It appears that Trump and Xi will meet at the G-20 in Osaka at the end of June, and it is becoming a meeting with significant implications, for the US-China trade negotiations and much beyond. The general vibe is of a hardening of positions on both sides. Knowledgeable pundits say the Chinese side cannot allow there to be even a hint of weakness, especially with the 70th anniversary of the establishment of the PRC hovering up over the horizon. The rhetoric is certainly becoming much more strident.
If an agreement is reached then fine, but what happens if the meeting ends without one? As a start, Trump indicated that extra tariffs would kick in, and the RMB may fall below 7 to the USD. Chinese officials have spent a lot of time in the past couple of weeks preparing the markets for this eventuality. And while it doing so would take pressure off them in terms of the amounts of money spent on supporting the currency, it also opens up the yawning uncertainty of, if not 7 then where? No breakthrough in Osaka would also increase the chances of an even greater and faster de-coupling of China from most of the rest of the world. Tech and trade of course, but potentially much more than that. Interesting signs of the times: Huawei this week started registering trademarks for its alternative smart phone operating system in preparation for the possibility that it is banned permanently from Google’s Android system, and shoemakers are apparently moving production from China to Indonesia. China being an integrated part of the global community and system is obviously the preferred conclusion of all of this.
Domestically, there are some clouds amidst the summer sunshine. The actual extent and potential consequences of the swine fever epidemic are unknown, but it could be that a significantly bigger cull of China pigs is ahead, with obvious implications for inflation, which saw an uptick in May. The problems in Hong Kong over the extradition treaty don’t make things easier for Those in Command, either in terms of the US relationship or the lead up to the Taiwan election next year. And further stimulus funds appear to be heading into the hinterland to help stave off the impact of the economic slowdown, raising again the question of how much money does China actually have to play with and what would be the implications of a further expansion of the debt mountain. Kyle Bass, the man who fought the People’s Bank on the RMB rate in 2015 and lost, is back in the market betting against the HK dollar pegged to the USD and clearly has a view on that.
Have a good weekend.