Money The $1.2 trillion weapon China could use in a trade war with the US

23:31  06 april  2018
23:31  06 april  2018 Source:   cnbc.com

US proposes tariffs on $50 billion in Chinese imports

  US proposes tariffs on $50 billion in Chinese imports The Trump administration is proposing 25 percent tariffs on $50 billion in Chinese imports to protest Beijing's policies that require foreign companies to hand over their technology. China immediately said it would retaliate against the new tariffs, which target high-tech industries that Beijing has been nurturing, from advanced manufacturing and aerospace to information technology and robotics.

As the United States and China inch closer to a full-fledged trade war, economists and investors worry about worst-case scenarios that could impact the global economy — and America. 

The war of words keeps getting harsher. China announced Wednesday that it may put tariffs on $50 billion worth of U.S. goods in retaliation against the Trump administration's plan for imposing 25 percent duties on Chinese imports. Markets were sent spinning, falling by more than 1 percent and then rebounding later in the day, while everyone is now wondering what might come next.

Top Trump officials are scrambling to downplay the threat of a trade war with China

  Top Trump officials are scrambling to downplay the threat of a trade war with China Multiple members of the Trump administration attempted to downplay the potential fallout from the brewing trade battle between the US and China. Some of President Donald Trump's top officials sought to walk back the possibility of a trade war with China on Wednesday as markets jolted up and down most of the day.

If this trade fight does escalate, then more tariffs could be slapped on more goods. But China could fire back in a far more significant way: selling a large chunk of the $1.17 trillion of U.S. treasury bonds it holds.

Over the last several years, China has bought scores of treasury bonds partly because it has U.S. dollars it needs to spend. Just like any investor, China wants to put some of the greenbacks it's made off its exports to the United States into safe investments, and there's nothing safer than U.S. bonds.

For the most part, China, which has owned around $1 trillion of U.S. bonds for several years, has held on to these assets, collecting billions in interest payments. It did reduce some of those assets in late 2016 and early 2017 to help offset an increase in the yuan, but it's already bought back much of what it sold.

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If China did decide to sell off those bonds in a fit of rage aimed at President Donald Trump, then it could cause major havoc on international markets, said Jeff Mills, co-chief investment strategist at PNC Financial Services Group. "It's certainly something they could do," he said.

The biggest impact would be on interest rates and bond prices, he says. If China floods the market with treasuries, and the supply of U.S. bonds spikes, then fixed income prices would fall and yields would rise. If yields climb then it would become more expensive for U.S. companies and consumers to borrow and that would cause the U.S. economy to slow down.

It will also become more expensive for the U.S. government to issue debt — they'll have to pay higher rates to borrowers — while the $15 trillion of treasuries held by itself and investors would fall in value. Equities would be sent crashing, too, as yields climb. "Higher interest rates would ripple through the entire economy," says Mills. "It would have a slowing effect."

Export recovery continues with $825 million surplus in February

  Export recovery continues with $825 million surplus in February Australia's exporters have put a weak end to 2017 behind them with a second consecutive solid monthly trade surplus for the year. In seasonally adjusted figures, the surplus came in at $825 million in February — in line with market forecasts, but a slight narrowing from the downwardly revised $950 million surplus in January. In seasonally adjusted figures, the surplus came in at $825 million in February — in line with market forecasts, but a slight narrowing from the downwardly revised $950 million surplus in January.

China holds about 20 percent of U.S. debt held by foreign countries, which is a lot, but it only accounts for about 5 percent of outstanding debt overall. Other holders include other countries – Japan owns about $1 trillion in treasuries – the U.S. government, corporations and investors. However, if China does decide to dump treasuries, it could make others panic and sell as well, says Vincent Reinhart chief economist and macro strategist at BNY Mellon.

Bond selloff also bad for China

Xi Jinping would have to be mighty angry to dump treasuries in droves, because a sell-off would have a negative impact on its own financial affairs. "It's like holding a gun to your own head and saying I have a hostage," says Reinhart.

If China were to sell its bond holdings, it would likely have to sell it at least some of the treasuries it purchased at a loss. If other countries sold, too, and prices plummet then it could lose billions. "It will inflict capital losses on itself," says Reinhart.

The U.S. dollar would also fall, which would then make this trade-related provocation somewhat moot, adds Mark Zandi, chief economist at Moody's Analytics. A lower greenback would make U.S. exports more attractive, which would then hurt China's own export market. "It would negate some of the impact," he says. "Rates might spike, but the dollar would fall and what's the net impact of that? It doesn't feel like it's a winning strategy."

The Australian dollar remains under pressure

  The Australian dollar remains under pressure The Australian dollar remains pressured by ongoing concerns surrounding trade tensions between the US and China. The Australian dollar remains under pressure, hindered by persistent concerns that trade tensions between the United States and China could erupt into a full-blown trade war.

As well, it's not certain that selling treasuries would have much of an impact, says Mills. If other countries step in to buy those treasuries, then interest rates could remain stable.

As of right now, U.S. bonds are still seen as a safe asset that people and countries buy when the global economy goes awry. If that stays the case then there's no reason why demand wouldn't materialize.

"It's not like demand for U.S. Treasurys has broadly fallen," said Mills. "I would think that if they did start to sell, there would be a fair bit of demand from other countries and U.S. companies, especially as rates slowly increase, which makes them more attractive holdings."

China could take a more measured approach, said Reinhart, and not buy new bonds as old ones mature. With the United States also reducing its quantitative easing-related bond purchases, supply would then slowly rise and potentially push rates to more extreme levels.

China's other options

However, Zandi thinks China can show its displeasure in other ways. It could devalue its own currency, which would then make exports even more attractive and increase the trade deficit that Trump has railed against. That would certainly anger Trump, he said, and create turmoil in financial markets. "It would inflict some real pain," he added.

They could also make it more difficult for U.S. workers to get visas or even take over offices based in the country. "You have operations here? Too bad; they're ours now," he said. "They can make life very difficult for someone trying to do business in China."

The hope is that all of this will die down before any drastic measures are taken. Of course, no one can know for sure how these two global powerhouses will react going forward — we're in uncharted territory. Reinhart thinks the United States ultimately won't do anything to damage its own economy, while Mills said that China, with its massive manufacturing employment base, needs America more than American needs them.

Zandi says that while we could see more back-and-forth arguing, responses will be proportional. In any case, all of this is troubling no matter what happens next. "This is not going to end in a place that's any better for anybody," he said. "Maybe everyone will save face, but no good will come out of this."

Iron ore markets remain choppy and directionless .
Iron ore spot markets remain choppy and directionless, continuing the theme seen throughout April. Modest gains were recorded across all grades on Friday, partially reversing declines in the previous two sessions. It has traded in a less than $2 range since the end of March. © Provided by Business Insider IncLike the benchmark, modest gains were recorded across the grades.Ore with 65% Fe content added 0.6% to close at $82.20 a tonne. 58% fines rose by a smaller 0.3% to settle at $37.87 a tonne.The gains in spot markets followed another sharp reversal in Chinese rebar and iron ore futures, this time to the upside.

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