The tension between the United States (US) and China regarding their trade relations rages on, but, in the last few days, there seems to be an effort from both sides to reduce it. The trade talks between representatives of both sides scheduled for the end of August 2018 could be a starting point, according to global market analysts. 

Mid-level trade talks are expected to focus on the value of the Chinese Yuan (Renminbi) compared to the US Dollar. According to a CNBC report, published on Monday August 20th 2018, the US Dollar has gained a bit more than 6% against the Chinese Yuan in the first eight months of 2018. The CNBC report noted that much of the US Dollar’s appreciation occurred during July and August 2018. The last time that the US Dollar traded around 7.0 against the Chinese currency was in May 2008, more than 10 years ago. 

The Chinese Yuan began to lose value when the US President Donald Trump spoke against the Chinese government’s trade policies, stressing that it’s unfair towards the US and pledged to do whatever he could to reverse the situation. Listening to US threats of sanctions against China made global investors worried and sent the world’s major stock markets down as there was no guarantee that there won’t be an escalation. The US Federal Reserve’s (Fed) move to raise its benchmark interest rates to 2% drove the US Dollar’s value up, affecting its exchange rate with the Chinese currency. 

Some analysts suggest that the Chinese government allowed the country’s currency to depreciate as a countermeasure to the imposed US sanctions on Chinese products. However, they are not sure whether this policy helped the Chinese economy withstand the sanctions’ pressure or made the situation worse. The weakness of the Chinese Yuan makes imports of materials more expensive from the rest of Asia which raises the cost of Chinese produced goods, and the surging government debt denominated in  US Dollars increases the doubts of analysts about the Chinese policies. 

The CNBC report notes that, during the upcoming meeting between US and Chinese officials, it is likely that the US side will express its discomfort regarding the Chinese Yuan’s depreciation. A report by the political risk consultancy Eurasia Group, released on Friday August 17th 2018, noted that the Chinese side will likely respond by saying that “China is not seeking to weaken the currency but allowing the exchange rate to respond to the pressures of the trade war, a slowing domestic economy, and monetary easing.”

A Wall Street Journal (WSJ) article on Saturday August 18th 2018 said that “the US and Chinese negotiators are outlining a roadmap to end their trade impasse ahead of the meetings scheduled between the US President Trump and his Chinese counterpart Xi Jinping in November 2018.” The article mentioned that the two sides want to keep a deepening trade dispute from torpedoing the US-China relationship and further shaking the global financial markets. 

Nomura, which is one of the largest financial services groups with headquarters in Asia, published a report on Sunday August 19th 2018 in which its market analysts suggested that additional protectionist measures from the US administration should be anticipated. “We expect the Trump administration to move ahead with the 25% tariff on an additional $200bn in Chinese imports, whether in full or by installments, with an announcement sometime after the USTR finishes the review process on September 6th 2018. There is still a significant amount of uncertainty around trade as developments could fare better or worse than we expect,” was noted in the Nomura report.

STO and trading the US Dollar

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