Trinh Profile picture
Aug 8, 2019 28 tweets 9 min read Read on X
Good morning🌞- another hot & hazy Thursday in 🇭🇰. After a Trump Tweet meets a weaker Yuan fix, Asian central banks didn't stand by & slashed🔪rates (RBNZ -50bps, RBI-35bps, BOT-25bps). Today, we got the BSP & expect a 25bps cut w/ a RRR cut to add extra liquidity.

#CurrencyWar
China July trade data is out & expectations of a sharper contraction of imports & exports weak.

Note this: China using the current account as a 1st line of defense is boosting its trade surplus via REDUCTION OF IMPORTS & that is bad news for traders 👇🏻.

Trade relationship between the US and China & the amounts w/ tariffs so far (45bn left to retaliate) & the amount not yet by the US on China (300bn left) 👇🏻. Notice the asymmetric relationship & also the last tranche mostly consumer & capital goods so Trump'll tread gently.
Another way to look at it & decomposed by manufacturing & non. Notice the massive manufacturing bias for China vs the US & also remember that manufacturing PMIs for China are still contracting. Escalated tensions likely to impact China July export figures in USD.
Because China has only 45bn left to retaliate (it knows this). And because its retaliation so far trails the US imposition of tariffs (110bn vs 250bn) & b/c the relationship is asymmetric, it is using the CURRENT ACCOUNT AS A LINE OF DEFENSE.

What does that mean? IMPORTS DOWN👇🏻
Why imports? Let's go back to this concept of a J-curve. The idea is that if you DEPRECIATE your currency (the yuan) then, depending on elasticity of demand, your weaker currency should help w/ pricing power.

But that theory ignores one fact - MOST GLOBAL TRADE INVOICED IN USD👇🏻
China's use of the RMB for trade invoicing PEAKED in Q1 2015, roughly ~65 of total merchandise trade. And do u remember what happened in August 2015? Yes, depreciation of RMB vs USD. Since then, usage of USD trade invoicing has risen to ~85-90%. This's important & pay attention.
Let's pretend u are a manufacturer in Guangdong. Ready?
Costs are: Fixed & variable & in CNY. May import some inputs for production but China uses mostly domestic goods except commodities (Trump's beef is that as China expands it export market globally, it imports less from RoW).
Price in USD to ur foreign customers.
Scenario1: CNY depreciates by 10% & tariffs go up say 10%.
Costs in CNY goes up by less b/c ur import content not so high but there is upward costs to fixed costs such as rent etc by 5%. Translates this into USD & costs of production cheaper
BUT, don't forget that u gain 10% in FX since last yr, but ur inputs in CNY don't stay constant & they go up say 5% so ur net is only up 5% & so in USD ur costs of production goes down by 5%. But tariffs are up 10% on the USD prices. To be competitive u have to discount in USD!
Tariffs are paid by importers (Americans & they are ur BIGGEST CUSTOMER 16-20% of market). But the importers VIEW UR PRODUCTS AS 10% more expensive vs. the others if prices same as last year in USD. Input costs lower but output has to be DISCOUNTED EVEN MORE & margin squeezed!
So the way Chinese manufacturers cope is by DISCOUNTING THEIR PRICES IN USD & passing on the SAVINGS to their American customers (this is why you don't see PCE in the US going higher). In the process, the margin they make on these products are LOWER despite savings in input costs
The DEPRECIATION OF THE CNY is helpful to lower INPUT COSTS & that means that if there weren't any tariffs, a Chinese exporter can get a boost if there aren't any tariff & may choose to either pass on the savings to be competitive or not but the savings less than FX depreciation.
This is why the Chinese government wants to expand usage of RMB in trade invoicing. But the fact is that MOST TRADE IS INVOICED IN USD. And that has implications in the PASS-THROUGH OF FX to the economy. Note that I haven't even touched trade financing, which is also in USD.
What is the macroeconomic implication of the dominance of the USD in trade-invoicing in China? The PASS-THROUGH OF FX IS THROUGH IMPORTS.

A 10% weaker CNY (not to mention a multitude of tax incentives passed recently to help w/ domestic market) means LESS IMPORT FROM WORLD.
You will see this today for the July figure & we already know that from the year-to-date figure of sharper contraction of imports (exports not doing great but domestic producers being helped by less competition).

Something else - the RMB REER is much lower than in 2015. So?
What is a REER? It is a summation of a trade-weighted FX (so say CNYUSD, CNYEUR, CNYKRW, etc) that is deflated by relative CPI. FX strategists/economists use this as a more comprehensive valuation of FX as USD just shows vs USD not other partners.

USD/CNY shows USD appreciating
Are you ready? This is the implication of China sheltering its economy through the current account (imports down): Asian exports are DOWN, especially key traders like South Korea.

Why are they down? Because South Korea depends on China for demand & that market is SHRINKING👇🏻
So the FX policy implication of this, and this is OLD NEWS, is that the Won can't appreciate against the YUAN (I wrote a report on this in 2016) & why you see the KRW DEPRECIATING MORE THAN THE CNY.

Why? Because it can't stand idly by & just watch its external market shrinking.
The mid-rate fix is 7.0039 today (lowest since 2008) & that means max it can weaken onshore is 7.143 (+2% & -2%). Okay, what do you think the trade figure will be? My guess is NOT PRETTY & watch the IMPORTS.

#CurrencyWar
The winner of Japan-Korea tensions, US-China tensions, weak domestic demand thanks to Moonomics & high household debt & low fiscal stimulus, weak global growth, China sheltering its domestic market using the current account as a 1st line of defense (fiscal + FX) is:

BOND🙇🏻‍♀️🥇💪🏻💪🏻
China July exports +3.3% vs expectations of -1% from -1.3% in June & IMPORTS CONTRACTED -5.6%YoY in USD.

Yes, trade surplus ballooning on weaker imports. With the CNY weaker, don't expect import demand to rise.
My guess is a lot of front-loading before the remainder of the tariffs go up (+300bn tariffs 1 September) & that is a key driver of the higher surplus with the US.
Front-loading will be even more intense in August, before the 1 September deadline of 10% of 300bn goods.
Details of China contraction of imports (-5.6%YoY) by destination:
USA -19.1% 🥶
Canada -23.6%🥶
Japan -13%🥶
South Korea -20.1%🥶
Singapore -2.9%🥶
EU -3.3%🥶
UK -22.4%🥶
Germany -7.5%🥶

Hong Kong up +19.9%
Details of China EXPANSION of exports (+3.3%YoY):
USA -6.5% (down but not as much as imports by China of American products)
Canada +6.5% (note that Chinese demand of Canadian is DOWN)
Japan -4.1%
South Korea +9.3%
Taiwan +19.9%
Singapore +11.6%
EU+6.5%
UK +9.1%
Germany +5.8%
Putting this together:
a) China exports to the USA contracts but by less than US exports to China as Chinese exporters likely discounted products (thanks to a weaker CNY) to offset tariffs
b) China exports to RoW rise as a weaker CNY helps w/ input costs
c) China IMPORTS CONTRACT
The big story of the year is:

China using the current account as a first line of defense & that story is especially more salient as the CNY weakness quickens. This has global implication b/c the stabilization of China comes at a great costs to exporters (less Chinese demand)👆🏻

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More from @Trinhnomics

Nov 21
Guys,

Are you ready for a Trump tariff thread and what this means? This is going to be a bit of a technical one but I'll make it easy & fun & we'll go through literature & analysis.

Let's go.
We start with the basics. How does tariff work? First, as you know, the US is a big free trader. Still is despite tons of tariffs on China. So goods in the US generally are tariff free to import & hence proliferation of foreign goods in the US.

But that being said, it does impose tariffs & duties. Sometimes overtly targeting a specific product to protect domestic sector due to lobbying. Anti-dumping duties is an example. A country that is not a market economy is an easy target (China, Vietnam) as u can say those countries have subsidized excessive production & hence duties.

But comes Trump. He has been consistent since the 1980s about the US trade deficit which he has railed against in public interviews and what does he do.

He started a US-China trade-war on washing machine duties.

Before we talk about what has Trump 1.0 (=first term 2017 to 2020) & Biden (2020 to 2024) done in terms of tariffs, I want to talk about the practicality of WHO PAYS FOR TARIFFS.
The IMPORTERS pay for tariffs. By that, American importers pay for tariffs. So when an item say costs 100 goes to 125 because of a 25% tariffs, there are a few things that COMPANIES that import can do.

They can PASS ON that cost to CUSTOMERS (buyers of goods). They can ABSORB that cost. They can FIND A NEW SOURCE to import. Or the SELLER can make the item cost 80 or a 20% reduction of previous price to then when the seller pay 25% that is just 100 BUCKS of import costs so the SELLER ABSORBS this margin compression.

That 25% goes to the IRS as government revenue. Who pays for it? Well, it depends on who ABSORBS THAT COSTS of 25% but surely 25% tariffs happen.
Read 18 tweets
Nov 8
Two days after the elections & as Trump team prepares their team, let's talk about economic impact. This morning, I will read with you a few papers that have analyzed what he said as literal policy translation.
First, Trump 2.0 will not be as messy as Trump 1.0. Why? Well, dude is gonna prolly get enough people to approve his thousands of people that will be appointed so DC.

This is what you get when you have total power (likely House, Senate).

Second, he has done it already so got a few people in the bags to choose from and the troops in the GOP have rallied behind him.

What does that mean? Trumponomics is going to be pretty forceful, whatever that may be.
There are a few things we know that he is very consistent:
a) On domestic policy - he will like extend his Tax Cuts and Jobs Act (TCJA) or basically corporate tax cuts and also income cuts. That will help boost economic growth but WIDENS THE DEFICIT.
b) On immigration - he will at the minimum TIGHTEN the policies. Whether he will actively deport all these people that entered illegally is a question mark. Irrespective, Biden towards the end of the term got the memo that the open border thing isn't good for politics and since tightened.
That said, he said he would deport so some deportation is likely. Magnitude is question mark.
Read 15 tweets
Oct 25
Prabonomics Wish List: Higher Tax Revenue, More Social Welfare and Rapid GDP Growth.

A thread on Indonesia's 8th President who will lead Southeast Asia's largest economy & fourth most populous in the world in the next five years. Let's go! 🇮🇩
First, what is Prabonomics? Well, we don't know yet but he won on the promise of continuity of Jokonomics that comprised of infra capex, fiscal prudence, and downstreaming of metals (nickel).

Still, let's talk about his objectives. On the economy, he wants:

GDP to rise by 8% in the next 2-3 years (Jokowi only managed 4.1% on average in 10yrs and excluding Covid years then 5.1%) so that is raising GDP growth by 3-4% higher than its current batting average.Image
How will achieve this 3-4% higher average GDP growth?

Well, more social welfare spending is where we wants to do it. Basically, more free school food, more housing, more self sufficiency of food.

So a mix of social capital & some infra but generally more about social welfare vs the emphasis on highways and new capitals.

How much more? Well, he floated IDR450trn or 30bn for free school lunch for 81m Indonesian or 2% of GDP.
Read 20 tweets
Oct 14
Here is a short thread on why China fiscal policy, specifically central government support, is sorely needed & monetary support so far is not enough.
First, China got triple D problems - deflation, debt, demographic. All going badly.

Regarding deflation, it reflects an imbalanced economy where supply-side support for a long time has led to too much supply relative to demand domestically.

The easiest way to see it? China's producer price index. It's -2.8%YoY for September 2024. Meaning, producers get less money for the same stuff they make vs last year.

Okay, how is this bad? Margin compression. Your revenue is lower if you are a producer. Or DECLINING INDUSTRIAL PROFITS.
The positive side of this equation is that as they produce so much stuff that is not in demand and prices are cheap, then they can sell ABROAD (exports) for much cheaper than the competition.

A cheaper yuan (meaning depreciated) also helped. All those reasons led to China gaining global market share in manufactured goods to the chagrin of big traders like the EU, South Korea, Japan, and even the not big trader like India that has a about USD100bn of deficit w/ China.

Okay, so it's a bright spot as it gets more income than it spends (imports) so it has a trade surplus.

But that is also a source of geopolitical tensions as other countries are not happy w/ their firms going out of business as they can't compete w/ Chinese goods that are literally deflated.

So tariffs are going up, started by Trump in 2018 but frankly increasingly the EU and likely more and more...
Read 12 tweets
Oct 4
Great story about India rice policy. What I find interesting about this is of course the agriculture gets the most subsidy in the budget & one can say that India gives so much more to farmers and the sector than any sector by a wide margin.

That is a distortion that favors them as they are a powerful vote bank. But at the same time, the government also banned the exporting of rice when rice surged and that meant farmers couldn't make more money.

What India does with farming is very interesting. As it is a country with food surplus and the budget gives most weight to farming while most farmers remain very poor and more than 75% work for sub minimum wage.
India's central government expenditure budget. Rural development + agriculture gets so much.

There is a lot of talk about production linked incentives but it really just got 1.5bn in FY25. So that means this budget is just mostly agrarian.

Meanwhile, farmers were blocked from exporting rice, causing rice to rot. This is a policy to prevent rice price from rising, causing CPI to spike.

This is a sector worth paying attention to as most Indians live in rural areas & they matter even if farming is only 16% of GDP.Image
One of the reasons India deal with w/ the energy and thus the food crisis is that it is a country that has a SURPLUS in food. As in they EXPORT food.

So to make sure domestic prices & supply stay ample during GLOBAL SHORTAGES due to shocks, India curbed food exports from wheat to rice and sugar.

Meaning, India exported less & so the Philippines saw a huge increase in rice price imported (btw, good for Vietnam & Thailand obvs).

Modi reversed his non-basmati white rice introduced in July 2023 but still have export duty on parboiled rice and minimum price imposed on shipments abroad of the white variety of grain.
Read 8 tweets
Sep 4
The best research on India is written by the @RBI and it's called the RBI Bulletin (very similar to BOE bulletin) & it's amazing. Go to the state of the economy for charts/details on what's going on in India & then they always have essays on specific issues.

Central banks are consistently the best place to get information on a particular country. I also like the RBA website as well. Enjoy!

We can read some of these together in case you find it intimidating reading central bank language.

rbidocs.rbi.org.in/rdocs/Bulletin…
Some charts of interest from my reading.

India annual installed capacity of solar + wind + other renewables > coal, oil and gas since 2017. Image
India merchandise export contribution:

Positives = Electronic goods + engineering goods + pharma

Bad = petroleum, jewels/gems, rice & ceramics Image
Read 7 tweets

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