U.S. Treasury Labels China a Currency Manipulator After Yuan Hits Major Level

Posted on 08/06/2019 4:10 AM

Beijing suspends purchases of U.S. ag products | More ag trade aid in 2020?

The U.S./China intractable tit-for-tat trade war is back with several big punches by both countries the past 24 hours, with the U.S. Treasury labeling China a “currency manipulator,” the first time it has done so since 1994, and just hours after President Donald Trump again accused China of weakening its currency to create an unfair trade advantage. The action moved the U.S./China clash to open economic warfare.
The latest moves boost concerns they would temper the U.S. economic expansion and put more pressure on the Federal Reserve to further lower interest rates, following its decision last week to lower rates for the first time in more than a decade. Futures markets are currently pricing in a 100% chance of at least one rate cut at its next policy meeting, on Sept. 17-18, according to CME Group. That’s up from 51% last Wednesday, when the Fed reduced its benchmark federal-funds rate to a range between 2% and 2.25%. Federal-funds futures reflect a nearly 41% probability of at least three more quarter-point rate cuts in 2019, according to CME Group. That is up from 8.2% one month ago.
     China’s central bank said Monday’s depreciation was “due to the effects of unilateralist and trade-protectionist measures and the expectations for tariffs against China.” People’s Bank of China Governor Yi Gang said that China won’t engage in competitive devaluation and that the decline was due to market forces. If China allows its currency to fall even more, countries in East and Southeast Asia that compete in similar industries could face market pressure to devalue their own currencies. But China today signaled it would not let their currency depreciate right away.
     Beijing said Chinese companies had suspended purchases of U.S. ag products, and that the government has not ruled out putting tariffs on U.S. farm goods purchased after Aug. 3. Zippy Duvall, the president of the American Farm Bureau Federation, called the announcement “a body blow to thousands of farmers and ranchers who are already struggling to get by.” American exports to China fell $1.3 billion during the first half of the year, and American farmers now stand to lose all of what was a $9.1 billion market in 2018, Duvall said. That had fallen from a $19.5 billion market in 2017, before the trade war began.
 President Donald Trump hinted at another round of ag trade assistance payments to farmers in 2020. Asked if there will be another round of trade aid, he told reporters Friday: "I'll always help our farmers. Our farmers were targeted by China. And our farmers — frankly, these are great patriots. I'll always help our farmers.”
     Asian equities tumbled following Wall Street’s worst one-day fall this year, prompted by the renminbi’s breach of Rmb7 to the dollar on Monday for the first time in 11 years, escalating the trade war between the two countries. China’s currency stabilized in trading today. The People’s Bank of China said it would issue 30 billion yuan ($4.25 billion) of central bank bills in Hong Kong — a move seen as limiting possible short-selling of the currency.
The International Sweetener Symposium continues in Asheville, North Carolina, with several ag industry, lawmakers and government officials and analysts speaking. You would expect some good desserts at such an event, and that is indeed the case, as shown below, via John Cook, Executive Pastry Chef of the Omni Grove Park Inn’s eight restaurants and lounges, as well as in-room dining and banqueting operations.
     Sugar at sugar



— U.S./China trade policy update:

  • The Trump administration labeled China a “currency manipulator” after the Chinese central bank allowed the renminbi (yuan) to fall below a key threshold, marking a significant escalation in the trade war between the two nations. The U.S. Treasury unveiled its decision after financial markets closed on Monday. It came just hours after President Donald Trump again accused China of weakening its currency to create an unfair trade advantage. The Treasury department said China had a “long history of facilitating an undervalued currency” by intervening in the markets. “In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past,” it added in a statement. The decision to label China as a currency manipulator for the first time since 1994 comes just four months after the U.S. Treasury passed on an opportunity to make such a formal designation as part of its semiannual currency report. It also comes after National Economic Security Council Larry Kudlow last week dismissed speculation that the Trump administration would interfere in currency markets.
  • The U.S. move came after China let the renminbi weaken to under Rmb7 to the dollar on Monday. Because China exports far more to the U.S. than it imports, it is hard for Beijing to match the tariffs. Devaluation is an obvious alternative. But Beijing pledged to ensure the currency's stability despite the U.S. labeling China a currency manipulator. On Monday evening in Beijing, Yi Gang, governor of the People’s Bank of China, said in a statement that China would ensure the currency's “fundamental stability” and “will not engage in competitive devaluation.” Observers believe China may be willing to see the renminbi weaken against the dollar, but authorities would step in if the pace of depreciation accelerates enough to risk spurring capital outflows. The currency’s slide threatens to revive concerns about the capital flight that helped prompt the country to spend $1 trillion of its reserves in 2015. Yi attributed the move in the renminbi, or RMB, to market forces, adding that many currencies had depreciated against the dollar recently. “I am confident that the RMB will continue to be a strong currency,” Yi said in an article published to the social media account of the central bank.
  • U.S. stocks recorded their biggest one-day drop this year and bond yields plunged as investors worried that the trade and economic tensions would temper global growth. Today, Asian stock markets opened sharply lower.
  • Beijing acted after President Trump late last week said the U.S. would impose 10% tariffs on another $300 billion worth of Chinese goods on Sept. 1 that aren’t now subject to levies, altering a truce that he reached with Chinese president Xi Jinping in June. In further retaliatory measures on Monday, Beijing asked its state-owned enterprises to halt U.S. agricultural goods purchases in retaliation to the U.S. tariff threat. Also, China’s Ministry of Commerce said the government was “currently not ruling out applying additional tariffs” on imports of U.S. agricultural goods because of President Trump’s plan to raise tariffs. It said Trump’s plans “seriously violated the consensus reached by the U.S. and China” at the G20 meetings in June. China’s potential tariffs would apply to purchases of ag goods made after Aug. 3, the day after President Trump announced his tariff increase, it said.
  • The currency manipulator label triggered a process whereby the U.S. could ask the IMF to evaluate China’s currency policies.
  • China holds more than $1 trillion of U.S. Treasury securities. In the three months to the end of May, China’s holdings of US government treasuries were reduced by $20.7 billion, to $1.1 trillion, still the biggest foreign stake in the U.S. Treasury market, although it has shrunk by $81 billion since June last year. But over the longer run Chinese ownership of outstanding US Treasuries has fallen from a peak of 14% in 2011 to 7% currently. In 2011, Ding Gang, a senior editor at the People’s Daily, argued in an editorial that Beijing should use its financial clout to teach the U.S. a lesson in response to its arms sales to Taiwan. In a 2012 report, the U.S. Defense Dept. argued that the threat was not credible because the use of Treasury securities as a coercive tool would have limited effect and would do more harm to China than the U.S. China could not dump Treasuries without pushing up yields (reducing capital values), leading to big losses on its holdings. If the proceeds were repatriated, the losses would be compounded by a surging renminbi and a falling dollar. 
  • Bottom line: Last Thursday’s tweet from President Trump threatening 10% tariffs on another $300 billion of Chinese products cascades the lengthy trade dispute into far more market-moving significance. Some observers say Trump could have made a strategic mistake, with tariffs now more likely ahead and still more pressure on the Federal Reserve to cut interest rates, with President Trump calling on the Fed to respond. "Are you listening Federal Reserve?” Trump tweeted. But China is able and more than willing to invoke countermeasures to punch back at each Trump action. Who wins a trade/economic war: no one. What now? Surprises are now in the likely category. Another extreme move by Trump, China watchers alert, would be if the president decides to get more aggressive in his words regarding the ongoing Hong Kong situation and the Chinese government’s actions to deal with the matter. If the trade war continues to accelerate, there’s a rising danger we are entering an era of deglobalization that will bring substantial pain to many of today’s multinational companies.

— Software glitches in MFP 2 and other topics bring uncertainty to unveiling of program. USDA officials acknowledge there are several “glitches” in the software being used in county FSA offices to implement the Market Facilitation Program 2 in which $7.25 billion in payments to farmers are expected by the end of the month.

Meanwhile, several cases, largely in southern states, find that some farmers did not certify their acreage in 2018 and that is a must before being eligible for MFP 2. In some instances, county FSA offices put farmers’ acreage as “idled” due to workload constraints. USDA Undersecretary Bill Northey told Pro Farmer on Monday in Asheville, North Carolina, that USDA “is aware of the situation and we are looking into it.” Farmers usually have a year to update their acreage certification, but the timing of the MFP 2 program has made such updates a problem.

Another farmer issue about MFP 2 is getting different responses from different FSA offices. The issue: While in most cases MPF 2 paid acres cannot exceed 2018 plantings, if a producer farmed new ground in 2019 and those acres were certified in 2018, the additional acres are eligible for MFP 2 payouts. However, some FSA counties are limiting the additional acres to purchased ground and not ground rented. Farm program payments have always “followed the farm and the farm number,” a veteran farm program source said. This could be another glitch in the MFP 2 software, some say.

— Key unknown for supplemental disaster payments ahead: what are the payment caps. Impacted producers are anxiously awaiting USDA’s rollout of disaster aid details later this month, with payments expected in September. The push is on to allow payment caps far higher than announced MFP 2 limits.

— Highlights from first day of the 36th International Sweetener Symposium:

  • National Farmers Union President Roger Johnson acknowledged the farm group has never supported a Free Trade Agreement in the past but said NFU’s Board would discuss the USMCA in September. He noted past efforts to improve trade relations with Cuba. “I'd be surprised if we don't” ultimately support the USMCA, Johnson said, stressing he did not want to get ahead of the September Board decision. "We need to make sure that it (USMCA) is fair,” he said.

  • NFU's Johnson said a renewed look should be made at idling some acres in the coming years, via an enhanced Conservation Reserve Program (CRP) or via the crop insurance program. He called for something “fundamentally different” in domestic farm policy, saying “there is a crisis” in rural America.

  • Dr. John Newton, chief economist for the American Farm Bureau Federation (AFBF), said the average rate of return for U.S. farmers is 1.3% this year, marking the fifth straight year of returns below 2%. That translates to a negative median farm income of -$1,449 this year, forcing most producers to depend on a growing amount of off-farm income to make ends meet and raising more concerns if any overall U.S. economic downturn develops. Returns this low create challenges for agriculture, he said, from keeping pace with rising input costs to repaying operating loans. And the impact ripples throughout the rural economy, he added. “Commercial debt in agriculture is at record highs, loan delinquency rates are rising, and Chapter 12 bankruptcies have increased sharply,” Newton told the group. “Some major lenders are reducing their exposure to agricultural loans and reducing lending volumes.”

  • Brian Cavey, senior vice president of government affairs for CoBank, said his bank continues to be a major agricultural lender, with 100% of its business focused on farm credit, agribusiness lending, and rural infrastructure.  But he agreed that current tailwinds in the rural economy are troubling. “Right now, the name of the game is managing risk and uncertainty,” Cavey said. This kind of environment necessitates strong farm policies to give lenders confidence that loans will be repaid in a timely manner. Protecting crop insurance and opposing cuts to the farm safety net are top priorities for CoBank, he explained.

  • Rep. Glenn “G.T.” Thompson (R-Pa.) came out forcefully in favor of the current U.S. sugar program, noting sugar is heavily subsidized in other parts of the world. He predicted the USMCA will pass the House “if the Speaker brings it up.” He was referring to House Speaker Nancy Pelosi (D-Calif.). He said approving USMCA would send a signal around the world that they can reach trade deals with the United States. Thompson is ranking member of the House Ag Subcommittee on General Farm Commodities and Risk Management. He said his vision for the Committee’s future is to “achieve a robust rural economy” and that “this requires the right farm policy for all our commodities, including sugar, that exceeds the expectations of our farm families. If we can exceed your expectations, then rural America is going to do quite well.” Thompson stressed he and other sugar program defenders “defeated efforts to repeal the sugar program with a remarkable 141-vote margin. That type of decisive [vote] should resolve once and for all that our current U.S. sugar policy is good for both the American consumer and for our hardworking sugar producing farm families.” Thompson thanked the audience for their efforts to help secure a 2018 Farm Bill that was passed on-time, and he pledged to continue to fight attempts to weaken sugar policy in the next farm bill. Besides maintaining a strong farm safety net, Thompson outlined other areas that he thinks are important for the House Agriculture Committee and Congress as a whole. “The greatest challenges before agriculture are regulatory reform and resolving trade agreements,” Thompson explained. “Tackling both of those areas will help our farmers compete on a level playing field.” Thompson also pointed to rural development and expanded educational opportunities as key to helping small towns rebound from current economic challenges and thrive. "I'm going to restore milk with both nutrition and flavor back into our schools. In 2010 we started serving our kids chalk water ... nonfat chocolate milk… disgusting!” Thompson told the gathering.

  • Rep. Richard Hudson (R-N.C.) stressed the U.S. needs “smart and fair trade” because farmers need markets, adding that the U.S. textile industry in the past had some “really bad trade deals.” He said USMCA is “on the right track” and he revealed that he told President Donald Trump that, “We should call Nancy Pelosi’s bluff” and send USMCA implementing legislation to the House for a vote. Regarding China, Hudson acknowledged the current trade dealings are “tough.” China “thinks in 100-year terms,” Hudson noted, but “our economies are absolutely intertwined.” He said when the initial U.S./China trade war began, he was concerned. Hudson said he then talked with President Trump, asking him what the end game was with China. Trump detailed the large trade imbalance with China and asked Hudson, “What do we have to lose?” Hudson said after he saw Trump was not a protectionist, “I stood and still stand with him… sometime China has to blink… this president is on the right track, but there is a lot of pain in the short term.” He stressed that the “greatest transfer of wealth” was being made by China, relative to “intellectual property being stolen” by China. On immigration reform, Hudson said, “We got so close to a deal,” but then things fell apart. Regarding sugar policy, Hudson said: “I want my sugar made here in America,” adding that he’s worked hard to defeat past attempts to weaken the country’s no-cost sugar policy. “It would have crushed our domestic industry,” he said of a 2018 Farm Bill amendment designed to gut U.S. sugar policy and outsource our sugar production. “Foreign countries are subsidizing their industries, dumping their sugar, and bottoming out prices…that’s not a free market.”

  • Jose Orive, Executive Director of the International Sugar Organization, said India is the main reason for recent sugar surpluses, but current indications signal a possible end to the surplus. “We’re getting killed on consumption with the war on sugar,” he told the audience, imploring sugar interests to “not just be quiet” on the matter and to “bring in third-party observers” in telling the sugar story.

  • USDA Undersecretary Bill Northey gave some updates on MFP 2 and the coming supplemental disaster program, noting payouts for MFP 2 would come at the end of August and in September for disaster aid. He said some disaster aid provisions still have to be approved by the Office of Management and Budget. Northey noted there would be a “top up” of small support for prevent plant acres in the coming disaster aid provisions, including some aid for stored grain damaged by floods. Signup for the General Conservation Reserve Program would begin in early December, he detailed. Northey said this year could be characterized by being a challenging production year and a challenging marketing year. On trade policy matters, he said “we are around the corner from good news” on a trade deal with Japan, listing the country as “a very good market without drama.” He said President Trump and USDA Secretary Sonny Perdue know that farmers have “chewed a lot of equity up” and that both are determined to assist the ag sector.

Other items of note:

  • Beijing held its second press briefing on Hong Kong in as many weeks. China lacks good options for handling unrest in the city and reportedly asked for recommendations from a group of key residents to buy time. The local government condemned as "violent acts" attacks on at least two police stations amid a citywide strike on Monday.

Markets. The Dow on Monday plunged 767.27 points, 2.9%, to 25,717.74, notching its biggest one-day percentage drop since December. The S&P 500 shed 3% to 2,844.74 and the Nasdaq declined 3.5% to 7,726.04. All three major U.S. indexes are now virtually even with where they were a year ago. Selling was especially heavy in the trade-sensitive technology, consumer discretionary and industrial sectors — companies exposed to the next round of Trump’s tariffs on China.

The CBOE Volatility Index on Monday soared 40% — its biggest one-day increase since October.

Inversion of the U.S. yield curve, a measure investors view as a predictor of an impending recession, on Monday became deeper than at any point since the onset of the financial crisis a decade ago, as the U.S./China trade war spread to the currency markets. The difference between the yield on three-month Treasury bills and the benchmark 10-year bond, which has turned negative or “inverted” before every U.S. recession of the past 50 years, widened to minus 32 basis points at its worst. The yield on the U.S. benchmark 10-year Treasury (used to help set borrowing costs for consumers and businesses around the world) fell to its lowest level since 2016, notching its seventh straight day of declines, the longest such streak since 2012.


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