For a nation with a large trade surplus like China, there is never a good time for a trade war. That said, the current dispute comes at a particularly unwelcomed time as China attempts to reduce its debt levels. to deleverage with slower growth, and second, its deleveraging plan isn’t a deleveraging plan at all. Basically, China’s deleveraging plan moves debt from corporations and local governments) to point B (the Moving debt from one place to another doesn’t achieve deleveraging but it can make debt more manageable.
a tax cut, while the People’s Bank of China is reducing its reserve requirement ratio to spur lending. Given China’s debt burdens and the cost of the trade war with the U.S., it seems unlikely that these measures will
In addition to spending increases and easing monetary policy, China has one other tool at its disposal: currency devaluation. China can essentially pressure on emerging market currencies in general, China doesn’t even have to actively drive the renminbi lower.
AFTER THE FED’S 1994 RATE HIKES, THE MEXICAN PESO COLLAPSED AND WAS FOLLOWED A FEW YEARS LATER BY THE ASIAN AND RUSSIAN CURRENCY CRISES.
emerging market currencies. The risk under this in other emerging market currencies, which, in turn, leads to a weaker renminbi. As such, China will likely act to slow the renminbi’s fall, so that it takes place in an orderly fashion while clamping down on capital next year if the Chinese economy slows further or if the trade dispute broadens. In the end, however, a weaker Chinese currency will probably prove to be bad news for U.S. farmers.
Chinese growth is best measured by the “Li Keqiang Index” of electricity consumption, growth in bank loans and rail freight volume. It exerts a strong but indirect China slows down, it puts pressure on the prices of industrial metals and crude oil. This, in turn, depresses Argentina, Brazil, Canada and Russia. This lowers production costs for farmers outside the U.S. and could fall in the event of bumper harvests.
Erik Norland E:
erik.norland@
cmegroup.com
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The This report and the information herein should not be considered investment advice or the results of actual market experience.
29 | ADMISI - The Ghost In The Machine | July/August 2018
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