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Will they or won’t they?

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Will they or won’t they?

By Vincent-Frédéric Mivelaz

Will China and the USA settle their trade dispute in a way that pleases markets? Despite US President Donald Trump’s statement last week that an agreement could be reachable, a second salvo of US import duties on Chinese products looms large. Preparations are underway for a 2-day meeting starting on 30 January between US Trade Representatives and Chinese Vice Premier Liu He’s delegation. However, China will not send two vice-ministers, due to a lack of progress in topics such as technology transfer and structural reforms that include state subsidies to Chinese companies. To top it off, the prosecution of Huawei’s CFO continues: the US Justice department is pursuing extradition from Canada, where she was arrested. Chinese authorities are not willing to leave the case overlooked.

Despite a weakening Chinese economy in Q4 2018 and a bearish global growth comment from the International Monetary Fund, the key question remains unresolved: how will the Chinese yuan react in a positive or negative deal? If negative, fundamentals would favour a drop in CNY, as China’s trade surplus would considerably reduce, whereas improvement in risk sentiment would tend to say the opposite. It is too early to know the balance. Looking ahead after 1 March, the rise of existing trade duties from 10% to 25% on USD 250 billion imports, close to 50% of China’s exports to the US, should further weaken CNY. This is unappealing to US authorities, because Chinese exports would gain further traction.

The currency pair is currently trading at 6.7856 CNY per USD.

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