Trade Fight With U.S. Spurs Top Yuan Forecaster to End Bull Call

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(Bloomberg) -- Escalating trade tensions between the U.S. and China are shaking Jason Schenker’s conviction in a strong yuan.

Schenker, president of Austin, Texas-based Prestige Economics LLC, has held on to his bullish view on the currency since at least 2016, after the yuan’s shock devaluation in August of the previous year. In 2017, he was among the most accurate analysts tracked by Bloomberg as China’s currency, known officially as the renminbi, defied consensus by rallying.

“Having been bullish for the past two years, I now see the potential for a lot more uncertainty,” he said in an interview last month. “Moving away from free trade and raising tariffs could hurt the growth of both China and the U.S. So it’s difficult to see a much weaker renminbi, but it’s difficult to see a much stronger renminbi.”

While the yuan strengthened 3.7 percent against the greenback in the first quarter, its biggest gain in a decade, the currency has since fallen back by 1.6 percent as the dollar rebounded. Both China and the U.S. appear to be hardening their positions over trade, with negotiations last week in Beijing failing to produce any agreement other than to keep talking.

Schenker, ranked by Bloomberg as the most accurate yuan forecaster for the last two quarters, now sees China’s currency weakening to 6.4 per dollar by the end of this year, compared with a forecast of 6.1 three months ago. On Wednesday, the yuan dropped 0.12 percent to 6.3747 per dollar, the lowest level since Jan. 24, as of 5:02 p.m. in Shanghai.

As part of its pushback against the U.S., China probably won’t resort to weakening the yuan or selling its Treasury holdings any time soon, but the trade dispute may limit Beijing’s enthusiasm for carrying out foreign-exchange reforms, says Schenker. He believes the conflicts will eventually be resolved with negotiations.

President Donald Trump wants China to reduce its annual trade surplus with the U.S. by at least $200 billion by the end of 2020 and not retaliate for American tariffs, according to a list of demands seen by Bloomberg News that were presented to China ahead of last week’s talks. China, meanwhile, asked the U.S. to stop an investigation into the country’s acquisition of sensitive American technologies. Trump’s threat to impose tariffs on as much as $150 billion in Chinese goods is still looming.

Here’s what the U.S. and China demanded of each other on trade.

“We are just at the beginning -- this is the very tip of the trade war and there’s a lot more to come,” Schenker said. “The longer this trade tension drags on, the higher the probability of a lasting impact. There will be some level of damage done to the global outlook that might not necessarily easily reverse.”

©2018 Bloomberg L.P.

With assistance from Tian Chen, Emma Dai

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