The expanded scope of the US-China conflict, which now officially extends beyond trade and tech, has materially raised the bar on any attempts to reach a compromise ahead of the newly threatened US tariffs by September 1. At the time of writing, it remains to be seen exactly what trade-related measures will be called upon by China in response to the latest move out of the US administration, with Beijing having already pledged “necessary countermeasures”. The signalling out of the world’s two largest economies speaks to deteriorating global trade conditions which are set to drag the world economy’s growth projections lower for the year.
How much Yuan weakness will China tolerate?
Another key theme over the near-term is the level of Yuan weakness that will be tolerated by the People’s Bank of China. The PBOC has just set a daily reference rate of 6.9683, compared to Monday’s reference rate of 6.9225, which allows the onshore Yuan to move up to two percent either side of the rate against the US Dollar. While a weaker Yuan preserves some measure of competitiveness for Chinese exports, provided global demand holds up, it may also exert more downward pressure on currencies of trade-reliant economies across Asia and emerging markets.