Asian equity markets tanked and the yuan hit an 11-year low on Monday after US President Donald Trump ramped up his trade war with China by hiking tariffs on more than half-a-trillion dollars worth of imports.
The decision on Friday stunned investors, who ran for the hills, hammering European and Wall Street stocks, while safe havens such as the yen and gold – go-to assets in times of turmoil and uncertainty – surged.
The move, which also came with an outburst against China by the American president and a call for US firms to leave the country, overshadowed a broadly dovish speech by Federal Reserve boss Jerome Powell but one that fell short of Trump’s demand for deep interest-rate cuts.
Friday’s tariff hike was in response to Beijing’s decision to raise levies on $75 billion of US goods.
US tariffs on $250 billion of Chinese goods will rise to 30 per cent and those planned on $300 billion in Chinese products will go to 15 per cent from October 1.
White House spokeswoman Stephanie Grisham added that the president regretted not raising levies more.
On Monday, China’s yuan currency fell briefly to 7.1487 to the dollar – its weakest level since early 2008 at the height of the global financial crisis. The drop is likely to ire Trump, who has labelled Beijing a currency manipulator.
“The gloves are coming off on both sides and as such yuan depreciation is an obvious cushion against US tariffs,” Mitul Kotecha, a senior emerging markets economist at Toronto-Dominion Bank, told Bloomberg News.
“As long as China can ensure that yuan weakness is well controlled i.e. it does not provoke strong outflows, expect to see further depreciation in the currency.”
On equity markets, Hong Kong led losses, slumping 2.9 per cent, with investors also spooked by fresh violent protests in the city that saw police use water cannon for the first time.
Shanghai lost 1.2 per cent and Tokyo ended 2.2 per cent down with investors unmoved by news that Trump and Japan’s Prime Minister Shinzo Abe had reached an agreement in principle on a major trade deal.
Sydney, Seoul, Wellington, Jakarta and Taipei all sank more than one per cent, while Bangkok was off more than two per cent. However, Mumbai rose more than one per cent thanks to economy-boosting measures by officials.
The flight to safer havens saw gold jump to a six-year high around $1,550 per ounce, while the Japanese yen was at its strongest level since the end of 2016.
Fears about the trade war’s impact on demand also hit oil prices with both main contracts extending Friday’s sell-off.
The tariffs news overshadowed Powell’s much-anticipated speech on Friday, where he pledged to ensure US growth and pointed to fresh stimulus if inflation softens.
He acknowledged the bank has no “rulebook” for dealing with the US-China trade war but did not announce any more rate cuts, sparking outrage from Trump, who blames the Fed boss for holding the economy back.
“As usual, the Fed did NOTHING!” Trump said.
“My only question is, who is our bigger enemy, Jay Powel or Chairman Xi?” Trump said, misspelling the Fed chief’s name and referring to Chinese leader Xi Jinping.
“Referencing the Fed chair as the enemy is, frankly, just par for the course .. . but referencing President Xi now as the enemy rather than ‘my friend’ is a lot more serious,” said Ray Attrill at National Australia Bank.
“Indeed, the fallout is already apparent in an editorial in Saturday’s state-run People’s Daily, saying China will follow through with retaliatory measures announced on Friday and fight the trade war to the end in the face of the US’s failure to keep its promises.”
US companies in China
Trump’s top aides on Sunday downplayed the idea of US companies being forced to abandon China any time soon, as an edict from the president ordering businesses to start looking for alternatives has been met with skepticism.
Treasury Secretary Steven Mnuchin and White House economics advisor Larry Kudlow took to the airwaves from Biarritz to smooth out tensions in the business community prompted by Trump’s Friday tweet.
Trump said he has “no plan now” to bring US companies in line, and his aides quickly reinforced the message.
“He would have the authority to do that . . . He has not done that,” Mnuchin told Fox News.
Mnuchin said that authority comes from the somewhat obscure International Emergency Economic Powers Act, a federal law passed in 1977.
The law grants the president powers to regulate international trade in the face of an “unusual and extraordinary threat” from abroad to US foreign policy, national security or the economy.
But it has never been used to tip the scales in a trade dispute.
“I think what he was saying is that he is ordering companies to start looking,” he added.
The Trump administration wants US businesses to operate in places where “trading partners respect us and trade with us fairly,” Mnuchin added.
On Friday, Trump – furious about Beijing’s decision to hike tariffs on US goods – sounded the alarm to homegrown companies just before announcing a planned escalation in tariffs on Chinese imports.
“Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA,” he said on Twitter – sending Wall Street tumbling.
‘Getting back to the table’
There was some sign of hope as Trump said on Monday that US and Chinese negotiators would “very shortly” resume talks in what he described as a breakthrough in the trade war.
“China called last night . . . said let’s get back to the table. So we’ll be getting back to the table,” Trump told reporters in Biarritz.
Trump said that Chinese officials had made two “very, very good calls” and that “they want to make a deal”.
The president’s tone was in marked contrast to the steady hardening of positions in the number one and two economies.
The US is trying to force China into deep reforms of its trading model to end decades of practices, including rampant intellectual property theft, that US companies say prevents a level playing field.
However, US allies have pressured Trump at the G7 summit, saying that the trade war puts the world economy at risk.
Trump said that his pressure had paid off, bringing the Chinese back to the table after talks had appeared to have gone off the rails.
“They hurt very badly, but they understand this is the right thing to do,” Trump said.
“One of the reasons he’s a great leader, President Xi . . . is they understand how life works.”
“It’s going to be great for China, it’s going to be great for the US, it’s going to be great for the world,” he said. “We’re going to start very shortly to negotiate . . . but I think we’re going to make a deal.”