After announcing 10% tariffs on $200 billion of goods, the US said it would raise it to 25% in 2019. The tariff list has also been revised to exclude some consumer goods. We believe that China will retaliate.
It was 10% then 25%, now back to 10%
First, it was 10% and talked higher to 25%, and now down to 10%. These kinds of tactics should not be effective for negotiations. China will retaliate, but the retaliation strength depends on the degree of damage. Back down to 10% means a smaller retaliation than a 25% tariff.
The tariff list was also revised to exclude some consumer goods. This would help contain the rise of US inflation, and help some Chinese exporters.
China unlikely to return to negotiations with a threat of 25% tariffs
The 25% tariff on $200 billion of goods has not gone away completely. It will be realized in 2019. Hopefully, this is not a strategy to push China back to the negotiation table, as I believe no one would like to be forced to negotiate. By then, US inflation would increase, and Chinese exporters would lose the export orders.
Our note yesterday analysed why China would not return to negotiations before the end of US mid-term elections. Now it becomes even harder for China to return to the negotiation table.
And the threat of tariffs on $267 billion is still in the cards of the US administration. Again, this threat would not push China back to trade talks, rather it is the opposite, it will deter China from returning to negotiations.
We believe China would only return to negotiations if the US keeps its previous promise that there would not be further tariffs. Then both sides can talk again. Hopefully, this is what is going to happen though the chance is low.
Yuan likely to weaken further
USDCNH spot now at 6.8925 (08:00 Beijing time). We expect when the market opens the yuan would weaken further.
Crossing 7.0 seems to be possible with the escalation of trade war though it could be temporary as the next day's fixing should manage the USDCNY back to below 7.0. But touching 7.0 could be a new norm.
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