JAKARTA (TheInsiderStories) – People’s Bank of China has devalued the Renminbi become weaker than RMB7 against the US Dollar for the first time since the global financial crisis. This should be viewed as a warning shot to United States’ President Donald Trump administration and not a fundamental change in China’ currency policy.

Above all, Chinese officials value financial and exchange rate stability, said Nariman Behravesh, Chief Economist at IHS Markit. He noted, they have the tools ($3 trillion-plus in foreign exchange reserves, capital controls, and other administrative means) to achieve this.

But, according to him, there is more uncertainty about what the Trump administration might do next. It could raise tariffs even more, but this would hurt US growth as well as China.

Furthermore, Behravesh sees, it could intervene directly in forex markets, but the combined Federal Reserves (Fed) and US Treasury exchange stabilization funds are only around $200 billion and pale in comparison with the daily turnover of $5 trillion in foreign exchange markets.

Extremely, he added, it could re-impose capital controls, which along with other developed economies, it has agreed not to use since the 1970s. This could have an extremely destabilizing impact on financial markets, and is, therefore, unlikely to happen.

Behravesh opined, it could browbeat the Fed to lower interest rates even more, a move that has massive risks of its own. At the end, he stated, China’ recent devaluation is relatively small in the whole scheme of things. If it stops there, and neither the US nor China take any other actions that would give markets a fit, then this episode will probably blow over.

On the other hand, if this is the beginning of a new and dangerous phase of the trade war, then all bets are off, and the ensuing financial fire storm could push the US and global economies into recession.

APAC Central Banks

The major wave of monetary policy easing by Asia Pacific (APAC) central banks that has been underway since May has escalated this week, with another round of rate cuts by the Reserve Bank of India (RBI), the Bank of Thailand (BoT) and the Reserve Bank of New Zealand (RBNZ).

A growing number of APAC central banks, including Bank of Korea (BoK), Bank Indonesia (BI), Bank Negara Malaysia (BNM), RBI, the Reserve Bank of Australia (RBA), RBNZ, BOT and Bangko Sentral ng Pilipinas (BSP) have lowered policy rates since May 2019, reflecting concerns about the escalating US – China trade war and the economic impact on their economies, with many East Asian industrial nations facing weakening exports and industrial production.

In June, Japanese exports fell 6.7 percent compared to last year (YoY), Singapore’ exports contracted 17.6 percent, while South Korean exports for the first 20 days of July slumped by 13.6 percent from last year.

The negative shock waves from the escalating US – China trade war on the Asian manufacturing supply chain have been compounded by a slump in global electronics orders. Singapore’s electronics exports were down 31.9 percent in June, while South Korean exports of semiconductors contracted 30 percent in the first 20 days of July.

The combined impact of the Federal Reserves (Fed) rate cut on 31 July and the escalation of the US – China trade war in early August have triggered a new wave of policy rate cuts by a number of APAC central banks in response to the deteriorating near-term outlook for Asian exports.

Recent declines in world oil prices also have improved the near-term inflation outlook for many APAC economies, further opening the door for more monetary policy easing by APAC central banks.

Risk aversion towards Asian emerging markets’ asset classes and currencies is increasing due to the escalating trade war and continued weakening in exports in many APAC economies, triggering a flight to safe-haven assets, notably US Treasuries, the Japanese yen and the Swiss franc, with gold prices also surging in recent weeks.

The Fed’ rate cut and the latest escalation in the US-China trade war have opened the door for another round of policy rate cuts by a number of APAC central banks. The RBI, BOT, and RBNZ have already eased monetary policy this week. Further rate cuts by APAC central banks are likely in coming months.

While the outlook is fraught with even more risks as a result of the escalating trade and currency war, a lot will depend on what the US and Chinese governments do next.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com