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A few weeks ago, I wrote an article entitled "Why America Wins the Trade War and How Smart Traders Can Profit From It", in which I suggested that the United States win their business battle with China. Since then, I've had the opportunity to read an article by James Rickard titled "Preparing for a Chinese Maxi-devaluation." In short, he thinks that China will devalue the yuan, up to the total amount of Trump rates, in order to cancel them, Mr. Rickard and I share a number of readers in common, and some of them have asked my opinion on this possibility.
He is right in saying that a massive devaluation of the yuan would, however, have a negative impact on China in many other respects: a global devaluation of the yuan would not only harm the United States, but also a declaration of currency war against the European Union, the United Kingdom, Canada and all other countries with which it trades. More importantly, China's cherished goal of internationalizing the yuan and benefiting from the kind of free financing enjoyed by the United States would be down for decades.
I give credit to the Chinese leadership for a lot of information. A massive devaluation of the yuan would not work and they know it. They can see that President Trump has shown no hesitation, like other previous presidents, in calling China for alleged unjust trade policies. His administration would respond quickly to the manipulation of the Chinese currency by declaring that China was a "currency manipulator". This would constitute a strong legal reason for the United States to impose additional high taxes on Chinese products and the administration would no longer need to hide behind an alleged "national security concern".
In other words, you can not stop people from doing stupid things. But, one of the stupidest things China can do is openly manipulate its currency to induce a devaluation of 25% or more. It would be like taking an elephant gun for a rabbit shoot. It would not work against the United States, destroy its plan for the internationalization of the yuan, and it would extend the trade / monetary war to the world. This is possible? Yes. But, I do not think so.
More likely, there will be a continuation of the same process of slight depreciation that we see now. In other words, a relatively low devaluation coupled with a very great war of words. In the end, for the reasons I have set out here, China will eventually capitulate to the most important demands of Mr. Trump. He will take concrete steps to open his market to American products. More importantly, he will agree to stop forcing US companies to disclose technological trade secrets in exchange for access to the Chinese market.
The so-called "trade war" between the United States and China scares almost as much European financial managers prospect of the inevitable disappearance of the euro. These are the same investors who, following the tightening of the Federal Reserve, act as a buoy for the US stock market. However, as the rhetoric of the "trade war" increases, they will be less optimistic about the safe haven feature of US assets. This should cause a significant temporary drop in US markets, and that is the opportunity to buy, amidst an overvalued stock market, of which I have spoken.
China will eventually capitulate to the demands of the Trump administration, as explained in my previous article. But, in all probability, this will happen before the problem of the euro is solved. With the resolution of the trade war problem, frightened foreign investors should return to business as usual. America should again appear as the refuge to escape the catastrophe of the euro. It is likely that they will reinvest money in the United States, reflecting the prices of US assets
The analysis involves a large reserve because it assumes that US markets will experience a sharp decline because of trade friction with China. But, the Federal Reserve could openly or secretly return to another series of print money if it sees the stock market plunge. Options include another round of so-called "quantitative easing" or a hidden expansion of money supply via hundreds of billions of so-called "window loans" to primary dealers, just like what he's done from 2002 to 2008. The reserve does this, stock prices could be prevented from falling into nominal terms
Disclosure: I have no / we have no position in the stocks mentioned, and we do not plan to take a position in the next 72 hours. ] I wrote this article myself, and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have a business relationship with a company whose stock is mentioned in this article.
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