Edition 08: Concerns about a currency war in the China-U.S. trade fight, the possibility of more Chinese investment in Canada, and why the U.S. launched tariff challenges against several WTO countries. Read more…
Quote of the week
Instead of a quote – a picture! Chinese factory workers making Trump 2020 banners (photo credit: REUTERS/Aly Song). Oh, the irony.
One Big Story: Why a Currency War across Global Markets Is – or Isn’t – Happening
China’s administration of its currency, the renminbi, is under fresh scrutiny after a two-month slide in the exchange rate. This has raised concerns that China is starting a currency war against the U.S. dollar.
Currency War: A potential new front in a trade fight
Currency wars are a condition in foreign affairs where states seek to gain by lowering their currency’s value relative to other currencies. For an export-dependent county like Canada, currency manipulation by its second largest trade partner, China, would clearly be a concern. A higher loonie versus the renminbi would make Canadian commodity exports more expensive for Chinese purchasers and give Chinese exporters a boost in selling into Canada. This may, in turn, hurt some Canadian companies, but help others as some intermediary inputs become cheaper.
With the renminbi hitting its lowest level last week, there are concerns that the China-U.S. trade war is opening up a new front.
A Currency War Could Help China Offset Price Increases from Tariffs
In the context of the current U.S.-China trade war, the currency war hypothesis works as follows: with U.S. tariffs raising the prices of China’s exports, China could lower its currency relative to the U.S. dollar, offsetting price increases from tariffs in the U.S. and boosting exports to others.
China has intentionally devalued its currency in the past (as have other countries), and U.S. President Donald Trump brought China’s monetary policy back to the forefront during both the 2016 campaign and the current trade war.
Trump’s accusations of direct manipulation are one thing, but it’s possible that China’s authorities have eased their grip on the renminbi, intentionally letting markets drive down an overvalued renminbi.
Or This Could Just Be China’s Response to Fresh Signs of a Slowdown in its Economy
Other economists don’t think the slide is part of a currency war. The slide comes days after the People’s Bank of China cut its reserve requirement ratio for banks, which could have lowered the renminbi anyway, and devaluing could also undo years of work tackling capital flowing out of China. Or maybe it’s a sign that markets think China is losing the trade war.
Economists note the falling renminbi will make it harder for China to manage cross-border capital. Additionally, China’s policy-makers are potentially more concerned about new signals of an economic slowdown in their economy than they are about the trade war. With both consumption and investment falling, the declining renminbi could be a pro-growth policy.
Either Way, More Chinese Investment Could Be Coming to Canada
For Canada, this means potentially more investment, with the opportunities and risks that poses. Beijing could be playing a perilous game: China risks a replay of the 2016 panic. For now, the renminbi is waning compared with its trading partners at a time when the international trading system is under threat.
Amid these tensions, an injection of capital into the Canadian economy could be a blessing – or, if it flows into sensitive sectors, such as real estate, it could aggravate other woes.
Bottom Line:
Many currency strategists say China would not use the renminbi as a weapon. But if it is, the impact on the United States would be limited if the U.S. could convince allies in Asia to avoid following China’s currency slide to compete for market share.
Regardless of the cause, a sustained low renminbi will add to the economic turbulence Canada is facing amid the trade war.
This week on the noise-o-meter…
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We’re back down to more normal levels after the highs reached in the last Brief. Stories focus on the China-U.S. trade war’s implications for Canada, as well as other trade, investment and agriculture stories.
Stories from the West
• SMART Technologies – based in Calgary – has announced a new product portfolio and strategic co-operative partnerships for the Chinese market. SMART is one of the biggest educational technology companies in the world.
• The largest shipment of oil sent from Vancouver to China since 2015 recently arrived in Guangdong, China. The shipment was loaded with about 514,000 barrels.
• In order to gain approval from China for the merger of Agrium and PotashCorp (now called Nutrien), Nutrien had to sell its stake in Arab Potash Co. to a Chinese state-owned company. Because this was an international merger, it required approval from various countries. The shares sold to the Chinese company for $502 million.
Issues that Matter
Trade and Investment
• The Canadian International Trade Tribunal has said that it found that China, South Korea and Vietnam have all dumped steel into the Canadian market. The tribunal – a quasi-judicial body that reports to parliament – was given more powers in March to investigate businesses and industries that try to dodge import duties, and to determine whether prices set in countries of origin are distorted.
• Canada is forming a group to talk about reforming global trade, but didn’t invite the two biggest players: China and the U.S.
• Canada is likely going to be “collateral damage” in the China-U.S. trade war. Experts aren’t exactly sure where it will hurt the most, but manufacturing is a likely candidate.
• For Chinese companies investing in Canada, they often find resistance – and willing consumers.
• The U.S. has launched tariff challenges against several countries at the WTO, including Canada and China. Their complaint? These countries retaliated against U.S.-imposed tariffs. (Seriously.)
• Don Pittis from CBC argues that Canada is going to be hit with a double trade whammy: one of those whammies will involve China.
• Finally, Canada’s Bombardier has signed a deal with Singapore worth up to US$880 million.
Agriculture
• China is buying a lot more Canadian wheat and barley this year; it looks like it is shifting its typical purchases from America to Canada.
• Same goes for soybeans, although China is looking to cut soymeal in its animal feed.
• Interesting note: as China cuts imports of U.S. soybeans and switches to Brazil, the Americans have a glut of soybeans causing a drop in prices while Brazil suddenly faces soybean shortage for its domestic demand. The result has been Brazilians scooping up bargain basement priced U.S. soybeans.
China-Canada Relations
• The Canadian government is increasingly concerned about the security implications of Huawei, a Chinese telecom giant. Trudeau is “working with key Canadian allies to limit its ambition to become a world leader in next-generation 5G wireless technology.”
• Lu Shaye, China’s ambassador to Canada, made an appeal to Canadians to stand with China against the U.S. in the Globe and Mail. Meanwhile, International Trade Diversification Minister Jim Carr did not invite China to Canada’s WTO reform meeting.
• For the first time in Canadian history, China has become Canada’s largest source of overseas tourists. (Note “overseas” does not include the U.S.)
• An op-ed in the Globe and Mail argues that China is “not the answer to our trade woes” and will never replace the U.S.
• China Brief Editor’s Note: the authors make the assumption that proponents of trade with China want to shift all our trade with the United States to China. As a proponent of trade with China, I don’t see this as the case: it’s important to diversify our trade to avoid relying on markets, American or Chinese.
• B.C. MP Jenny Kwan has called for Canada to create a national day commemorating the Nanjing Massacre. This has made some people in the Japanese-Canadian community unhappy.
By the Numbers
China’s retiree population is growing by entire countries: 33 million Chinese will retire between 2015 and 2025, the equivalent of almost the entire population of Canada. By 2053, you’ll also be able to fit South Korea, Vietnam and Germany’s current populations into China’s retirement pool.
*Note: Current retirement age in China is 55 for women, 60 for men.
Interesting Tidbits
• A #MeToo Reckoning in China’s Workplace Amid Wave of Accusations (July 26) New York Times
• China’s “Saturday Night Live” steered clear of politics — and still got yanked (July 17) Quartz
• Hyperloop, the superfast ‘vacuum train,’ is coming to China (July 20) CNN
• How to separate the myths and realities of China’s role in tackling Africa’s infrastructure deficit (July 24) Quartz Africa
• Looks at Chinese investment in context – which is a pretty rare, interesting piece
• China fossil tells new supercontinent story (July 24) BBC
That’s all for today! Questions, comments? Send them our way! – Sarah Pittman, policy analyst, and Kai Valdez Bettcher, policy intern.
The China Brief is a compilation of stories and links related to China and its relationship with Canada’s West. The opinions expressed in the links are those of the articles’ authors and don’t necessarily reflect the views of the Canada West Foundation and our affiliates.
[i] Media measurement is provided by a third-party, independent media monitoring service. To be included in the noise-o-meter, “China” must be in the title, and one of the four western provinces somewhere in the article. While not a perfect system, this gives us an idea of how much China and the West are being discussed together.