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

Jun 27
Good afternoon,

Yes, it has been a while. I have been running around the world & Asia. It was nice seeing so many people and places to share views, but my inner nerdling self fundamentally enjoy sitting at desk listening to music to read and analyze. For those that I got a chance to meet, thank you! People make the world go around - we all yearn to understand our reality & seek to be understood.

Anyway, shall we review first half? And perhaps think about second half 2025, which starts Tuesday next week.
First, we live in a Trump world. By that, we can't escape his decisions, pushing, wanting.

What does he want? That is a question I get a lot. And most people tend to response with this, "He probably doesn't know it himself."

I don't agree. He does. He's clear about it. It's how he gets there and the people that he surrounds himself with to execute it is a big if but not what he wants.

I'll put three things that Trump wants and basically got so far despite everyone calling him TACO (Trump always chickens out).
Three things Trump wants:
a) Tariffs - he likes tariffs. He sees it as a tool to get what he wants, which is to grow US industrial prowess & rebalance US trade. We can disagree on whether this is the right tool or subsidies or industrial policies are better. But tariffs he wants and he gets.

People think TACO is the trade. But tariff is the trade. It's higher. You accept this new normal fine.

I'll give you an example. We got 50% on steel. 25% on aluminum. 25% on auto. +25% fentanyl on Mexico and Canada excluding USMCA products. +20% on China.

And +10% on rest of the world. For China, expires August. For rest of the world, 9th July. Probably gonna get extended.
Read 9 tweets
Jun 20
Good morning,

Happy to be back in Hong Kong! The world is on fire, this time, the threat of war widening beyond just Israel and Iran but to the US and that means the gulf.

Meanwhile, Japan sees core inflation rising to 3.7%YoY and this forces the BOJ to hike (it really doesn't want to for many reasons) as it struggles with policy response - note that inflation has been higher than 2% for so long while policy rate is only 0.5%.

So who is most affected by this whole conflict? Well, we all in different ways but the most obvious outcome is oil. Let's take a look.

We Asians IMPORT 69% of oil going through the Straight of Hormuz and the Saudis export the most.
First, let's go through what's happening. Iran has been attacked by Israel and has shown that it is weak. Now that it is weak, it will have to fight back strongly or risk being seen weak.

So it's a question of how it will surrender not whether and when. Will it do that to the US or Israel? It will fight first. Second is the US, will they take this opportunity to wipe out the threat of Iran nuclear power?

If the US is involved, there is a chance of this widening out as US assets in the region will be targets.

Hence the question of the Straight of Hormuz.Image
20% of global oil consumption flows through the Strait of Hormuz. It is a narrow channel so if that gets choked up, we're looking at a big oil supply shock.

Who's affected? Producers - the gulfs like Saudi, Kawait, UAE.

Who are the importers? Asians, namely China, India, Japan, South Korea. They make up 69% of total imports.

eia.gov/todayinenergy/…Image
Read 5 tweets
Jun 9
Good morning Hong Kong,

Happy to be back in Asia. Paris was great for many reasons - but mostly because the vibe in Europe is much better as people feel more empowered by change that allows people to zoom out from usual distress over political stalemate, even if challenging.

What do I tell clients? Well, the same as I usually do. When you look at data, don't get fixated on a point in a series. Non-farm payroll/jobs data is an example. Markets get so fixated on what the expectations are & whether results are a beat or not. But what we should look at is a trend over time. Revisions happen. Downward revisions or upward. Seasonality happens (strikes/weather/etc). But what does the trend tell you & what does that mean for policy reaction function?
Well, if you zoom out, then what we see is that job gains are SLOWING in the US. And labor market data is lagging.

The ISM, both manufacturing and services, both point to slowing activity.

Meanwhile, we have CPI coming out in May - markets expect 2.5%YoY from 2.3% in April.

So what? What will le Fed do?
Inflation is an interesting figure. Why? Because it mirrors what Trump's doing on tariffs and also the dollar going lower, which means imports cost more now.

Both tell you that US goods inflation should rise over time. But what does that mean for US CPI? Well, most weights for US CPI is housing/services, which are non-tradeable in nature.

So while US CPI is rising, the Fed will want to see if core PCE is rising. Anyway, if employment is softer over time, and inflation is rising, doesn't that constraint the Fed from seeing through the fog and know what to do?
Read 15 tweets
May 29
Trump tariffs. Where are the powers coming from? Well, he has a menu of tariff options. It's the only tax that the president can incur without congress.

For Reciprocal Tariffs, he used the International Emergency Economics Power Act (IEEPA), which has an advantage of SPEED and SCOPE but disadvantage in FOUNDATION or legality.

Why? Well, he declared that the TRADE DEFICIT is the national emergency.

The US Court of International Trade said that he MISUSED the IEEPA, as in the foundation of the "emergency" is not right.
Trump team knew this. They know the laws. They decided for SCOPE and SPEED. What happens next?

Well, they appeal. And eventually, it will be the Supreme Court that will decide. But the foundation of his "emergency" was always being questioned.

Irrespective, for markets, there was already a Trump put, and a clear one. He himself sees these "reciprocal tariffs" as maximalist positions anyway.
Remember that he has other powers to choose from. Section 232 has a STRONGER FOUNDATION but takes a while. You need consultation and etc so it takes time.

The +25% steel & aluminum tariffs for example is from Trump 1.0 and he's just removing exemptions + raising alum from 10% to 25%.

Auto tariff is new.

There is a few others that are being "consulted".
Read 4 tweets
May 26
Happy Memorial Day to Americans! And good morning to Asia!

Let's talk about something very topical. Debt. Yes, it has risen. How much debt do we have really? Who owns it? Why is cost of debt an issue?

Can the US solve its debt crisis? Image
This chart is my fav chart. I show stock of debt & then flow of debt (change since 2019 in orange bubble). Debt matters in terms of who owns it, which sector, etc.

Who is the biggest debt of them all? Well, Japan. It is also the biggest creditor to the world (lending money). Japanese debt is unique in that because of weak private sector, the government has been just expanding like crazy because the households and corporates just sit on savings.

Okay, why is this important? Well, those savings traditionally invested in their own debt (used to be very low yielding on the longer end) and also OTHERS' debt, USA + other emerging markets, also Europeans etc.Image
The Japanese sovereign yield curve is interesting not just for Japanese lifers, banks & JGB strategists but also for everyone else.

What has happened? Well, per usual they will run fiscal deficit. Nothing new. But the BOJ also owns like 48% of this debt and wants to reduce, but very hard because lifers etc don't want to buy so much more of this supply.

So what happens? The yield curve steepens. What is a yield curve? Well, you can borrow short-term (overnight) or for a long time (30 to 40 year in Japan) at a set rate. Japan has been running very close to zero rate for a long time.

So debt is not an issue if your servicing costs were close to zero.

But the longer, esp the 40-yr is now 3.5%. Yep!
The shorter end, which is policy rate is 0.5%.

This curve is STEEP!Image
Read 13 tweets
May 14
Good morning,

US April inflation came over night softer, and that's no surprise really - we knew that energy, food and service costs were going lower. Everyone said, well, what pain for China if April exports were strong, not to the US of course, but to the world (+8.1%)YoY. The same is said about US CPI. It's actually slower to 2.3%YoY despite a very soft USD & tariffs that started since February.

What does that mean? Why did the the US-China both come to the table to stop the embargo of trade?
Can both of these arguments be true? Of course. First, we must talk about these different balance sheets. They are one and the same. But they interact differently.

CPI is a domestic phenomenon. US inequality/lack of affordable housing/high costs of college/healthcare/etc are DOMESTIC IN NATURE. We call it NON-TRADEABLE. Sure, higher steel & timber make building a house more expensive. Higher appliances also make it expensive. But let's be honest here, the biggest costs of the house is the land & next costs is the regulations and the permits and the actual time and capital erecting it.

California/NYC/Seattle where the jobs are all have regulations that make it very expensive to build. And that has been the case during LOW TARIFF REGIME.

So listen, just think if you live anywhere. When you get a paycheck, where does your money go? Well, if you rent or mortgage, then it's HOUSING.

Next, if you live in the US and send your children out of state or private for education, it's not a rounding error on two middle class incomes.

Of course, another essential - FOOD.
Another one is transport - that includes FUEL + Car (and indirect cost is TIME).

Goods, while you know, nice to have, durable goods you buy once and hopefully last you a decade or two, like a washing machine or a fridge or a microwave.

Toys, definitely like you buy according to age and once & don't repeat and prolly can get used because everyone disposes of this once the child is done.Image
So when you look at US inflation, the largest weights aren't GOODS or IMPORTED goods for a consumer.

It may be a very big part of a producer that imports intermediates. Say an oil driller that needs steel to build infra to drill or a domestic producer of appliances that need parts that are cheaper to source, say China.

Irrespective, an AVERAGE American person isn't going to feel tariffs. They will feel it via the news, via tiktok, via social media, via the financial markets that have exposure to the higher costs, but they are not feeling it much if they don't have a lot of financial assets.

So the reality is that inflation in the US is GOING DOWN for core goods. Egg inflation is lower after a flu supply shock. US food exporters will sell more domestically if selling abroad faces tariffs. But food isn't the bulk of inflation.

It's the services like housing etc. And they are going down.
Read 9 tweets

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