58 Finance & economics The EconomistAugust 10th 2019
21buyers exemptions from some tariffs. But
after Mr Trump’s new tariff threat it has re-
portedly told state-owned companies not
to buy American farm goods after all. Thus
Mr Trump’s tariffs may have caused the de-
cision they were designed to punish.
Whatever the cause of the new levies,
what might be their effect? Some of Ameri-
ca’s existing tariffs (of 25% on roughly
$250bn-worth of merchandise) had been
imposed on Chinese goods that American
importers can buy elsewhere. That min-
imised the harm to American buyers and
maximised the harm to China’s exporters,which lost business to close rivals else-
where. Indeed, according to Goldman
Sachs, other Asian countries have filled
around half of the gap created by the previ-
ous round of tariffs.
The next round of tariffs will hit goods
for which China has fewer competitors.
That should make it harder for American
buyers to switch suppliers. Nonetheless
the new tariffs’ direct impact could reduce
China’s growth by at least 0.3 percentage
points in 2020, according to ubs, to below
6% for the first time since 1990.
To support a slowing economy, China’sgovernment has already cut taxes, in-
creased infrastructure spending and re-
lented in its campaign to restrain credit
growth. But it is reluctant to boost the
property market, which helped pull the
economy out of previous slowdowns,
points out Andrew Batson of Gavekal, a re-
search firm. House prices have risen merci-
lessly and developers have accumulated
worrying levels of debt. China, in short,
wants to keep growth stable, stand up to
America in the trade war and constrain ex-
cesses in the housing market. It is becom-
ing harder to do all those things at once.Buttonwood The meaning of seven
A
principle followedby traders who
speculate on short-term movements
in market prices is “cut your losses early”.
This doctrine finds expression in the
stop-loss—an order to sell a security,
such as a company share, automatically
when it hits a predetermined price.
People being people, stop-loss orders
tend to cluster at salient levels, such as
whole or round numbers. They might
instruct a broker to sell the pound at
$1.20, say, or sell Apple at $200.
The round-number fetish is a strange
one. But when a situation is uncertain
(and financial markets are always un-
certain) arbitrary numbers or thresholds
are often charged with great meaning.
And few have had the significance of
seven yuan per dollar. So when the yuan
broke through seven on August 5th, it
prompted a violent sell-off in stocks and
a rally in bonds. That was followed by a
formal charge by the us Treasury that
China was manipulating its currency.
On the face of it, that looks like an
overreaction. If things were fine when
the yuan was at 6.99, why did all hell
break loose when it reached 7.01? Odder
still is the idea that a currency that has
only fairly limited use outside China is
suddenly a prime mover in global capital
markets. Yet China’s heft in the world
economy has made it so. The yuan-dollar
exchange rate is now the world’s most
watched asset price. And “seven” mat-
tered simply because people had come to
believe that it did.
To understand why, go back four
years. Until August 2015 the yuan had
been closely tied to the dollar. Since then
its external price has been set by officials
each day, ostensibly by reference to a
basket of currencies. The idea is that the
yuan’s value should somewhat reflect
market forces. The outcome is that theyuan has moved in a limited range against
the dollar, capped at seven. Were the yuan
to surge, it would hurt China’s exports;
were it to plummet, the dollar debts of
Chinese firms would loom larger. A large
fall would intensify an ever-present fear:
devaluation and capital flight.
The yuan is still a long way from being a
free-floating currency. It is further away
still from being a global one to rival the
dollar. It is not a straightforward business
to buy and sell yuan. Traders joke that it is
less liquid than the shares of Alibaba, a
giant Chinese e-commerce firm, which is
listed in New York. Yet despite the con-
straints, the waxing and waning of the
yuan’s value has had a growing influence
on the foreign-exchange market and on
asset prices more generally.
This is in large part because the cur-
rencies of economies that do a lot of trade
with China have tended to move in tandem
with the yuan. Its clout owes much to
China’s weight in the global economy, but
also to its gravity in export markets. When
the yuan moves, it imparts news about
global trade. The message is quickly pickedup by the currencies of other export-
oriented economies, not only in Asia but
in Europe too.
It is not wholly surprising, then, that
President Donald Trump’s trade war with
China has bled into a conflict over the
yuan-dollar exchange rate. Reports from
China in recent months suggested that it
had become a sticking point in the
stalled trade negotiations. The governor
of China’s central bank even dropped a
public hint in June that there was no red
line at seven. America’s treasury secre-
tary, Steven Mnuchin, countered that if
China gave up supporting the yuan, it
might be interpreted as an attempt to
weaken it. That is one reason why cross-
ing seven caused such a fuss.
But there are others. The yuan-dollar
exchange rate has become a gauge of
global risk appetite. A weak yuan is often
associated with weakness in a host of
other important currencies, including
the euro. The result is a strong dollar.
That in turn squeezes global credit,
because many countries and companies
beyond America’s borders borrow in
dollars. One consequence is slower
global gdp growth. Another is that mon-
ey tends to flow out of riskier sorts of
securities, such as stocks and emerging-
market bonds, into safer assets such as
Treasury bonds.
Arbitrary numbers often take on a life
of their own in financial markets. China
bears some blame in this instance. It has
a penchant for control and opaque
policymaking. Left to their own devices,
investors start to impute greater signif-
icance to key thresholds. Officials follow
their lead. The markets had become used
to the yuan trading in a familiar range. It
is not clear what the new rules are. The
only thing that is certain is that yuan-
dollar remains the asset price to watch.How yuan-dollar became the world’s most closely watched asset price