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The influence of the US-China trading war on the financial markets
JustForex - 8/22/2018 8:20:01 AM
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In the previous article we considered the main chronology of events in the case of a trade conflict among the USA and China. The second part of the article is aimed on the analysis of trading war’s influence on the financial markets.
 
The US-China trading standoff makes investors really nervous for the global economy. After all, it’s the Chinese reactive response on Trump’s position that has a strong impact on the world’s financial markets, reducing their growth prospects and pace of development. Experts believe the best way out could be a backward step of the American president. In fact, according to the American Chamber of Commerce at stake is around 2,6 mln Americans who can lose their job due to the circumstances. Such market reaction can’t be determined as positive. Anyway, it’s hard to talk about the results chosen by Trump’s course yet, because the consequences may be completely unexpected if he insists on taking his course.
 
A number of large US companies have already suffered significant losses from trading conflict with China. Beijing added more than 100 most important US import units to its list:
 
soybeans, airplanes, cars and chemicals. Such production giants as Ford Motor Company, Caterpillar Inc., General Motors Company came under pressure. 
 
 
It is noticeable that for the last 6 months the Chinese yuan weakened against the US dollar by more than 9.5%. USD/CNH quotations have reached their highs since 2016. These events forced the Сhina’s Central Bank to introduce additional foreign exchange interventions to stabilize the exchange rate of the national currency. Currency interventions of the People's Bank of China are generally designed to block rapid movements in both directions. 
 
 
Source: justforex.com
 
In a report of the Bank for International Settlements on the state of the PRC currency market (Recent RMB policy and currency co-movements) the focus is on the significant increase of the  Chinese yuan role in the world economy. The yuan is called the most traded currency in developing countries, according to the BIS, even though it has a modest result in operations in the global foreign exchange market — only 4%.
 
The actions of the White House significantly affected the Chinese stock market — RPC hadn’t been feeling such a massive collapse for about three years already. Now the Chinese government is trying to stabilize the situation in any possible way. For this, the requirements to the reservation ratio (RRR) have already been lowered and conduct active liquidity injections. And although at this point when the outflow of capital is still not so bad, the biggest risk is a decrease in the inflow of portfolio investments.
 
 
 
If China's GDP level does not match the planned level for this period (and there are indications, based on the data on the economic activity of the PRC and the latest PMI indices), 
 
the world economy will significantly reduce its pace of development. This is indicated by the fact that the global manufacturing PMI index fell to an 11-month minimum.
 
During the period of geopolitical uncertainty and financial instability, the demand for safe assets is significantly increased. The Gold and the Japanese yen are classical examples of these types of assets. This week, the US and China are planning to hold negotiations to resolve the trade conflict. In case countries do not reach an agreement between themselves, demand for assets of "quiet harbor" can grow significantly.
 
Igor Afa, financial analyst JustForex
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