Trade war, day 97: U.S. Treasury tightens investment oversight, warns against yuan devaluation


The U.S. Treasury Department took two actions today that dialed up the financial stakes of the U.S.-China trade war.

  • First, it initiated a toughened investment regime, approved by the U.S. Congress this summer under the Foreign Investment Risk Review Modernization Act (Firrma).
  • This act “expanded the purview of the Committee on Foreign Investment in the United States” to be “able to review a much wider array of deals, including joint ventures and smaller investments by foreigners in American businesses that make technology deemed critical for national security reasons,” according to the New York Times (porous paywall).
  • The regime will remain a “pilot program” for one month, and will become formalized on November 10.
  • Second, it warned China against currency devaluations. Steven Mnuchin, the Treasury secretary, told the Financial Times (paywall) “that the Treasury monitored currency issues ‘very carefully’ and noted that the Chinese renminbi had fallen ‘significantly’ during the year, adding that he wanted to discuss the currency with Beijing as part of trade talks.”
  • This comes as the Chinese yuan, also known as the renminbi, approaches the “key psychological level” of seven yuan per dollar, a level it “hasn’t breached in a decade,” Bloomberg reports (porous paywall). Right now, one dollar buys about 6.92 yuan — only half a year ago, a dollar bought about 6.3 yuan.
  • But China is “not purposefully devaluing the currency,” write the economists at Trivium, as devaluation is instead a natural outcome of “the trade war and diverging monetary policy in the two countries.” Reuters even reports that “China is suspending approvals for a niche overseas investment product in Shanghai,” which can be seen as a precaution against capital outflow and another of many protections put in place against rapid devaluation.

All the financial doom and gloom hit stock markets today — “Stocks suffered their steepest drop in eight months,” the New York Times reports (porous paywall):

“The Standard & Poor’s 500-stock index dropped 3.3 percent, bringing the broad equity benchmark down 4.4 percent for the month. The yield on the 10-year Treasury note, a key measure of borrowing costs, inched up to more than 3.24 percent during the trading day before declining.”

More trade war news:

  • Alibaba execs weigh in on trade war; trade war weighs on Alibaba stocks
    US will ‘suffer more’ in trade war with China: Alibaba’s Jack Ma / SCMP
    “American efforts to launch a cold war of sorts against Beijing to neutralise the rise of Asia’s biggest economy are ‘ill advised,’ Alibaba Group’s top executives said on Wednesday.”
    Alibaba’s stock hits 52-week low amid trade war / TechNode
  • Unexpected optimism
    Chinese finance ministry official says ‘optimistic’ on trade war breakthrough / Reuters
    “Currently the ball is in their court. But personally I’m a little bit more optimistic,” Zhou Qiangwu, Associate Counsel of the Finance Ministry’s department of international affairs, told Reuters on the sidelines of the annual IMF and World Bank meetings in Bali.
    “The talks are still going on, via different channels. The cancellation (of official trade talks) is only one of them,” said Zhou, although he did not elaborate and said he was unsure when the next formal negotiation would take place.
  • SOEs
    Beijing directs state firms to ‘perform like normal enterprises’ after trade partners’ complaints / SCMP
    “Beijing has set fresh guidelines for state-owned enterprises (SOEs), a target of recent complaints by China’s major trading partners, by advising the companies to operate like normal business entities and to continue to cut excessive steel and coal production capacity.”
    “The directives mark a departure for the government from a previous policy of making the state behemoths ‘bigger and stronger’ in favour of a softer tone, just weeks after trade ministers from the US, EU and Japan – in an obvious swipe at China – jointly blamed SOEs for market distortions.”
  • Japan-China warming ties
    China seeks Japan’s economic cooperation amid trade war with US / Nikkei Asia Review
    “Chinese Premier Li Keqiang on Wednesday called on Japanese business leaders to bolster economic cooperation, as a tit-for-tat tariff trade war between China and the United States has been escalating.”
  • Oil trade
    China is dramatically cutting US oil imports, analyst says, even though it’s not on tariff list / CNBC
    “Oil may not have been on China’s official tariff list, but the country appears to have not imported any U.S. crude U.S. crude oil in August, according to BIMCO’s chief shipping analyst Peter Sand, who cited U.S. Census data.”

Previously in SupChina’s trade war coverage:

Trade war, day 96: Trump says ‘sure, absolutely’ to more tariffs, as any talks through end of 2018 are thrown into doubt