The Trade War Explained
Even before Donald Trump became president of the United States, he held the believe that China manipulated its’ own currency for economic advantage. Whether the believe was actually true is another matter. But being the president of the United States, Donald Trump’s administration has embarked on a trade war with the Peoples Republic of China.
The 2018 trade war started with a single safeguard by the United States on washing machines and solar cell panels in January. This safeguard has pick up speed escalating into a full scale tariff war. At the core is President Trumps’ belief that trade deficits with countries around the world are hurting the U.S. economy and in particular manufacturing.
The reaction by China is a tit-for-tat response by imposing tariffs on $250 billion worth of Chinese imports. Tariffs were imposed especially on US agricultural goods.
The trade war has increased global economic uncertainty while the USD is strengthening against all major currencies, not least of which is the Chinese yuan. The effect is that US exports become more expensive and thus less attractive. True to his nature has President Trump tweeted that the Chinese and Europeans are manipulating their currencies to hurt the US. The Feral Reserve was also not spared. The Fed’s interest rate increase pushed up the exchange value of the Dollar.
The Trump administration has targeted China, the 27-member European Union and neighbors Mexico and Canada with trade tariffs. Despite a warning by President Trump to these countries not to retaliate in kind to US tariffs, the affected countries did just that.
China took some sting out of the US tariff sting by allowing its currency, the yuan to slide 9% against the dollar. This is the lowest level in several years making Chinese exports much cheaper. For the Chinese yuan to fall that far was a conscious decision, because Beijing still largely controls the value of its currency and could have intervened to stop the slide. In some ways the move to weaken the yuan was quite easy as the currency had steadily gained in value the prior year, providing some room to fall without causing too much damage.
Now, with Trump’s tariffs set to escalate even further, there are fears that China could just let the yuan fall as it did this summer, essentially unleashing a currency devaluation that would further ramp up bilateral tensions.
In late September, the United States levied 10 percent tariffs on $200 billion worth of Chinese goods, and the tariff is scheduled to rise to 25 percent in January. Trump has also threatened additional tariffs on $267 billion worth of Chinese products, adding up to essentially everything the country ships to the United States.
What happens to currencies when tariffs are imposed?
When a country imposes tariffs on another country, doubt is created on the imposed country’s economic outlook and raises the likely outcome of a retaliatory tariff decision. When there are doubts on the economic outlook of a country, investors are more likely to pull their capital from the country and that could lead to currency declines.
A decline in currencies normally lead to price instability and enhanced volatility.
Trade Forex with the Chinese Yuan
The currency of the People’s Republic of China is known as the Renminbi (directly translated as the People’s Currency) with the actual bank notes and coins themselves being called the Chinese Yuan. This is similar to the UK currency being known as Sterling, with the notes and coins being referred to as the Pound. The symbol used for the Yuan is ¥, and there are three Forex codes connected with this currency: RMB, CNY and CNH (which refers to the offshore tradable currency). The Chinese Yuan is used across the People’s Republic of China but not in Macau or Hong Kong (although it is sometimes accepted in these two regions), and it is not accepted as legal tender in Taiwan.
The rate of the CNY is set by the central bank, the People’s Bank of China, and it has a narrow band of variation, basing its value against several international currencies. The Yuan was originally pegged to the US Dollar, and this has been the case off and on over the last few years, with the most recent de-pegging occurring in 2010.
The currency pair CNY/USD is becoming increasingly popular with all kinds of investors due to the rise in interest in the Chinese economy. This pairing refers to the Chinese Renminbi currency and the US Dollar.
The Yuan is now the ninth most-traded currency worldwide. Each Yuan is made of 10 Jiao, and each Jiao consists of 120 Fen.
The CNY/USD pair is an exotic currency pairing because there is less trading of this pair when compared to the Cross and Major pairs, there is less market liquidity, which leads to a higher cost of trading.
There are several advantages to choosing to trade the exotic CNY/USD pair:
- Predictability – As there is a lower trading volume and slower trading pace in the CNY/USD market, price action can be predicted more easily, making long-term trades a possibility.
- Fewer traders – CNY/USD transactions have a higher cost than that of major pairs, and when combined with the lower exposure of this pairing to the global Forex trade community, it means that speculators and casual investors are excluded from the market. This results in fewer traders.
- Opportunities for diversification – The CNY to USD trade usually attracts more experienced investors wishing to develop a more diverse portfolio of investments. The CNY/USD market enables them to try a more unusual market, which may bring a greater profit should the trade work out successfully.
- Challenging opportunities – As the CNY/USD market is quite unique, it represents a more challenging opportunity for experienced Forex traders, which enables them to create their own strategies and formulas in order to achieve a higher level of trading success.
Forex Brokers in China
With more than a billion population and fin-tech industry on the rise, the world’s second-largest economy is a country with huge forex market potential. Nonetheless, China is in fact one of the most frustrating jurisdictions in the world for retail forex brokerages.
The reason for this is the policy of the Chinese government, which doesn’t seem too keen on the forex industry, to put it mildly. There was a ban on advertising of forex trading and related services on Baidu, the largest search engine operator in China. It was lifted, however there are still a number of impediments to forex brokers in the country, such as the unclear license application procedure, problems with cross-border payments, as well as a leverage cap of 1:20, to name a few.
The previous paragraph needs to be seen in the light of the fact that first forex retail license has been allocated on the 19th November 2018 to a Hong Kong brokerage named Guo Tai Jun. The broker is now allowed to enter the interbank forex trading market and carry out “spot FX, futures and swap currency trading operations.”
More importantly, people in mainland China will now be able to trade with Guo Tai Jun without needing to have a Hong Kong bank account with HKD in it.
There are foreign forex brokers in China. There have been concerns about the Chinese authorities shutting down non-Chinese FX brokers after they banned crypto currency trading in the country. Yet, it appears that the brokers licensed by reputable financial agencies such as the FCA in the UK or ASIC in Australia, are out of trouble, especially if they have physical offices in the country
Yet another option for foreign brokerages who wish to operate in China is through a joint venture with a partner that is 100% Chinese owned.