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

Apr 1
At the Asia Society to listen to Asia’s view of Trump 2.0. Will share later ideas shared! Image
China:

Highly popular in China as he is entertaining as he has made China great again. His pressure has pushed China reforms forward. China has become more resilient and less reliant against the US. Chinese indigenous tech is decent & confidence domestically is highest ever. External pressure has rallied stakeholders around the central leadership for advancing tech & expanding domestic demand. Exports will not be a key driver & infra ROI down. China has benefited from Trump pressure.

Trump has a good story teller for China as Trump has helped the China story. The Chinese is projecting stability in a more volatile world & saying that China is open for business while the door is closing by the US.

DowJones & SPX down while China is up. Nasdaq down & HSI up. All thanks to Trump.
Middle East:

Everything Trump does in the Middle East is for Trump to focus to China. Trump puts on the table risky strategies. He wants to bully Iran to the table. Bombing Yemen is an example.

No one takes Trump seriously. What he says versus what he does. What he says is the maximum. Example is Palestine. The best strategy is to wait him out & Iran strategy is waiting him out & Iran has no leverage except time.

Time showed his hand of not having time. In a hurry.

People are convinced that Trump is going to collapse in six months. So give him something but not in a hurry to give him a good deal.

Considerations. Trump is willing to negotiate with Russian directly. He is willing to play outside US foreign policy. His handling of Zelenskyy is like a loan shark makes it difficult for Iranians to respond to him.

For Iranians, it is not what he tells them but what he does to others. For him to have wins quickly, he would have to pay the price.

He can’t give Iran what he wants with Israel. The Middle East problem won’t be solved easily.
Read 16 tweets
Mar 31
Trump "Liberation Day" is coming & if it is anything to go by like other tariff days, it won't feel "liberating." Why? Because he is front-loading bad news.

It sounds crazy but I have given it some thoughts and here are what I think his short-term objectives. Image
First, we know he has 20% tariffs on China on top of others so we are now got a lot of friction to trade with China, which the Trump administration sees as its #1 security threat.

But isn't happy with this friction to trade and investment and keen to close loop holes. Remember that Biden also increased tons of investment and tariff curbs with China.

How to close it is the question? It requires others to do it. Who are the others? The easiest is Mexico and Canada as they have USMCA, which Trump agreed in 2020 (previously NAFTA).Image
There are clues to what Trump wants from Canada and Mexico in the latest 25% AUTO tariff.

Why? There are exemptions to USMCA for US content and also the implementation of tariff is contingent on them figuring out how this 25% tariff is going to work.

Meaning, USMCA essentially is still in force but only exemptions in USMCA.

But Trump isn't happy w/ current USMCA. Wants change.
Read 11 tweets
Mar 27
I have a thread that I was going to make about auto tariffs but instead, I decided to just read/listen. The Peterson Institute has a good paper on modeling 25% tariff on the EU I am listening to this one by Paul Krugman because, well, he's a free trader and a great trade economist. And most importantly, he's old enough to have some historical perspective. Interesting to listen to him (I am a student of Fukuyama as well) because I think what's interesting is that people of his generation couldn't imagine the world we are in today in the 1980s when they recommended the policies they did.

tradetalkspodcast.com/podcast/206-pa…
If you don't like listening, here's the transcript: tradetalkspodcast.com/wp-content/upl…
So basically, Paul Krugman is a big free trader that thinks there is no reason for industrial policy (IP). Why? He thinks that we are not good at picking champions so just let trade be free.

Anyway, upon reflecting on 2025 vs 1987 when he was peak free trading, he sees a few mistakes of his free trade/total globalization idea:

1) Did not see strategic argument to trade, as in, if u free trade everything away, like the US and many countries have, and produce nothing, and the country that is dominant decides to INVADE, well, that's a vulnerability. In the 1980s, he spent ZERO time thinking about risks of free trade and was a free trade maximalist. Now he thinks that was arrogant (I said this not him - he wouldn't say that about himself) to perceive ZERO RISK.
2) Negative externality of globalization and the need to harness political capture for good will. Basically IP is needed to push a world in a certain place, which means, well, free trade got downside.
3) Downside of globalization is that industries are concentrated so losses are felt acutely in areas that lose jobs.

But he goes on to say free trade is best and IP is not good. Anyway and then he goes on to talk about virtues of IP. Haha!
Read 7 tweets
Mar 20
Let's go to the last part of the Miran's paper, which is currencies (Chapter 4 & 5).

Remember that his articulation of all the ills of the US trade imbalance is about the USD as a reserve currency & also the security support the US has to do (two burdens) that has grown, dwarfing the US economy RELATIVE size.

So let's talk about it. But before we even talk about, we have to go through a bit of economics history, if that is okay with you. We'll keep it pretty brief.
Triffin was a famous guy. He famously testified before Congress in 1959 & predicted the collapse of the Bretton Wood system, which happened in 1971 when the US broke away from the gold-dollar link.

What did he say? Well, simply, that as a gold-dollar reserve currency, the US would have to expand its liabilities as fast as required for global trade. But since it's backed by gold, which grows SLOWER than global trade, then we got a problem as lower rates would cause a run on the gold stock or dollar liabilities > gold stock.

And if the US didn't accumulate fast liabilities, well, global liquidity would shrink as US rates would go to high and cause global deflation.

If you want to learn more about it, see the paper below. The author btw isn't a fan of Triffin so says he got a bunch of stuff wrong and whatever he got right, it was probably not by design but accident.

Either way, he predicted that & got very famous obvs. What else did he predict?

bis.org/publ/work684.p…Image
Btw, the key reason the BIS author said Triffin was wrong/flukey is that dude didn't account for Euro dollar or USD outside the US (note at the time it was mostly Europe that held that hence the name & also the EUR was not even conceived although Charles de Gaulle was already pissed off about the dollar privilege & coined "exorbitant privilege phrase) so his timing of the "crash" was off. Either way, he was right for something and maybe it would have been different but either way, 1971, Nixon called the dollar-gold thing off.

Anyway, Triffin and went on to modify things because now we are no longer a USD-gold FX but just well, USD fiat currency.

So he now has a current account version of Triffin (btw, there's also a fiscal Triffin too). Let's talk about his current account idea.

He basically says this, well, as reserve FX or KING DOLLAR, the USD liquidity or USD liabilities will need to grow at the rate of global growth, which would lead to persistent current account DEFICIT.

Well, voila, the US did run since 1980s current account deficits (see graph from Miran's note).

Why? Well, it strengthens the USD and makes imports cheaper than exports + other countries' mercantilitic policy that makes them devalue their FX relative to their trade position.

BIS provides a bunch of counter arguments of why Triffin was off so read that but I won't summarize because, well, the point is to read the Miran paper and not why Triffin might be right for the wrong reasons.

Btw, the whole Triffin thing is about eventually, that things would become unsustainable.

But of course, BIS paper disagrees and say, well, FX would readjust and rates would adjust.Image
Image
Read 15 tweets
Mar 19
Okay, let's talk about Trump end game. To do that, let's read Stephen Miran's "A User's Guide to Restructuring the Global Trading System" together.

Note that there's a disclaimer that this is not a policy advocacy but catalog of tools available for them to "reshape the global trading system."
hudsonbaycapital.com/documents/FG/h…
Trump has been talking about global trade & how he thinks the US trade deficit is unfair since the 1980s (see his Oprah interviews) so this is beef he carries and he has the power to do it.

Trump 1.0 was a test case and Trump 2.0 is going to go full steroid on what he views as the current world order not working for the US. It may work for u, but not for him & his team is going to change it. Here's how Miran is laying it out.
First, the root of all US problems & its imbalances lies in the overvalued dollar. Yes, others lament its "exorbitant privilege" (a French FM said it) but here Trump team & also corroborated by many economists, including @michaelxpettis that while it is good for US FINANCIAL SECTORS, terrible for MAINSTREET. So basically Wall Street gains at the expense of the VACUUMING out of US industrial base.
Read 22 tweets
Mar 12
Emerging Asia Braces for Trade War Impact: Losers and Winners of Trumponomics

A thread. Let's go!

research.natixis.com/Site/en/public…
Let's start with the basics. What's on & what's promised/threatened. So far, on 12th March 2025, we have:
+25% on steel & aluminum on everyone (for steel, not new for everyone & just those that got exemptions. In Asia, that's AU, SK, and Japan. Canada & Mexico got exemptions and so did EU).
+20% on China, including Hong Kong.Image
Let's talk about the 20% on China. China is clearly targeted with 20% higher tariffs as well as its commercial ships, of which higher fees of docking in the US are being considered.

China will try to cope with higher tariffs as it did the past, which is offshoring productions to more neutral countries such as Mexico, Canada, Southeast Asia and sell more to the rest of the world as well as expanding relationships with the Global South (e.g. BRICS).

But with widening unilateral tariffs as well as others erecting barriers, this time around, beefing up domestic demand will be key.

Who loses in this tariff for Asia? China for US markets, but it will try to export elsewhere so there is a fear of a flood of Chinese goods coming.

Who gains? Well, it depends but those that can limit the flood of Chinese goods as well as export more to the US & attract investment. In other words, a lot of ifs but winners are possible.
Read 9 tweets

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