On Friday evening, Beijing released trade data for August and amusingly, the country’s surplus with the U.S. hit a record $31.1 billion last month.
Obviously, some of that is due to exporters trying to race the clock ahead of new tariffs on an additional $200 billion in Chinese goods, and the yuan’s steep decline in June and July doubtlessly buoyed exports. Indeed, that was the point of the PBoC countenancing currency depreciation. In yuan terms, exports rose 7.9% YoY, better than the median estimate of 5.7%.
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Still, the 9.8% YoY growth in exports (in USD terms) was the slowest since March and came in a shade below consensus.
Going forward, the currency won’t be able to help or at least not if last month’s four-pronged effort to put the brakes on the yuan’s slide is any indication.
Officials took a series of steps to support the currency following the quickest pace of depreciation since the August 2015 devaluation. Specifically, Beijing reinstated forwards rules (August 3), chided onshore banks for selling RMB (August 7), moved to squeeze offshore liquidity (August 16), and reinstated the counter-cyclical adjustment factor (August 24). That’s a clear indication that authorities believe they’ve reached a limit in terms of what they can achieve by allowing the yuan to weaken.
It’s worth noting however, that as long as the Fed sticks with a hawkish lean (and there’s every reason to believe they will, at least in the near term), the policy divergence between the U.S. and China will continue to grow, putting pressure on the currency, despite Beijing’s best efforts to support it.
As Reuters wrote last night (and as simple math dictates), “the surplus with the United States was larger than China’s net surplus for the month, indicating China would be running a deficit if trade with the world’s largest economy was excluded.”
News of the record surplus with the U.S. came hot on the heels of Donald Trump’s latest verbal escalation in the ongoing trade dispute with China. On Friday afternoon, while aboard Air Force One, the President told reporters the following when quizzed about the timing on the expected imposition of the fresh duties mentioned above:
I hate to do this, but behind [the $200 billion] there is another $267 billion ready to go on short notice if I want.
That’s absurd for all manner of reasons. First of all, reporters weren’t asking about a theoretical third escalation, and not because everyone doesn’t expect it, but rather because the second escalation hasn’t even been confirmed yet.
The public comment period on prospective duties on another $200 billion in Chinese imports expired on Thursday and most observers expected an immediate announcement that the administration is set to move forward with the levies.
In addition to the ambiguity on the timing, there’s also no definitive word on what the tariff rate will be. In late July, the administration suggested the rate could be hiked to 25% from the expected 10% in light of Beijing’s recalcitrance.
Because no one knows i) whether Trump will move ahead with the levies on $200 billion more in Chinese goods or ii) what the rate would be if he did, it goes without saying that nobody has any idea what the rate would be in the theoretical next escalation the President tipped on Friday.
What we do know, however, is that the hypothetical third escalation would bring the total amount of Chinese goods taxed to around $500 billion (the initial duties on $50 billion in goods that were implemented in two steps on July 6 and August 23 + tariffs on $200 billion more expected this month + this new threat against $264 billion in items). That’s consistent with Trump’s “I’ll go to $500 billion” rhetoric from July.
For context, here is why China is constrained in their capacity to respond reciprocally with tariffs and, implicitly, why Beijing will need to get “creative” going forward:
(Bloomberg)
Anyway, the point is, Trump’s trade war isn’t yielding results. China’s surplus with the U.S. is growing, America’s farmers are on actual welfare, and prices for U.S. consumer goods are set to rise in the next round of tariffs.
Meanwhile, Trump will continue to insist that everyone should be patient, because you know, you’ve got to “let it gestate like a chicken”…
And hell, if we let it “gestate” and it still doesn’t work, then the President can always lean on the old standby line about how seeing actually isn’t believing…
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