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Dollar Still Above 7 per Yuan as US-China Trade Hope Runs Amok

Dollar Still Above 7 per Yuan as US-China Trade Hope Runs Amok

2019-11-28 17:00:00
REAL VISION, Guest Contributor
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US-CHINA TRADE DEAL OPTIMISM AMISS CONSIDERING CORE ISSUES RUN DEEP

  • Stock prices have recorded a string of record highs on hopes that the US and China will soon reach a partial trade deal, but USD/CNH continues to trade above the redline 7.0 level
  • The US-China trade war may be far from over considering Washington and Beijing face key fundamental differences on several outstanding issues like IP theft and currency devaluation
  • Kyle Bass shares his thoughts in a Real Vision interview on China trade practices, the Chinese economy and how the world’s second largest economy might see massive capital outflows

Kyle Bass, founder and chief investment officer of Hayman Capital, has long been an open critic of China. In a recent interview hosted by Raoul Pal of Real Vision, Kyle discusses China’s economy, the country’s trade practices and how a currency crisis might loom with regards to the ongoing spat with the United States. Kyle floats the idea how sustained downward pressure on the Chinese economy – driven largely by the impact that trade war uncertainty has had on slowing global GDP growth – could lead investors to abruptly pull their money out of the country.

The premise of aggressive capital outflows from China correspondingly has potential to spark a major Chinese Yuan currency crisis, Kyle argues, which could be the ‘Achilles heel’ that brings down China’s economy despite opposing efforts by the PBoC and Chinese government. While stock market indices – such as the Dow Jones or S&P 500 – have enjoyed a boost to record highs from upbeat reports pointing to the potential that a partial trade deal will be signed by Donald Trump and Xi Jinping sometime this year, there is a growing risk of complacency.

USD/CNH Price Chart

US Dollar to Chinese Yuan spot USDCNH price chart

The recent dose of Sino-American trade optimism and similar influx of risk appetite might prove to be in disarray despite the perceived improvement in trade relation. This is partly evidenced by the US Dollar to Chinese Yuan exchange rate (spot USD/CNH) seeing that the direction of the renminbi and PBoC fixing can help gauge the trade war.

As such, it seems as though markets may be in disarray with spot USD/CNH still hovering above the ’taboo’ 7.00 barrier despite growing speculation that the US-China trade war could soon near an end. On that note, there are still several key issues that US and China trade negotiators must face that could lead to a breakdown in trade talks and another rise in tension between the world’s two largest economies.

For example, the US Treasury still has China listed as a designated currency manipulator amid PBoC intervention in aim of devaluing the Yuan to offset the economic cost from President Trump’s tariffs. Also, US Congress just passed legislation in support of Hong Kong democratic protestors despite China’s resentment, which has potential to throw a wrench in recent trade talk progress. This is in addition to other major fundamental differences the US and China have on trade such as intellectual property rights violations and theft of technology that remain unresolved.

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