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With Currency Manipulator Label, China Trade War Moves Into Unchartered Waters

Last week’s announcement by Trump of more tariffs coming for everything shipped to the U.S. from China and Monday’s move by Beijing to allow for a weaker yuan begins Act III in the trade war.

Here’s the plot twist:

Treasury just hit China with currency manipulator status after market hours on Monday. It came at a time when nothing was trading. Investors were stuck in the Twilight Zone. Tuesday morning is going to be a madhouse rush for “sell China” orders by the algos. Wait for it.

As one hedge fund manager told me, “we’ve just thrown gasoline on the fire.”

Currency manipulator status gives Beijing less wiggle room because if they weaken the yuan to make up for tariffs, tariffs will likely go up to compensate.

We are in unchartered waters. At risk is what amounts to sanctions on key U.S. commodities like soybeans and pork by the Chinese government, and political risk involving Hong Kong as civil unrest continues there, putting its special trade status in the crosshairs of a China-bashing American Congress.

President Trump told reporters last week that he figured China would depreciate the yuan in response to his plan to hike tariffs to 10% on the remaining balance of China imports by Sept 1.

In isolation, a 10% tariff on $300 billion in combination with a 10% yuan depreciation would be functionally equivalent to Chinese households writing a check for $30 billion to the U.S. Treasury. “Trump may not have gotten Mexico to pay for its border wall, but he is getting China to pay (the government) for its tariff wall,” says China bear Brian McCarthy, chief strategist for Macrolens, a big picture investment research firm.

Currency manipulator status makes the trade war worse for China.

Meaningful and enduring negative feedback about China will lead to extreme financial market volatility in Asia, especially in China’s mainland equity market where a gambler’s approach to trading by the dominant retailer investor class there might cash out. And why not? China’s mainland stock indexes are up over 20% this year and this may be seen as the time to take money off the table.

Short sellers shouldn’t discount the possibility of the People’s Bank of China pumping money into the A-shares this week.

It’s too early to start expecting widespread defaults on China’s corporate dollar-denominated debt (which some firms estimate to be around $800 billion). A default would deal a harsh blow to foreign investors who have been big buyers of Chinese bonds as that market opens up and joins the major indexes.

The transmission mechanism from yuan devaluation to global securities is expressed more obviously through Europe and other emerging markets, especially those heavily linked to China — such as South Korea and Brazil. Both currencies had an ugly looking chart on Monday.

Meanwhile, the Fed can potentially isolate the U.S. economy from any economic fallout by cutting rates. Though this opens up a whole other can of worms, namely rates sinking to zero in the event of a recession.

The yuan settled at 7.05 to the dollar today after the central bank set the daily rate at just over 6.9 to the dollar. The currency is allowed to trade within 4% of that daily fixed rate. The yuan is now at its weakest level in over 10 years.

“These moves represent a significant escalation in the trade war,” says Joseph Brusuelas, chief economist for RSM, a global financial advisory firm.

“There is a specific logic and order of operations with respect to the tit-for tat retaliation likely to play out that will not result in longer-term inflation, but will instead create conditions for deflation and negative nominal interest rates along the U.S. maturity spectrum if a longer-term trade compromise cannot be reached,” he says.

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I’ve spent 20 years as a reporter for the best in the business, including as a Brazil-based staffer for WSJ. Since 2011, I focus on business and investing in the big emerging markets exclusively for Forbes. My work has appeared in The Boston Globe, The Nation, Salon and USA Today. Occasional BBC guest. Former holder of the FINRA Series 7 and 66. Doesn’t follow the herd.

Source: With Currency Manipulator Label, China Trade War Moves Into Unchartered Waters

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How China Could Ruin 2019 For Apple, Tesla, Boeing

Image result for china economy ruins america

It was 27 years ago when Deng Xiaoping observed that “Saudi Arabia has oil; China has rare earths.”

Talk about a prescient observation. In the early 1990s, China’s then-supreme leader had zero inkling of the iPhones, Tesla cars, drones, robots and high-tech fighter jets yet to come. Yet China’s dominance over these vital inputs is more relevant than ever as the trade war intensifies.

There is a pervasive view that President Xi Jinping’s government has less leverage over Donald Trump’s. Why, then, is Xi the one walking away from a truce? With Trump increasingly desperate for a win, any win, on the global stage, China could get off cheap.

Xi’s team could be misreading the moment. Or putting testosterone ahead of geopolitical peace. A more interesting reading: Beijing reckons it has more cards to play in this game than investors recognized.

In May, Xi made a pointedly-timed visit to a rare earth facility. Though not quite Saudi oil, China’s massive store of elements vital to myriad tech products gives Beijing considerable leverage over Silicon Valley.

It’s but one example of how China may have Trump over a barrel. What other cards are up Xi’s sleeve?

Louis Gave of Gavekal Research just put out one of the more intriguing lists of possibilities. On it: banning rare-earth exports; making life “impossible” for U.S. executives operating in China; devaluing the currency; dumping huge blocks of U.S. Treasury securities; engineering a plunge in global energy prices; sharp drops in orders of goods across the board.

There are a couple of other options. One, dissuading mainland consumers from visiting America. Two, pull a Huawei Technologies on pivotal U.S. companies. This latter step could wreak immediate havoc with the Dow Jones Industrial Average.

Imagine the blow if Xi’s government suddenly closed off Boeing’s access to Asia’s biggest economy. Or if General Motors found its cars parked at Chinese customs. Halting Apple Inc.’s sales would send its own shockwaves through corporate America. Curbing Chinese imports of American soybeans would do the same in agricultural circles.

So far, China has kept retaliatory moves to a minimum. Xi seems to be rolling the dice that Trump will get distracted or impatient and move on to another target—like Japan. His calculation also seems aimed at 2020. Why give away the store to Trump when Americans might elect a less erratic leader?

Weaponizing rate-earths minerals might be Xi’s first real shot across Corporate America’s bow. The U.S. has other sources, of course. If U.S. deposits don’t suffice, companies could turn to Australia, Myanmar, India, Brazil or Thailand. And Trump seems tight enough with Vladimir Putin to score some stock from Russia. But the supply chain disruptions would surely have top CEOs — who tend to be big campaign donors — calling Trump to register their dismay.

It could backfire, too. In 2019, Beijing deprived Tokyo of rare-earth metals and China’s market share has never been the same since. “Unfortunately,” Gave says, “this would give China a ‘feel-good’ boost, but be as productive as landing a mild blow on Mike Tyson’s nose. Such an export ban would undermine China’s long-term production capacity, for the simple reason that rare earths are not that rare.”

The dumping-dollar-debt option could be especially dangerous. Just like an “uncontrolled currency depreciation,” says Michael Hirson of Eurasia Group, selling huge blocks of U.S. Treasuries would “threaten blowback to China’s economy.”

Any surge in bond yields could devastate the American consumer. The shockwaves would quickly zoom from Wall Street to Shanghai. Xi might be hinting at such a move, though, as Beijing buys fewer and fewer Treasuries. At present, China has more than $1.1 trillion of U.S. government securities. Xi seems to think that’s more than enough.

Even so, markets may live in semi-constant fear of a massive bond route bearing Chinese fingerprints. Or any number of ways in which China would ratchet up tensions with Trump and vice versa.

“The path to a potential de-escalating deal is fraught with challenges as both sides dig in, and how markets react will likely help determine the outcome of talks,” say analysts at Fitch Ratings. “Over the longer term, we maintain our long-held view that protectionist trade policy led by the US is likely to persist in the years ahead, marked by cycles of escalation and de-escalation.”

Roughly a week after Xi’s rare-earths pilgrimage, he visited Jiangxi Province, the starting point of Mao Zedong-era 1934-1936 “Long March.” There, Xi called for a new one as Trump’s America does its worst to halt China’s march to the top of the economic rankings.

That hardly sounds like a Chinese leader who’s going to cave to Trump. More like one who’s in this trade battle for the long haul.

Chinese President Xi Jinping visits a memorial hall marking the departure of the Long March by the Central Red Army in Yudu County, Ganzhou City, during an inspection tour of east China's Jiangxi Province.

Chinese President Xi Jinping visits a memorial hall marking the departure of the Long March by the Central Red Army in Yudu County, Ganzhou City, during an inspection tour of east China’s Jiangxi Province.

Xinhua/Xie Huanchi

I am a Tokyo-based journalist, former columnist for Barron’s and Bloomberg and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.”

Source: How China Could Ruin 2019 For Apple, Tesla, Boeing

Scary! Rising US-China Trade War Tensions Could Take 10% Off the S&P

Global markets continue to digest the impact of President Donald Trump’s Sunday evening tweetstorm. Meanwhile, analysts from some of the world’s biggest investment banks including UBS and Bank of America Merrill Lynch have detailed their forecasts for what a full-on trade war between the U.S. and China would look should the worst happen.

Among the many hair-raising projections is the prospect of the S&P 500 entering a correction by losing 10% of its value, which would almost certainly trigger a long-feared recession. That particular forecast was made by UBS analyst Keith Parker, according to CNBC. Parker specified that key European and American cyclical markets would bear the brunt of the declines.

S&P 500

| Source: Yahoo Finance

“FASTEN YOUR SEATBELT AND DON’T HOLD YOUR BREATH”

There is an old saying that when two elephants fight, it is the grass that suffers. In this case, both elephants will also sustain a significant amount of damage if Parker’s projections hold true. He predicts that a full-scale trade conflict between the world’s two biggest economies will see China shed anything from 1.2% to 1.5% of its GDP, which is equivalent to a drop of between $132 billion and $165 billion.

If China responds to Donald Trump’s threatened 25% tariff with a tariff increment of its own from 7% to 15% on approximately $60 billion worth of American imports, this could see the U.S. shed 0.1% of its GDP, or about $14 billion. In the ensuing scenario, Bank of America projects that China may hike tariffs on U.S.-made vehicles and reduce its soybean imports from the U.S. Meanwhile, Chinese imports of American soybeans have already fallen off a cliffsince 2017, dropping roughly 98% last year as China looks toward less antagonistic partners like Brazil.

According to a Bank of America report also cited by CNBC:

“Fasten your seatbelt and don’t hold your breath. The latest escalation of the trade war was completely unexpected, despite the strength of the economy and the markets. This is evident from the immediate negative reaction of U.S. equity futures to the news.”

As the two elephants knock heads, the amount they are erasing from each other’s economies is equivalent to the GDP of mid-sized nations. European and Asian economies will also feel some pain, according to UBS.

IS TRUMP BLUFFING?

According to the White House, the new 25% tariff regime that could potentially kick off this entire sequence of events will come into effect just after midnight on Friday. Expectedly, markets have been in virtual freefall since Monday, with the NASDAQ and S&P 500 both shedding close to 1% on Monday alone. The miserable market conditions continued through Tuesday, with little sign of respite as investors react with horror at the thought of a damaging 20th-century-style trade conflict between economic superpowers.

Dow

The Dow Jones Industrial Average continues to trend downward following Sunday evening’s shock announcement. | Source: Yahoo Finance

Not everyone believes that the panic is warranted, however. JPMorgan CEO Jamie Dimon, for example, believes that the shock announcement by Trump was nothing more than a way of cornering a formidable opponent and forcing them to negotiate. Speaking to CNN Money’s Poppy Harlow, Dimon stated that regardless of the market’s reaction, Trump will count it as a win because it has become the only successful way of getting the Chinese to the negotiating table on his terms.

Whether this is a considered masterstroke of strategy or simply a typical Trump action, it certainly appears to have done the trick. Chinese Vice Vice Premier Liu He will be part of a trade delegation to the U.S. later in the week, which at the very least is a sign that China is willing to give ground so as to avoid a damaging trade war.

Source: Scary! Rising US-China Trade War Tensions Could Take 10% Off the S&P

Rakuten Taps Chinese Blockchain Firm for $60 Billion Authenticity Market

In 2008, at least 54,000 Chinese babies suffered after ingesting formula that had been contaminated. Demand for safe products has grown year over year, every year, since then. Companies like blockchain-centric Techrock have capitalized on this market by finding unique solutions to the authenticity problem. Techrock uses the blockchain to track every step of a product’s lifecycle and rewards consumers for verifying it through their mobile phones.

Chinese Consumers Increasingly Willing to Pay a Premium for Authentic Imported Food

In China, it is reportedly difficult to get authentic products. Some researchers have found that more than 90% of the food sold in China is faked in one way or another.

For non-food products, this isn’t such a big deal; but there are some markets where it’s life and death – such as baby formula and other food products, which can have deadly side effects. According to Techrock, which spoke to CCN about their recent partnership with Rakuten, the situation has created a market for authentic goods as large as $60 billion per year.

Techrock uses blockchain technology in two aspects of its business. On the one hand, it offers a loyalty program for customers who use the service to purchase authentic products. On the other, it creates a permanent record of a product’s authenticity.

From Supply Chain to Reward Points, Blockchain’s Role

Every product in Techrock’s store has a digital representation on the blockchain. The company has developed a reputation for delivering high-quality, authentic goods, and it’s applying the same process to its Rakuten “zone.”

Their target market is less about authentic shoes or electronics and more about health supplements and other things which people prefer not to risk. The loyalty program helps them retain customers, and using the blockchain for it, the points have no expiration date. A side effect of Techrock’s Tael loyalty program is that it introduces many people to blockchain for the first time.

Techrock recently entered a partnership with Japanese retail giant Rakuten to get authentic Japanese goods to customers. Rakuten has long had an interest in blockchain companies, but it only touches the technology in a tertiary way here.

Rakuten is looking to expand its reach in China, where it is far from the leading retailer. By contrast, Alibaba is the boss in China – but Alibaba’s eBay-style product suffers a lot of knock-off problems that the rest of the Chinese market does.

Growing Year-Over-Year

Built on Hyperledger, Techrock’s labeling technology ensures that products are real. The customer can verify this with an app on their phone, and once they do so, they earn their reward points at the same time. The rewards can be used to purchase more goods in the store, which encourages customers to keep using Techrock.

Techrock’s partnership with Rakuten means that Chinese customers don’t have to worry about fakes, and they have streamlined access to authentic, safe products. Techrock Co-Founder Alexander Busarov told CCN:

“We already sell in over 220 or 230 cities where our consumers are located. It’s all sent by the local dealer companies. We think our business will grow as the demand grows.”

China is reportedly the largest market for both food and firms that verify the safety of food. Consumers have been driven online as they continually lose trust in local vendors. Regulations and other issues make it such that local companies, like Techrock, will ultimately supply the demand.

Techrock’s partnership with Rakuten is notable because they’re the third to secure such a partnership – JD.com being one of the first – and they are built entirely on blockchain.

Source: Rakuten Taps Chinese Blockchain Firm for $60 Billion Authenticity Market

Better Off in a Cave: Chinese Count Costs of Apartments In Anti-Poverty Campaign


May 11, 2018

By Joseph Campbell

LIN COUNTY, China (Reuters) – Seventy-year-old Chinese farmer Guo Jiaming has lived most of her life in a cave, shunning modernity for a home carved into a mountainside that keeps her cool in summer and warm in winter.

“A cave is convenient and it’s warmer,” said Guo, explaining why she preferred her home to alternatives such as a high-rise city apartment, despite the cold winters of China’s northern province of Shanxi.

“An apartment building is only heated when the central heating is turned on,” she said.

“Old people like me can’t stand this cold during the winter,” Guo added, pointing to a wood-burning heater that warms her cave and the bricks under her bed.

Local authorities want Guo and other cave-dwellers to swap their homes for apartments in a nationwide campaign to relocate 2.8 million people to new homes this year.

The drive is part of efforts to eliminate extreme poverty by the end of 2020 in China, where about 30 million people live on less than a dollar a day.

The relocations are voluntary, say residents of Lin county, but Guo sees no reason to abandon her cave house.

A form of shelter known as “yaodong” that dates back thousands of years, cave houses, which typically have several small rooms with earthen walls, are common in China’s hilly north, where they are carved out of slopes and cliffs.

“IT’S TERRIBLE”

Nationally, authorities say the relocations are going well.

“Our work has been proceeding smoothly,” Liu Yongfu, an official handling poverty alleviation and development efforts, told a news conference in Beijing in March. “The common folk are very supportive.”But authorities in Lin county declined to comment on their relocation plans when contacted by Reuters.

Cave dwellers who have moved say they regret shifting, because they found bare concrete walls with no plumbing or electricity in their new blocks, instead of the finished units they had been promised, including furniture and television sets.

Zhao Yugui, a 54-year-old farmer assigned to a family-sized apartment, said he now lived 10 km (6.2 miles) from his fields.

“I can only ride a motorbike back to work in my fields and take care of old people and my wife,” Zhao said, showing a visitor round his flat, where wires protruded from bare concrete.

Hua Xiaomo, 50, recently moved into a nine-storey building in a different neighborhood.

“It’s terrible,” she said, adding that when she lived in a cave, she never had to walk upstairs.

“Sometimes it’s really inconvenient. The lights aren’t bright either. It’s dark,” she said, describing the area around her apartment block.

The cost of living in the city also chafes elderly farmers, who earn a meager 500 to 800 yuan ($80 to $126) a year. They say the government should provide an allowance.

“Those who leave need to have money. Where does that money come from?” asked 68-year-old Li Congdai.

(Writing by Elias Glenn; Editing by Darren Schuettler and Clarence Fernandez)

Vía One America News Network https://ift.tt/2KQML1c

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