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Stock Markets Predicting Peace in the Yuan War

The Yuan War Continues

Stock Markets Predicting Peace in the Yuan War

About: Bank of New York Mellon China ADR Index (BKCN), Treasury Department, U.S. trade representative Susan Schwab, New York University professor Nouriel Roubini, Bloomberg, China's President Hu Jintao, President Obama, ADR Index, China Stock Digest, Chinese equities, Jim Trippon, China's equity markets Bookmark and Share

The real story of what’s happening in relations between China and the U.S. can be found in the tale of the tape. The Bank of New York Mellon China ADR Index popped over the past week, while mainstream news media continued sounding the alarm about a trade war or an attack on the dollar by China.

The threat of deepening division between Washington and Beijing has been making China investors nervous recently. Five U.S. senators have called for stiff tariffs against Chinese goods as punishment for “undervaluing” the yuan. On April 15th the Treasury department is expected to issue a sensitive report that could brand China a currency manipulator. Former U.S. trade representative Susan Schwab went to far as to predict that the “currency manipulator” label was inevitable as political pressures mounted.

In turn, officials in Beijing warned Washington that Beijing would not accept threats. This was seen in some circles as yet another hostile remark when it was a mere statement of fact. Beijing’s mandarins may indeed negotiate, but they will balk, and perhaps even lash out, if they feel demeaned, humiliated or coerced.

Stock Markets Predicting Peace in the Yuan War

New York University professor Nouriel Roubini told Bloomberg last week the U.S. and China are on a “collision course” over the Chinese currency and investors are underestimating the disruptions for global financial markets.”

But astute investors have read between the lines of reports from China and the U.S. recently and discerned a new tone of cooperation emerging. A flurry of indications points to a desire by both sides to cooperate as much as possible.

China's president, Hu Jintao announced that he will attend a Washington summit on nuclear security on April 12th, just three days before the currency report was expected. Although the US-China relationship has come under considerable pressure recently, Beijing's decision to attend the April 12 summit, to discuss nuclear terrorism and possible responses, indicates possible cooperation on the sticky question of China and Iran.

China has previously resisted calls to slap sanctions on Iran, an important trading partner. But President Hu’s decision to visit Washington may signal a shift in policy in favor of U.S. concerns. On Thursday night, President Obama spoke by phone with Mr. Hu for about an hour from Air Force One, an unusual length of time considering past frosty relations. China’s press reported that President Hu expressed a desire for healthier ties. The White House said Mr. Obama pressed China to get tougher on Iran and its nuclear ambitions.

It would be a diplomatic gaffe to brand China a currency manipulator, and to begin the process of imposing tariffs just days after President Hu visits Washington in a clearly cooperative gesture. Indeed, the White House has declined to affirm that its currency report will be released on April 15th as anticipated. I expect that it will be delayed as China sends more signals.

Stock Markets Predicting Peace in the Yuan War

Don’t expect China to knuckle under to Washington’s calls for an upward valuation of the yuan in the 25 percent to 40 percent range. Beijing recently signaled through its media why that won’t happen. The Chinese government has conducted “stress tests” on companies that could be affected by yuan revaluation. The outcome is no surprise.

The tests indicated that many industries, including home appliance, light industry and textiles, cannot bear an immediate and sharp appreciation in the yuan's value. A mere 3 percent appreciation of the yuan will reportedly shrink profits by up to 50 percent at machinery and electronics makers.

Clearly Beijing will not expose its fragile export industries to this kind of punishment. Expect China to agree to a wider trading band in the valuation of the yuan, instead.

That may not seem like much, but it appears we are seeing important harbingers of peace and cooperation between Beijing and Washington. That alone has been enough to quell investors’ nerves and send the ADR index to a peak just shy of its 52-week high of 400 points.

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