FX Spotlight | RMB: US-China relationship back in focus | Article – HSBC VisionGo

RMB: US-China relationship back in focus
Finance  ·    ·  6 mins read

  • US and Chinese presidents had their first extensive conversation in six months, discussing bilateral relations
  • The WSJ reported that the USTR is looking into tariffs on Chinese imports
  • We believe an official announcement on tariff cuts could see a knee-jerk response in USD-RMB

US and Chinese presidents spoke for the first time since February, discussing bilateral relations and relevant issues of shared interest

Headlines on the US-China relationship have flip-flopped lately. Last Thursday (9 September), US President Biden and Chinese President Xi had their second extensive conversation, with both sides seeking to keep the overall relationship from deteriorating further (Bloomberg, 9 September 2021). Since US President Biden took office in January, the first call between the two leaders was in February, before the Lunar New Year. However, the WSJ reported on 10 September that the Biden administration is considering launching an investigation into China’s subsidies under Section 301 of the US trade law, which could lead to new tariffs (WSJ, 10 September 2021).

The WSJ reported that the USTR is looking into tariffs on Chinese imports

The details in the WSJ report are not as negative as the headlines suggest though. The article reported that the United States Trade Representative (USTR) does not plan to reduce tariffs on more than half of Chinese imports, but it has been looking into which tariffs are hurting the US economy or could substantially raise the costs of other parts of the Biden agenda (e.g. infrastructure building).

Meanwhile, according to a survey done by the American Chamber of Commerce in China, 47% of its members want the removal of tariffs, with more than 75% of companies complaining that the measures impact their operations (Bloomberg, 10 September 2021).

Past experience suggests that the path towards a trade deal with even partial removal of tariffs could be bumpy

As we have seen in the past, the path towards a trade deal with even a partial removal of tariffs could be bumpy. Also, the current USD-RMB level is not too far from the 6.35 level when the tariff threat first started in 2Q18. It is also worth noting that the 6.35 level is also the point when the People’s Bank of China raised its reserve requirement ratio for onshore FX deposits in May.

An official announcement on tariff cuts could support the RMB, albeit temporary, in our view

In our view, an official announcement on tariff cuts could see a knee-jerk response in the RMB; however, thereafter, we believe the market will shift its attention back to the USD bullish factors, including moderating global growth, the Federal Reserve’s tapering, and COVID-19. 

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