Commentary on Political Economy

Wednesday, 27 May 2020

Flare-up in US-China tensions heaps pressure on renminbi 
Investor optimism over recovery from coronavirus hit by rising trade tensions 

 China’s currency fell by the most in three weeks and the global stock rally slowed as the country’s plans to impose a sweeping national security law on Hong Kong prompted a flare-up in tensions between Beijing and Washington. The renminbi weakened by 0.35 per cent on Wednesday to Rmb7.16 to the US dollar, hitting the lowest level since September 2019. Hong Kong’s Hang Seng equity index also shed 0.6 per cent as demonstrators and riot police clashed. Protests that had been kept at bay by the coronavirus pandemic re-erupted following Beijing’s move and a separate law that could result in prison sentences for insulting China’s national anthem. Beijing’s actions have rankled President Trump and officials in his administration. Larry Kudlow, Mr Trump’s economic adviser, said on Tuesday the president was “miffed” over China’s handling of the Covid-19 crisis and that Beijing was making a mistake over its implementation of national security laws in Hong Kong. Mr Trump told reporters that he was “doing something now” on the Hong Kong issue and planned to provide further details in the “next couple of days”.

 Investors in Hong Kong, a global financial hub, are concerned that Washington could retaliate by removing its special trading status with the US. Credit Suisse’s chief investment office warned that “volatility could continue as US-China tensions intensify”. Lauri Hälikkä, a bond and currency strategist at Swedish bank SEB, said such sanctions would “most likely lead to retaliation from China and harm US-China relations even further . . . risking the progress made in the trade talks last year”. Ken Cheung, chief Asian currency strategist at Mizuho, said the currency could come under “renewed depreciation” if the US response to the Hong Kong crisis led to a reassessment of the phase-one trade deal between the world’s two biggest economies. Equities markets in Europe posted smaller gains on Wednesday after rallying sharply earlier in the week on growing economic optimism. The Stoxx 600 edged higher by 0.4 per cent, after rallies of more than 1 per cent on Monday and Tuesday. Bourses in Paris and Frankfurt rose about 0.8 per cent. London’s FTSE 100 climbed 1 per cent. S&P 500 futures rose 0.7 per cent after Wall Street’s benchmark stock barometer rallied on Tuesday to its highest level since early March.

 Markets have marched higher in recent weeks as economies around the world have begun easing lockdown measures, with investors pinning their hopes on a swift rebound in business and industrial activity. In commodities, oil prices lost some ground after rising the previous day on reports that Russia’s energy minister had met with the country’s petroleum producers to discuss deeper production cuts in the second half of the year. Brent crude, the international benchmark, fell 2 per cent to $35.37 a barrel, while US marker West Texas Intermediate dropped 2 per cent to $33.56. The yield on the US 10-year Treasury bond slipped 0.008 percentage point to 0.69 per cent, signalling a slight rise in price.

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