Yuan drops as Trump softens tone

We’ve got your doom and gloom and boom news from various fronts of the U.S.-China trade war today: currency, tech and investment, Chinese market opening, and the effects on stock markets.

Currency  

CNBC reports that China’s currency hit a new six-month low against the dollar, spurring talk that trade wars could turn into a currency war.

• China could devalue the the yuan, making Chinese goods cheaper in the U.S. and markets the U.S. sells to, despite Trump’s tariffs. Some wonder if China has intentionally allowed the yuan to deflate this week. However, CNBC says that “analysts doubt that China would do that intentionally.”
• I don’t envy China’s central bankers and financial planners right now — CNN reported on Sunday that “the Chinese government is dealing with an emerging trade war with the United States and concerns its economy is weakening faster than expected.” The People’s Bank of China freed up about 700 billion yuan ($107 billion) in the financial system by reducing the required reserve ratio (RRR) — i.e., the amount of deposits that most commercial banks are required to hold.
• They freed up the cash to stimulate the economy, explains CNN: “The move to cut the requirement by half a percentage point…will encourage banks to lend additional cash to businesses and can generate more economic activity.”

U.S. restrictions on Chinese investment in tech

U.S. President Donald Trump has apparently softened his tone. Today. Maybe. Below is the latest:

• The White House has “opted for a less confrontational approach” with China and retreated “from plans for strict limits on Chinese investment,” says the Wall Street Journal (paywall), referring to Trump’s decision, announced yesterday, to back off on executive action limiting Chinese investment into the U.S.

• Less confrontational for now? “Should Congress fail to pass strong FIRRMA legislation that better protects the crown jewels of American technology and intellectual property from transfers and acquisitions that threaten our national security — and future economic prosperity — I will direct my Administration to deploy new tools,” warns Trump in the White House statement released yesterday.
• Or maybe not less confrontational at all? U.S. National Economic Council Director Larry Kudlow “rejected the notion that the U.S. has softened its stance toward China on foreign investment,” reports CNBC.
• New laws will let the U.S. block joint ventures of American companies in China “if critical technologies are involved,” Treasury Secretary Steven Mnuchin says, according to CNBC, although he noted that the laws applied not just to China but to “anywhere.”
• Should the U.S. start a trade war with China over tech? That is the question discussed as the subject of an ongoing ChinaFile debate, with contributions so far from Yukon Huang, Jack Zhang, Graham Webster, Elsa Kania, and Rush Doshi.
• ZTE — the company American legislators love to hate — has more bad press. CNN asks, “Where’s ZTE? Execs go AWOL at China’s big smartphone fair,” while the Daily Beast dials up the panic meter with a story titled “ZTE could help Chinese ‘institutes’ at Western schools become surveillance hubs.”

Olive branches from China

Xi Jinping is reported to have told a group of Western business executives that China will not turn the other cheek but will fight back against American trade attacks. Nonetheless, Beijing continues to release news about further opening of various sectors of the Chinese market:

• China has released a list of long-anticipated relaxations of “foreign investment curbs on sectors including banking, the automotive and heavy industries, and agriculture as Beijing moved to fulfill its promise to open its markets further,” reports Reuters. The list takes effect on July 28.

• The announcement confirms earlier promises “to remove ownership limits fully on industries such as insurance and autos within the next three to five years,” but it also also eases or scraps “ownership caps on businesses including ship and aircraft manufacturing, power grids and the breeding of crops, excluding wheat and corn.”
• “As Beijing relaxes the rules for foreign financial players, JPMorgan Chase & Co. said it is growing the headcount of its China-focused business and reorganizing its investment banking teams to better reflect the country’s economy,” reports Caixin (paywall).

Bystanders start to get hurt

The uncertainty is taking its toll on the markets and on other countries. Three signals:

• “Global passive funds are buying China’s domestically traded shares for the first time and it’s not going well. Stocks in Shanghai have tumbled 13 percent in dollar terms since MSCI Inc. added so-called A shares at the start of the month. Only equities in Argentina and Namibia have performed worse.” That’s how Bloomberg describes the “gut punch” that global funds buying China stocks for the first time have received.
• “Global stocks were mixed Thursday as investors digested assurances from the U.S. and China on trade, after a series of exchanges between the two resulted in widespread uncertainty,” reports the Washington Post.

• Trade war has overtaken China as the biggest worry for Japanese CEOs, according to Nikkei (paywall).
• “Escalating trade threats are deepening the chill felt by Chinese dealmakers seeking U.S. takeovers,” says CNBC, noting that “headline deals blocked by Washington in recent months included, notably, the $1.2 billion acquisition of Moneygram International by China’s Ant Financial in January.”