The yuan started rallying against the greenback yesterday after the Chinese government announced that steel imports from major trading partners would be subject to import duties. The latest initiative is seen as an effort to achieve industrial growth target as trade war and protectionism has slowed down the world’s second-largest economy.
From a high of 6.8868, the USD/CNY pair declined to a low of 6.87126 in the past 24 hours. The currency pair is trading at 6.8774 at the time of writing this article.
A few weeks back, China’s Ministry of Commerce confirmed that it would slap import duties ranging from 18.1% to 103.1% on hot rolled stainless steel plates and steel billets from this week onwards. The decision targets steel imports from Indonesia, Japan, the European Union, and South Korea.
The announcement indicates that all 28 eurozone markets will be slapped with a 43% duty, while Japanese exporters will face a 29% tax. With an import duty of 103.1%, South Korean exports will bear the maximum brunt. Indonesia, on the contrary, will be subject to 20.2% duty.
Dumping refers to a scenario where an imported product is sold at a lower cost than the price at which it is usually sold in the domestic market. China, notably, is the world’s largest manufacturer and exporter of steel, shipping nearly 67 million metric tons in 2018, down 9% from the previous year.
The ministry said dumping has severely harmed China’s industry. “Dumping from the EU, Japan, Korea, and Indonesia has caused substantial damages to the Chinese domestic stainless steel billet and hot-rolled stainless steel plate industry.”
Of late, China started implementing a strategy to increase industrial output after production levels plunged to 5% in May, representing a 17-year low, although growth rebounded to 6.3% in June. The Industry Ministry opined that strenuous efforts are required to attain this year’s growth target of between 6% and 6.5%, sparking a series of stimulus measures by the government to boost output.
The unresolved US-China trade war has forced several local and overseas manufacturers to leave China and set up facilities in neighboring countries such as Vietnam, Malaysia, and Thailand. As of now, the businesses which have shifted their production facilities account for only around 2% of total capacity.
Even though the Chinese government and the central bank (People’s Bank of China) has slashed the reserve requirement ratio to boost lending, several small- and medium-sized banks are reluctant to lend, leading to a delay in payment of invoices by several firms. Furthermore, several manufacturers have started postponing order placement while reducing employee count.
Regarding the shifting of manufacturing facilities, Li Jiajun, the chief financial officer at Guangdong LiShun Yuan Intelligent Automation Co., said: “These days the most discussed topic — something that we always talk about in meetings — is whether we should move to Vietnam. Many of my clients have moved there. Government policy and implementation on the ground are still somehow disconnected. It’s not so easy — at least, I haven’t enjoyed much benefits so far.”
Having seen the trend of shifting manufacturing facilities, Beijing has already started taking countermeasures. In March, the government announced tax cuts to the tune of about $300 billion for a range of industries and also to increase consumer spending. Economists believe that this will negate the negative impact of a trade war with the US to some extent. The International Monetary Fund (IMF) has cautioned that China is worse affected than the USA in the current scenario.
The initiatives taken by the Chinese government may keep the yuan range-bound with a slight bullish bias.
Technically, the USD/CNY pair has made a double bottom, as shown in the image below. The Chaikin money flow indicator also has a positive reading. As fundamentals and technical contradict each other, the currency pair may remain range-bound between 6.872 and 6.878 in the short-term.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
