BEIJING -- Trade tensions between the U.S. and China subsided a bit on Tuesday, giving U.S. investors a reason to wade back into stocks after a big sell-off a day earlier. Still, experts worried that recent actions taken by the two sides presage a prolonged dispute.
China stabilized its currency Tuesday, suggesting it might hold off from aggressively letting the yuan weaken as a way to respond to U.S. tariffs on Chinese goods. That move came a day after Beijing sent financial markets tumbling by allowing the currency to fall to an 11-year low against the dollar. China on Monday also said it would halt purchases of soybeans and other crops from the United States.
Things were calmer on Tuesday. After falling 3% on Monday, the S&P 500 index rose 1.3% -- its first gain in seven trading days.
The Chinese central bank governor, Yi Gang, had tried to reassure markets, promising in a statement "not to use exchange rates for competitive purposes."
The central bank is "committed to maintaining the basic stability" of the yuan "at a reasonable and balanced level," Yi said.
In the U.S., President Donald Trump and economic adviser Larry Kudlow made the case that the U.S. economy is in a better position to withstand a trade war.
"I think China is getting hurt significantly [by the trade dispute], much more than we are," Kudlow said on CNBC.
"As difficult as things may be, and I know the markets are bit volatile, the reality is we would like to negotiate," Kudlow said.
The U.S. Treasury Department on Monday officially declared that China improperly manipulates the yuan's value. The move came hours after Trump accused China of currency manipulation. American officials have long complained that a weak yuan makes China's export prices unfairly low, hurting foreign competitors and swelling Beijing's trade surplus.
The designation could open the way to new penalties on top of the tariff increases already imposed on Chinese goods in a fight over Beijing's trade surplus and technology policies.
China on Monday allowed the yuan to fall to the politically sensitive level of seven per dollar and pinned the blame on U.S. protectionism. While a weaker currency would help offset the effect of higher tariffs on Chinese goods, an uncontrolled decline could cause instability in its markets and spur capital flight -- something officials have sought to avoid in recent years.
A weaker yuan can help neutralize U.S. tariffs on Chinese goods by making them more price-competitive on international markets.
The People's Bank of China on Tuesday set the daily currency fixing at a stronger level than analysts expected and announced the planned sale of yuan-denominated bonds in Hong Kong. The moves helped drive the yuan up 0.2% a day after it sank the most since 2015. The Chinese currency declined to 7.0562 to the dollar before strengthening back to 7.0264.
China's central bank will sell $4.2 billion of bills in Hong Kong on Aug. 14, according to a central bank statement Tuesday. The move typically drains liquidity offshore, making it more costly to short the Chinese currency.
"China wants the currency to have two-way flexibility, but it doesn't want the market to be too panicked," said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. The central bank will let the fixing be more market-based unless it needs to restore confidence in the currency, he said.
"The [People's Bank of China] is sending signals that it would like to mitigate yuan depreciation," said Frances Cheung, head of Asia macro strategy at Westpac Banking Corp. in Singapore.
The respite is not expected to continue much longer. A number of White House officials said they now expect a long, drawn-out battle with Chinese leaders, as the on-again, off-again trade negotiations that began in December have shown little sign of progress.
Trump is convinced that the Chinese economy is suffering more than the U.S. economy and that leaders will eventually back down, said people familiar with the matter. And he has felt validated as his hardball threats in other circumstances, including a recent tangle with Mexico over border security, seemed to get at least some results, even if they scared investors in the short term, the people said.
Stocks have whipsawed as Trump and China have escalated the trade conflict. Democrats, some of whom are supportive of a more adversarial economic relationship with China, have criticized Trump's penchant for making impulsive moves.
The practical implications of Treasury Secretary Steven Mnuchin's move to label China a currency manipulator on Monday were limited. It begins a process of discussions between him and the International Monetary Fund about ways to address China's behavior.
The tensions between the two nations reached a new high after Trump announced plans last week to impose 10% tariffs on an additional $300 billion worth of Chinese imports starting in September. His decision came a day after U.S. and Chinese negotiators held inconclusive trade talks in Shanghai.
The U.S. and China are scheduled to resume trade talks in September in Washington.
But by allowing the Chinese currency to weaken past a key level, Chinese leader Xi Jinping is adopting a hard-line stance in what is turning into a long-lasting duel between two economic superpowers.
Xi also appears to have a team of hard-liners around him, including Minister of Commerce Zhong Shan, who was recently added to the Chinese negotiating team.
"For now, Xi is signaling that he is a tough nationalist who will not back down in the face of very aggressive behavior on the part of the Trump administration," said Victor Shih, an associate professor at the University of California, San Diego, and an expert on the Chinese economy.
Analysts at Capital Economics estimate that if the 10% tariffs Trump plans to impose on $300 billion in Chinese goods next month were to eventually rise to 25%, then U.S. economic growth would be reduced by 0.4 percentage points. The U.S. economy grew at an annual rate of 2.1% in the April-June quarter.
Information for this article was contributed by Tian Chen and Claire Che of Bloomberg News; by Joe McDonald of The Associated Press; by Jane Perlez and Alexandra Stevenson of The New York Times; and by Damian Paletta of The Washington Post.
A Section on 08/07/2019