Yuan posts biggest gain in two years after temporary trade truce between US and China

The yuan posted its biggest gain in two years after the US and China agreed to a temporary ceasefire in the trade war, easing concerns of capital outflows from the mainland.

The 90-day truce agreed at the weekend postpones the planned escalation of tariffs on US$200 billion of imports from China from 10 per cent to 25 per cent. China also agreed to a “very significant” increase in its purchases of US products to help reduce the large bilateral trade imbalance.

The trade truce provides a framework for negotiations, easing worries that the yuan would fall below the psychologically important level of 7.00 per dollar this year and trigger rapid capital outflows. The truce also covers Christmas and Lunar New Year, which could also help boost China’s exports over the next three months.

The onshore yuan, traded in China, surged 1.09 per cent to 6.8848 against the US dollar, marking its biggest daily increase since February 2016. The offshore yuan, traded outside the mainland, rose 0.93 per cent to 6.8857 per dollar.

“The postponement of tariff hikes and resumption of dialogue and negotiations are a positive, compared to the more sombre scenario we and most other analysts were assuming until a few days ago,” said Louis Kuijs, head of Asia economics at consultancy Oxford Economics.

Kuijs warned, however, that the positive outcome seemed to have largely resulted from a change of heart on the US side, which was very fragile. China’s position had not changed significantly and if the negotiations on changes to China’s economic policies did not yield satisfactory results, the US would raise the tariffs anyway.

Eugenia Fabon Victorino, head of Asia strategy at Nordic bank SEB, noted the differences between the official statements underline the structural issues at stake.

The White House statement focused on what China has agreed to in exchange for the 90-day grace period. Trump also tweeted that China said it would “reduce and remove” car tariffs, which were missing from Beijing’s statement.

In contrast, China’s statement was mainly on the reduction of trade tensions with limited details. Foreign Minister Wang Yi suggested that the two countries will work towards scrapping all tariffs, a clause which is noticeably absent from the US announcement.

“In our view, China cannot change its stripes in 90 days. Thus a permanent resolution is unlikely over the time frame,” Victorino said.