US: Trade war with China at the forefront – BBH

There is a 60-day period between the announcements and when the US tariffs will be implemented and China has not indicated when it will enforce its tariffs, which is understood to allow room to negotiate here in Q2, according to analysts at BBH.  

Key Quotes

“Also, this is seen as compatible with the Trump Administration's bold rhetoric and climb down in practice.  Consider the recent flip on NAFTA, from threatening to leave it to seeking an agreement in principle next week.  As part of the effort, the US appears to have softened its demands on the controversial domestic content requirement for autos (presently 62.5%, and the US had sought 85%).”

“From camps that have been critical of China about its holdings of US Treasuries, large debt accumulated since 2008, currency practices, etc., bellicose language is still fanning the flames.  This war camp worries that one way that China could retaliate is to allow its currency to depreciate.  Sure, it could, but over the last few months there is only one major country that stood accused of talking its currency down.  In fact, it was so disturbing that it raised addressed at ECB press conference, and was subsequently, walked back by the US President and the Treasury Secretary.”

“The war camp that is playing up the possibility that China sells its Treasuries in displeasure also complains when China buys US Treasuries.  We can also test the hypothesis of what happens when China has sold US Treasuries in the recent past.  From June 2016 through November 2016, China's Treasury holdings according to US data fell by $200 bln, which was 15% of their holdings.  What happened to the US 10-year yield (as a rough and ready metric of the impact), you ask?  It was virtually unchanged.”

“The Chinese yuan has appreciated 3.2% against the US dollar this year.  As we have noted, the US Treasury's report on the international economy and foreign exchange is expected this month.  China's behavior in the foreign exchange market has not changed.  It is slowly rebuilding its reserves that were previously run down by 25%.  Capital controls appear to have arrested some of the outflows. China is expected to report March reserves figures in the coming days.  They are expected to have risen by about $14 bln.”