China currently owns about $1.13 trillion of U.S. Treasurys but experts say it is unlikely that Beijing would sell those assets as retaliation against higher American tariffs on some Chinese goods.
Still, investors are closely watching moves in the Chinese yuan as trade tensions between the world's two largest economies intensify.against the dollar since December. The on-shore yuan traded around 6.8713 as of 12:48 p.m. HK/SIN on Tuesday and if it hits 7 yuan per dollar, Beijing could potentially intervene to stall the depreciation.
"The level of dollar/yuan at 7 is an important psychological barrier, both for the market, in terms of the investor side, as well as from the domestic regulators," Seth said, adding that while a weaker currency remains one of the tools China can use, it will not likely do so easily. "It's very important to note the fact that a currency war in the current scenario is not going to be positive for anyone.
A weaker yuan makes Chinese exports relatively cheaper in dollar terms. But such a move could also potentially trigger capital outflows from China and make imports more expensive. "China's policy-makers have plenty of policy tools to withstand the negative shock from the trade war, but the potential long-term cost is huge," analysts at Macquarie wrote in a recent note. With a lot at stake, including national pride, "policy-makers have no choice but to maintain a stable economic backdrop amid the upcoming trade negotiations."
Macquarie said that at this stage, it's still unclear what the actual size of the damage caused by the trade war is — it could lead to slowing exports, rising uncertainties and a softening global economy, they said. "As such, policy tone could change as early as in the July Politburo meeting" — a top decision-making body of China's ruling Communist Party.
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