Post

Trinh

@Trinhnomics

Aug 8, 2019 • 28 tweets • 9 min read • Read on X

Scrolly

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

https://twitter.com/Trinhnomics/status/1158881235776593922?s=20

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 👇🏻.

https://twitter.com/Trinhnomics/status/1158881235776593922?s=20

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)👆🏻

• • •

Missing some Tweet in this thread? You can try to force a refresh

More from @Trinhnomics

Trinh

@Trinhnomics

May 9

UK-US trade-deal and what does it tell you about Asian trade deals?

The UK got 100k auto for 10% vs 232 25% for autos & that's basically 100% of UK auto exports to the US (exported 104k in 2024)

UK got jet engines & plane parts at 0%, which is also a top export

UK got 0% on steel but the UK is on the verge of closing the last steel plant, which is Chinese owned anyway, so no benefit here but maybe it will help beef up some production.

10% on the rest of exports.

Mutual reduction of tariffs on ethanol + beef (agri win for the US but not so much)

For autos, given the 10% tariff but at 100k quota, which is basically all of UK autos, there is no room for "rerouting" of other autos that won't get tariffed. Meaning, the lower tariff from 25% to 10% but with a quota is an interesting move that sets up for EU trade talks on autos.

Steel - UK not a threat so 0% means maybe UK can beef up product but less competitive than the US as the US is almost self-sufficient w/ steel

Agri - US will need to produce beef that UK standard to export. I suppose that can't be hard

Ethanol is at 0% tariff so a win for US agri. For US soybean producers etc, ethanol is a win but how big is it if its biggest export market, China, is shut?

There are talks that the US will slash tariffs on Chinese goods. But let's remind ourselves this:

The US has 20% tariffs on China from Trump 1.0 to Biden (roughly) + 20% of fentanyl tariff on China + reciprocal that was later escalated to 145%.

If the US lowers 145% to say 50%, you still have close to 100% tariffs on China on most goods and higher levels for say autos.

nypost.com/2025/05/08/bus…

Read 5 tweets

Trinh

@Trinhnomics

May 8

Okay, I want to talk about tariffs a bit because there are a lot of tariffs. On everyone:

1) Steel + aluminium +25%
2) Autos is 25% (and some auto parts except USMCA qualified) - but note that Trump has realized that steel & alum are INTERMEDIATE GOODS and when you tax that then you got a big problem so he's BACKTRACKING on that for the auto sector, as in, they don't get steel & alum on top of auto
3) 10% on everyone ex China on top of above until early July in Asia.
4) China gets embargo level of tariffs or >100% and some >200%.
5) Exemptions for semiconductor, energy, pharma, ICT (phones, laptops etc), commodities.

How bad is this?

Tariffs are a tax on investment so Trump is PUTTING A TAX ON INVESTMENT ABROAD.

Specifically: steel & alum & auto ex USMCA and specifically China.

More to come of course but this is now.

He is starting to understand that when you tax a lot of stuff, especially sectoral, especially intermediates, you are SHORTENING SUPPLY CHAINS AS THIS COMPOUNDS.

A car is made of thousands of parts. Steel is part of it of course. So he has to make exemptions to make sure things don't kill the auto sector that he is trying to rescue/prop up. But supply chains are complicated.

The US used to be almost tariff free. Low single digit of trade-weighted tariff. That means a lot of PING PONG OF TRADE.

As in you can ship intermediates back and forth and have things assembled etc. SUPPLY CHAINS LENGTHENED.

Tariffs SHORTEN SUPPLY CHAINS.

So this complex supply chains that is stretching across US-Canada-Mexico and Asia (ping-ponged across Asia from Japan to Malaysia/Thailand/China) etc is all going to get shortened.

So that is what tariffs will do. Supply chains will be more REGIONALIZED.

No matter what the negotiations will be - US w/ China for example, or US with other Asians or Europeans, the fact is that Trump tariffs are starting at MAXIMALIST positions and will settle at a MORE REASONABLE POSITION BUT STILL VERY HIGH TARIFF REGIME VS BEFORE.

And they will be very TARGETED to shorten supply chains to favor US/Canada/Mexico & maybe key allies in Asia and key allies in Europe.

US trade will China will ultimately be to serve rest of the world or to feed into the above. It will ultimately be cutoff. Because China and the US are strategically decoupling. They are putting a floor on that speed but the speed is towards decoupling.

Read 11 tweets

Trinh

@Trinhnomics

May 6

I'm back in Hong Kong after being in Poland for two weeks. Poland is a country that is better every year (I have been going there every year since 2015) & a country that is very mindful of its geography and being next to two giants (Germany & Russia) that have historically invaded. Kaliningrad (Russia, which was a former Prussian or German town) borders the north & so the Pols are painfully aware the very thin line between peace and a potential invasion. The entrance to my husband's family farm marks several grave cites. One of them is the Tomb of Unknown soldiers from WW1 and we regularly find WWII remnants on the farm ground as well as rubbish from the communist collectivist era when it was part of the Soviet Union or Russian empire.

Poland is an interesting country for me to visit as it is am EM with world class infrastructure but at the same time you can see in the people the pain of the past. If you see older Pols, they look like they have had a hard life in their body and face. This is very similar to what you see in China or other parts of Asia where the impoverish past is very recent and generational differences in skin/look/aesthetic reflect not just time but also transformation of society.

What I find interesting about Warsaw is that brutalist of Soviet architecture - the Nazi invasion (Germany & German soldiers) leveled the city w/ extreme severity and so most of the city is newer than the "new world" as they were built post war or re-created post war. If you find an older building/neighborhood, it's actually pretty rare and very treasured, like the Polytechnic University neighborhood that looks like Paris while the rest look, well, brutal at best.

Read 4 tweets

Trinh

@Trinhnomics

Apr 24

It is a marathon & not a sprint. Produce below costs & run losses & still produce & gain market share as your goods are much cheaper (selling below costs & hence running losses) & competition goes out of business.

Once you reach a critical mass of market share (monopoly) then the sector consolidates and u can raise prices.

These companies can survive because they are backed by state policy that want certain sectors to develop & not worry about profit margins.

This is why Chinese equities underperform Indian equities or American equities over a long period but China dominates global manufacturing.

Foreign companies find it cheaper to import products that are produced in China & resell at a much higher price & then in the process have high profit margins.

The issue here is that it vacuums out domestic industries as they cannot compete & eventually we are left with the US where it is.

It does not have the capacity to have self-sufficiency in strategy sectors required for defense.

This is the biggest flaw of globalisation, beyond of course the vacuuming out of industries.

Read 4 tweets

Trinh

@Trinhnomics

Apr 24

The EU trade deficit with China is basically what the US trade deficit with China used to be. And as the US markets increasingly shut out China, imports from China will rise as goods are produced at a cheap costs. If u look at China industrial profits, they have been terrible but product has continued to rise. Why? All about gaining market share, the long game.

Profit margins for exporting are higher than domestic as competition is fierce so there is a strong desire to export vs selling onshore for diminishing return.

All this sets up for an unsustainable global trade picture & I suppose the question is whether Europe or others are happier with cheaper goods (the key thesis for global trade) or having to erect barriers to trade (protectionism like EV tariffs they imposed) beyond what they already have.

I was asked a question recently when I went on Fox on whether the global trade system is fair.

The thing is it is not about fairness. China is fighting with a state-led approach using the savings & will of 1.4bn industrious people to become self sufficient sector by sector.

It is not a listed firm in the US that cares about quarterly earnings. They operate at a loss for a long time and still churn out production because the state implicitly & explicitly supports by promoting that sector via capital, land, and subsidies.

So the question is not fairness but that this is not the WTO designed trade system. Countries that are smaller & weaker and also firms, no matter how big, cannot compete with state-level competition.

Read 5 tweets

Trinh

@Trinhnomics

Apr 22

I'm going on Fox News at 240pm EST for the Charles Payne show to discuss tariffs impact on the US and Asia. Today, the US slapped anti-dumping duties on Southeast Asian solar with varying rates but they are essentially embargos on the import from the region, especially from Cambodia, Laos and Vietnam, and slightly less so Malaysia.

This is a result of the Biden administration probe that started a year ago that was initiated by a South Korean Hanwha Qcells, Arizona-based First Solar Inc and several smaller producers. South Korea is one of the countries that deployed a lot of capital to the US after the US imposed tariffs on solar on China a decade ago and recently Biden introduced industrial policy the IRA.

As the US gave Southeast Asia exemptions, about 70% imports came from the region. But now with anti-dumping duties, that is essentially done for US markets. But note that most of these exports are by Chinese producers that committed capital to arbitrage tariffs. They already started to halt production last year as the anti-dumping duty probe started.

Note that this is an interesting study because it is a bipartisan issue of using antidumping duties/tariffs to protect a domestic industry or foreign companies that have invested capital in the US (Korea's solar). Meaning, it raises costs and ultimately is targeting Chinese solar. Much of Cambodian solar is Chinese. Is this a big loss for the region? Well, even for companies that are not Chinese, the tariffs are a reminder that the costs of allowing Chinese investment leads to also domestic solar companies in Vietnam being smacked with tariffs.

While it is just solar, it raises the question of two issues: Where is Chinese solar moving next to avoid tariffs to the US? If that's not possible, then that means it will need to sell to wherever it can (Europe!).

For the Southeast Asians, the impact is two folds.

First, of course, selling solar to the US is done. But more importantly one should ask what is the real impact? If they were just merely rerouting exports, then not so much as the value add is not really Southeast Asia but rather Chinese.

That being said, not being able to sell to the US means that this particular sector faces risks itself onshore as it faces both more fierce Chinese imports (they were likely Chinese imports anyway) and any hope of moving up the value chain is now very difficult. This is especially the case of Vietnam.

And finally, it raises the costs of allowing rerouting/Chinese investment to arbitrage tariffs, especially in strategic sectors the US care about for the domestic sector because it risks having all producers having essentially no trade w/ the US on solar in particular. A cautionary tale so to speak ahead of negotiations w/ the US on reciprocal tariffs.

Read 7 tweets

Share this page!

Enter URL or ID to Unroll

Trinh

Try unrolling a thread yourself!

More from @Trinhnomics

Trinh

Trinh

Trinh

Trinh

Trinh

Trinh

Did Thread Reader help you today?

Don't want to be a Premium member but still want to support us?

Send Email!