When the Elephant and Dragon in the Room Fights

The US China trade war is escalating towards new territory with the US accusing China of currency manipulation. What will be the implications of all this?

China’s Yuan has depreciated to a decade low, passing the 7:1 threshold. The US China trade war is escalating towards new territory with the US accusing China of currency manipulation. What will be the implications of all this? And how will it affect countries like Thailand that are stuck in the room with these two superpowers.

Trump‘s latest round of tariffs of 10 percent on 300 billion dollars worth of goods has prompted a counter move from Beijing that takes the economic conflict between the world’s two biggest superpowers beyond their tit for tat tariff battlefield.

 

China has let its Yuan slip pass the 7 to 1 peg after the People’s Bank of China set its daily reference rate at a weaker level than 6.9 , a rate unseen since the 2008 financial crisis. The US president was just as prompt in using his go to weapon of mass media destruction. On August 5th, president Trump tweeted:

“China dropped the price of their currency to an almost a historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”

 

Global markets went red across the board, however, that’s been more than expected. Seasoned speculators would have been well aware of what happens when economic superpowers clash against each other; markets retract.

The US deems this as a reaction to its new round of tariffs that will take effect this September 1st. With China’s list of imports from the US exhausted with tariffs already set in place, China’s logical response is to let its currency weaken. A response that the IMF assess is in line with economic fundamentals.

With a weaker currency Chinese exports become cheaper, which renders the US tariffs less effective. It seems that the US’s strategy of putting up price barriers has given China justification to gain greater economic competitiveness. However, in the long run Chinese businesses that are dependent on imports will certainly suffer. Beijing will most likely step in to alleviate the stress within those sectors as well.

If the US isn’t able to get the label of Currency Manipulator to be accepted by the global financial institutions, its tariffs will become very limited in terms of real impact.

 

Meanwhile, the weaker Yuan spells trouble for countries that depend on Chinese patronage in such sectors as tourism. Thailand’s recent growth and slowdown in its tourism sector has been greatly attributed to the raise in Chinese purchasing power. The Thai condominium boom saw many Chinese investors and owners that desire to have properties they actually own. With both the tourism industry and real estate businesses staggering and hinting at a burst, Thailand must take action before it is too late, again.    

It is times like these that new investors will have to put their knowledge to the fire to acquire wisdom. The fundamental integrities of businesses will be the determining factor that enables some to sail through this coming currency storm, and some to sink.