Trade war could force heavier hand from China on yuan

Analysts at Bank of America Merrill Lynch see the yuan ending the year at 6.95 per dollar. (Reuters)
Updated 03 September 2018

Trade war could force heavier hand from China on yuan

  • Market watchers say renewed pressure on the currency is inevitable as the Sino-US trade war escalates
  • Top Chinese officials have repeatedly vowed they will not use yuan depreciation as a weapon in the trade war

SHANGHAI: China’s central bank may have to decide soon whether to intervene more forcefully to support the wobbling yuan currency as the United States readies more sweeping tariffs on Chinese goods.
After tinkering around the edges while the yuan fell for four straight months, the People’s Bank of China (PBOC) recently signaled it was not comfortable with further losses and managed to steady the currency before it tested the sensitive 7-per-dollar level.
But market watchers say renewed pressure on the currency is inevitable as the Sino-US trade war escalates, threatening to put more pressure on China’s already cooling economy.
President Donald Trump’s administration could slap tariffs on another $200 billion of Chinese imports as early as this week, the latest punitive measures aimed at forcing Beijing to improve market access, cut industrial subsidies and slash its huge trade surplus with the United States.
Such a move could sharply amplify risks to the yuan, which is already facing downward pressure from Beijing’s domestic monetary easing, rising US yields and the broad-based rise in the dollar.
“The central bank is now keeping a delicate balance, and any unexpected outcome from the Sino-US trade talks or risk events in the market could weaken such balance,” said Ji Tianhe, China rates and FX strategist at BNP Paribas in Beijing.
That could spur the PBOC into tightening foreign exchange measures, Ji said.
Analysts at Bank of America Merrill Lynch see the yuan ending the year at 6.95 per dollar, another 1.6 percent decline following the currency’s losses of about 5 percent so far this year.
Goldman Sachs maintains a forecast of 7.1 per dollar by early next year, although their senior China economist M.K. Tang expects it will strengthen thereafter as trade tensions ease.
The PBOC has taken a number of steps in recent weeks to support the currency and make it more expensive for traders to bet against it, helping to ease jitters in global markets where memories are still fresh of China’s shock devaluation in 2015.
The latest came on Aug. 24, when the central bank said it had reintroduced a “counter-cyclical factor” in its daily yuan fixing, arresting a record-breaking 10-week fall in the yuan’s value that saw it dip to 6.9340 per dollar.
State banks were seen swapping yuan for dollars in the forward market, presumably to stock up on dollars and to dampen expectations for a fall in the yuan’s value in the future.
Controls on capital flows that China imposed in 2016 and 2017 also seem to have helped prevent a recurrence of the volatility seen then, when China unsuccessfully burned through a trillion dollars worth of FX reserves to try and contain the yuan’s fall and stem capital flight.
But analysts think the PBOC has only bought itself some time, and expect renewed yuan weakness as the dollar rises.
“Further depreciation of the yuan will run the risk of triggering market panic and large-scale capital outflow,” said Jonathan Cavenagh, head of FX strategy for emerging Asia at JPMorgan Chase in Singapore.
Analysts expect the next measures won’t be as light as the ones announced so far.
Going by the PBOC’s response in 2017, it could potentially impose heavier reserve requirements on offshore yuan deposits in China, change the settlement method used in currency forward contracts or significantly raise the cost of yuan for foreign short-sellers in offshore markets.
Goldman Sachs’ Tang says it is not possible to rule out other measures to tighten capital flows, or even direct dollar-selling intervention, though he says the latter would require “quite a lot of pick up in FX outflows” to spur the bank into direct action.
For now, though, market participants still don’t know which lines in the sand the PBOC will defend most aggressively.
On the surface it appeared the PBOC was stopping the yuan from a potential breach of 7 per dollar — a level not seen since the global financial crisis a decade ago. But it also seemed to have stepped in when the trade-weighted index fell near 92 — a level it possibly felt made the yuan too cheap and which it defended in 2017.
Its willingness to cross a possible third line in the sand — China’s $3 trillion safety cushion of foreign exchange reserves — is also in doubt.
Top Chinese officials have repeatedly vowed they will not use yuan depreciation as a weapon in the trade war, while Trump has accused Beijing in recent weeks of manipulating its currency to offset the impact of US tariffs.
But a senior trader at a foreign bank in Shanghai warned that a sharp escalation in the dispute could leave the PBOC at a loss unless it put its money where its mouth is and defended the yuan more aggressively.
“If the authorities really want to stabilize the currency, they have to come up with real money. All this sleight-of-hand is not enough,” he said.


Saudi Aramco iktva forum kicks off in Dhahran

Updated 15 min 15 sec ago

Saudi Aramco iktva forum kicks off in Dhahran

  • Iktva has become one of the Kingdom’s most important and strategic programs focused on developing the energy sector and creating a world-class supply chain
  • The program aims to reach 70 percent local content, increase exports of Saudi-made energy goods and services, and create thousands of jobs

DHAHRAN: Saudi Aramco’s 5th annual iktva (In-Kingdom Total Value Add) forum kicked off on Monday at the Dhahran Expo center, with over 70 exhibitors, 14 government entities, and 8 international energy partners all present at the mega-event.

Iktva was launched by Saudi Aramco in 2015 to drive increased levels of localization in its supply chain. 

Amin Nasser, President and CEO of Aramco, highlighted the success of the event and how the forum has contributed to the kingdom’s reputation internationally and locally.

“The iktva Forum and Exhibition 2020 represents an ideal opportunity to continue to build on the enormous progress which has already been made in creating an integrated supply chain for the oil field service industry, serving not just the Kingdom but the entire region. As you know, we take great pride in our low-cost production, and our reputation for reliability. A first-class supply chain is a critical factor that makes both possible,” he said.

He also indicated that the success of the event could be seen in the numbers.

“For the first time, the majority of our procurement is from in-kingdom: 56 percent to be exact. Our suppliers have tripled their local purchases of goods and services, their employment of Saudis is up 50 percent, and female employment has increased by almost a third. Our suppliers are exporting 50 percent more from the kingdom, because of iktva,”

Aramco signed 66 initial agreements and strategic and commercial collaborations valued at more than $21 billion with international partner companies and entities from 11 countries in several industrial and business sectors across the Saudi Arabian energy sector.

In addition, a joint venture agreement with Baker Hughes was also signed. The joint venture will be a multi-sectorial non-metallic investment platform designed to innovate, develop and manufacture composite materials for both oil and gas as well as non-oil and gas applications.

The venture will leverage polymer materials and state-of-the-art manufacturing processes to deliver transformational non-metallic products, starting with reinforced thermoplastic pipes. The JV facility will be located at the King Salman Energy Park (SPARK), and will serve the MENA region. 

Launched in 2015, iktva has become one of the Kingdom’s most important and strategic programs focused on developing the energy sector and creating of a world-class supply chain. The program aims to reach 70 percent local content, increase exports of Saudi-made energy goods and services, and create thousands of technical and professional jobs and careers.