This article examines the recent weakness in the renminbi and stock market volatility that has resulted in the significant sale of equities. Increased volatility and the likelihood of a correction are considered with the purpose of providing investors with some guidelines for dealing with market turbulence.
The China-US trade war shows no sign of ending any time soon as all the tariffs imposed by the US are still in place. President Trump has announced more tariffs of 10%, possibly more in the future, on the remaining $300,000,000,000 of Chinese goods imported into the US that had not previously been subject to tariffs. This announcement came in wake of the breakdown of talks when an American delegation to Beijing was unable to make any headway, and talks were broken off fairly quickly even though diplomatic language was employed for the sake of politeness.
The tough stance regarding China should be seen in the context of American aggressiveness towards Russia. New sanctions have been put in place against Russia at the same time as nuclear arms treaties have been cancelled. Sanctions against Iran continue to hamper economic development in this important Middle Eastern country, while Venezuela has suffered intensely due to restrictions imposed by the US with the aim of changing the regime in Caracas. There are also problems with the EU that have not been solved regarding tariffs on automobiles as well as the question of steel and aluminum imports. It is thus clear that the Administration is active on various fronts, and China is only one of them.
President Trump must have been aware of the likelihood of Chinese retaliation of some sort to the imposition of tariffs on the totality of Chinese goods shipped to the US. The Chinese response was to suspend the purchase of American agricultural goods on the part of state enterprises and a weakening of the renminbi in Forex markets. The Chinese had agreed to the purchase of American agricultural products, but apparently, the truce was off, and previous agreements voided because of the most recent upping of the ante in the trade war on the part of the US represented by the imposition of a 10% tariff on the remaining $300,000,000,000 of Chinese goods.
It is not widely known in the US that Chinese and Japanese businessmen study the treatise of Sun Tzu, "The Art of War", as part of their preparation for careers in business. President Trump authored "The Art of the Deal" with a ghost writer, who really did most of the writing. The book is mainly the story of Trump's emergence as a tycoon. The Chinese act as if they are fighting a war while Trump is wheeling and dealing.
Sun Tzu was able to beat enemies that were much stronger than the forces that he had available. Whether there will be a winner and a loser in the trade war remains to be seen. There may be only losers. Thus far, the trade war has had a negative impact on both countries as well as the global economy, and the situation may worsen further.
The renminbi weakened as the PBoC did not take immediate action as the currency declined. This changed when the renminbi was fixed Monday 5th June 2019, at 6.9683. This took place shortly after the US declared China a "currency manipulator", which is very strange since the PBoC has been manipulating the currency for over twenty years. In fact, the Chinese admit that they have extensive experience in dealing with managing the currency. Washington did not complain when the PBoC kept up the strength of the renminbi against the US dollar. See the chart below.
It is truly ironic that a relatively small change in the exchange rate has resulted in such furor. Apparently, the number seven arouses emotions globally. In any case, the PBoC is still in control, and it is an exaggeration to speak of devaluation at the moment. This does not exclude that the PBoC could resort to a currency war in the future. At the moment of writing, the renminbi is at 7.06 to the dollar.
The Stock Market
In the stock markets, the Trump tariff announcement came after a week of loses, and the situation only got worse as the trade war ground on. The DJIA suffered significant loses and was down to 25,717 but has since recovered somewhat and is now at 25,724.06 at the time of writing.
However, if taken in perspective, the drop was perhaps only to be expected as the DJIA was clearly overpriced due to the marked advances since the election of Donald Trump to the Presidency.
In the aftermath of Trump's election, the DJIA went from 15,000 to over 25,000. The affirmation that inflation has consistently been under 2% for the last decade does not hold when it is a question of asset prices. Given the bubble in asset prices, the large overhang of corporate debt and federal debt and consumer debt, it is no surprise that the stock markets were due for a severe correction. It is a moot point whether stock market loses are to be attributed to renminbi weakness or to other underlying factors.
In conclusion, investors are going to have to reckon with heightened volatility and possible downturns in the stock markets. Gold has been advancing and has entered a bull market. Given all the uncertainty regarding the trade war and a possible currency war in the offing, hedging with a higher allotment to gold in one's portfolio could be a good move. In any case, T-bills are a better bet than 10s at the moment and, a defensive stance regarding equities, that is, diminishing exposure to loss, will help to protect value. Obviously, for American investors, Chinese stocks should be avoided as the risk and volatility do not justify any hopes for profits there.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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