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IMF gives China cover to weaken the yuan further

  
Analysis, Economy
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IMF finds no fault with yuan weakness

IMF finds no fault with yuan weakness
The IMF is recommending that Beijing allow the yuan to fall further if the trade war escalates, according to the South China Morning Post.
They cited comments from Alfred Schipke, who is the IMF’s senior resident representative to China. He spoke in Beijing yesterday.

“If there is a shock, the exchange rate ought to be part of the adjustment and should be allowed to depreciate. That is what exchange rates are for,” Schipke said, adding that the exchange rate should be decided by market forces. “In principle let the market decide,” he said.

China has been leaning against yuan weakness by setting the mid-point at levels below the market. The currency has fallen about 4% this month.

Trump is also tweeting about the economy:

TweetThe latest GDP report showed growth at a 2.0% annualized pace.

Here are the rate cut steps expected from the PBOC, perhaps as soon as next month

  
Analysis, Economy
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A report from Reuters outlines the likely path for People’s Bank of China interest rate cuts, maybe as early as September.

  • expected to first reduce their funding costs by lowering the rate on its medium-term lending facility (MLF)
  • That will open the door for a cut in the PBOC’s new benchmark lending rate, the loan prime rate (LPR), the next time it is set on September 20
  • he MLF forms the basis for the new LPR rate, but banks can add a premium to reflect funding costs and credit risks
  • In what was seen as a symbolic move, the revamped one-year LPR was set at 4.25% last week, down 6 basis points (bps) from 4.31% previously and 10 bps lower than the existing benchmark one-year lending rate, which will still apply to older loans
Article was overnight, so an ICYMI, link here for more.
PBOC Gov Yi Gang:
A report from Reuters outlines the likely path for People's Bank of China interest rate cuts, maybe as early as September. 

China exploring ways to loosen or remove car-purchase limits

  
Analysis, Economy
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China has begun to roll out a series of guidelines to encourage consumption, led by a boost for the auto market.

  • exploring ways to gradually loosen or remove car-purchase limits
  • to support new-energy vehicle purchases in some areas
  • incentives to build more gas stations in rural areas
  • removing investment barriers on fuel wholesale and storage businesses
The State Council made the announcement late Tuesday.
China has begun to roll out a series of guidelines to encourage consumption, led by a boost for the auto market.

Ifo economist: German industrial sector is in a recession, services is now following

  
Analysis, Economy

Comments by Ifo economist, Klaus Wohlrabe

  • There will be GDP stagnation at most in Q2
  • The last time industrial companies demonstrated such pessimism was back in 2009
  • Latest developments in trade war not yet reflected by the latest survey
The final comment is arguably the most scary thing about the report here. If sentiment is already this bad, the escalation in the trade rhetoric will only cause the German economic outlook to deteriorate more rapidly in the coming months.

Trump announces fresh tariffs on Chinese products, ramping up rates by 5%

  
Analysis, Economy
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Trump makes the announcement via Twitter

On October 1, Chinia is going to be hit by fresh tariffs.
Here’s the announcement, which was clearly timed to hit moments after the FX close:
For many years China (and many other countries) has been taking advantage of the United States on Trade, Intellectual Property Theft, and much more. Our Country has been losing HUNDREDS OF BILLIONS OF DOLLARS a year to China, with no end in sight Sadly, past Administrations have allowed China to get so far ahead of Fair and Balanced Trade that it has become a great burden to the American Taxpayer. As President, I can no longer allow this to happen! In the spirit of achieving Fair Trade, we must Balance this very unfair Trading Relationship. China should not have put new Tariffs on 75 BILLION DOLLARS of United States product (politically motivated!). Starting on October 1st, the 250 BILLION DOLLARS of goods and products from China, currently being taxed at 25%, will be taxed at 30% Additionally, the remaining 300 BILLION DOLLARS of goods and products from China, that was being taxed from September 1st at 10%, will now be taxed at 15%. Thank you for your attention to this matter!
One thing that’s a bit unclear is the Dec 15 tariffs. I’m guessing those are still exempted until then.
All told, this isn’t that bad. It could have been worse. He’s ramping up tariffs by 5%. It’s not some kind of apocalyptic announcement but it certainly continues the trend of escalation.
trade war

IMF says monetary easing unlikely to make a lasting improvement in trade balance

  
Analysis, Economy
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Exchange rates can’t do it all

The IMF is out with a blog post about the effectiveness of using monetary policy to weaken a currency and boost exports.
“One should not put too much stock in the view that easing monetary policy can weaken a country’s currency enough to bring a lasting improvement in its trade balance,” the authors write.
They estimate that a 10% decline in a country’s currency improves the trade balance by about 0.3% of GDP in the near-term, largely via a contraction in imports. Over three years the effect is larger and hits an average of 1.2% of GDP.
One thing they highlight is that much international trade is done in US dollars. This slows and limits the effects of weakening the currency.
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