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Is the Trade War with China coming to an end?

Fox News: "China announces it seeks 'calm' end to trade war, as markets tank and currency hits 11-year flatline" (…/china-announces-it-seeks-end-to-t…)

Deal time? Maybe.

The Chinese currency continues to take a beating. In the chart, you can see the big movements accompanying each announcement of tariff increases against the Chinese.

The devaluation of the CNY is now approaching 15% (4% in the last few weeks). The tariffs started at 10%-25% on a portion of Chinese exports (10% on aluminum and 25% on steel) and gradually added other products covering about 1/3 of China's exports to the US in the initial round. In the second round, announced in the spring, it increased to about 2/3 of Chinese goods and generally went to 25%.

From Jan 2018 to today import prices in the US have fallen about 1%. Why? When the Chinese currency was devalued it wasn't just on 'tariffed' goods, it was on all goods (that's how currency deval works). At the same time the $US has strengthened against other currencies as well (one of the reasons the President is calling on the Fed to cut interest rates - short rates affect currency value).

China might have used its currency devaluation to help negate the effects of the tariffs and to maintain market share, but it also may be losing control of its ability to 'peg' its currency to the price it desires. Currency flows out of an increasingly 'risky' China could also drive the devaluation.

Market Insider: "Investors are pulling billions out of Chinese stocks and the bleeding is unlikely to stop anytime soon" (…/investors-pull-billio…)

The 15% drop in value in the CNY vs the $US is a real drop in 15% revenue on all exports to the US. That equates to an approximate .6% drop in Chinese GDP on a $ basis. If the CNY continues to deval to the full 25%, it will shave a 1% OFF GDP, not off GDP growth, but off actual GDP.

At the same time that CNY deval is hurting Chinese exporters, it is driving up the cost of imports for Chinese producers (commodities need in production), including food for Chinese consumers.

China imports about 15% of its food because it is not self sustaining. For the past year or so it has been ravaged by both the Asian Swine flu killing off millions of feeder hogs, and also 'Army Worm' which is destroying crops. It is estimated that by 2020 its food production deficit could grow from 15% to 25%.

The average Chinese family spends in excess of 20% of their budget on food (its about 6% in the US). As goods trade in US dollars that could mean increased food imports at increased prices could consume another 5% of the Chinese family budget.

So, is China ready to deal? Maybe.

CNY V USD 2018 - Aug 26, 2019

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