberg’s survey of economists. The increase came as the yuan suffered its worst quarter since 1994, as China and the U.S. neared the imposition of tariffs on at least $34 billion of each other’s goods. Further declines in the yuan may stoke concern over capital flight, prompting the central bank to use reserves to defend the currency. “Rising FX reserves this month is a little bit surprising,” said Iris Pang, Greater China economist at ING Bank NV in Hong Kong. The increase “could mean that there is more room for yuan to depreciate.” China’s sound economic fundamentals have effectively stabilized market expectations, the State Administration of Foreign Exchange said in a statement on its website, with cross-border flows remaining relatively stable. China’s foreign exchange market in June was steady overall, and balanced international payments, a rising dollar, and asset price changes all contributed to the increase last month, it said. “Combining the external and internal factors, China’s foreign reserves are likely to remain stable with some volatility,” SAFE said.