Trade War Becomes a Currency War

Trade War Becomes a Currency War

Chinese authorities have reportedly deployed the country’s central bank to resist intense trade pressure from Washington as nearly 85 percent of China’s sales to the US were hit with export tariffs amid an escalating trade war.

The People’s Bank of China has announced first steps towards easing monetary policy, pledging to boost demand for the national currency. The regulator said it would cut the amount of cash reserves for some banks by 0.5 basis points and unleash some 700 billion yuan ($108 billion) of liquidity to accelerate the pace of debt-for-equity swaps and support smaller companies.

The measure, which takes effect July 5, is expected to weaken the national currency and consequently make Chinese goods taxed by the US cheaper. Tariffs announced by President Trump earlier this month will come into force on the same date.

Chinese policymakers have been pushing for debt-for-equity swaps since late 2016 to ease pressure on corporations struggling with their debts.

On Monday, the yuan weakened by 0.74 percent against the US dollar, its lowest since late December, and slightly sank against a basket of currencies, marking a drop of 0.47 points.

“The intensity of the move exceeded market expectations,” Wang Jun, Beijing-based chief economist at Zhongyuan Bank, told Reuters.

“This move will help support the real economy and stabilize financial markets. We’ve seen rising debt defaults and funding strains on small firms, as well as a sharp adjustment in the capital market.”

Last week, China’s central bank pledged to deploy all the possible tools of monetary policy to protect its economy against US tariffs, to provide the economy with growth and eliminate financial risks.

The idea that a trade war between US and China is good for the dollar is complete nonsense, according to investor Peter Schiff. He believes that greenback will only depreciate.

“The thinking is – at least when it comes to trade – is that the dollar is going to benefit from a trade war, which I think is wrong. I think it’s just as wrongheaded as the concept that the dollar is going to benefit from larger budget deficits,” Schiff said.

According to Schiff, while one may think that a trade war or US budget deficits can create a dollar deficit that will prop up the greenback, in reality the world will be flooded with American currency. “The thinking is this is going to absorb all the dollars out there and there is going to be a dollar shortage, which is complete nonsense.”

He explains that the excessive amount of dollars will be provided by the mint of US treasury bonds. “You’ve got a treasury, you’ve got a dollar. I mean, what’s the difference between a 30-day treasury bill and a dollar? You know, they’re pretty much the same thing. The only difference is people don’t readily spend their treasuries, right? They don’t go into a store and purchase something with a treasury. But they can. They can cash it in and buy something. But they’re effectively dollars. So, even though the Federal Reserve, in theory, will be shrinking its balance sheet, the US government will be expanding its balance sheet.”

Schiff says as the supply of dollars is going to grow and grow, the demand for the American currency can fall, while the US Fed will be unable to stop the dollar glut. “Eventually, what’s going to happen is it’s going to be the demand for those dollars is going to collapse, not the supply. And when the demand for dollars collapses, then the price of the dollar collapses. You get massive inflation. That is what is coming.”

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S. Jack Heffernan Ph.D. Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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