After Yuan Devaluation, Likely Chinese Retaliation & ETF Ways
Zacks Investment Research | Aug 07, 2019 02:00AM ET
There was yet another twist to the longstanding U.S.-China trade spat at the start of August with Trump announcing that he will levy 10% tariff on $300 billion in Chinese imports that aren’t yet subject to U.S. duties. The new tariff will be levied starting Sep 1. Another $250 billion in Chinese goods are already subject to a 25% U.S. tariff. President Trump also indicated that the new round of tariffs biggest loss of the year on Aug 5. WisdomTree Chinese Yuan Strategy ETF (TSX:CYB) was off 1.9% on the day.
Targeting the U.S. Treasury Market
China is one of the biggest holders of U.S. Treasury’s, possessing about $1 trillion of bonds in 2017, according to the Federal Reserve. If China chooses to offload its holdings or stop buying new U.S. bonds, U.S. treasury yields would rise, resulting in a decline in bond prices.
The situation can turn more problematic given the Fed is also on a policy tightening mode and treasury yields are on the higher side this year. iShares 20+ Year Treasury Bond (NASDAQ:TLT) ETF (NZ:TLT) will come under pressure in such a situation (read: Treasury ETFs Rally to New Highs on New Tariff Threats ).
Higher treasury yields would make new debt issuances for the U.S. government costlier. However, chances of such moves are less likely as “”it would make China's own holdings lose value and there’s no good safe alternative for their dollars,” per CNBC.
Hitting U.S.-Based Companies Hard
Per an article After Upbeat July, Will Semiconductor ETFs Slump in August? ).
Per Morgan Stanley (NYSE:MS) equity strategists, “semiconductor and semiconductor equipment companies have the highest revenue exposure to China at After Upbeat July, Will Semiconductor ETFs Slump in August? ).
Limiting Rare Earth Exports
China exports about 80% of rare earths, which are important in defense, energy, electronics and automobile sectors, to the United States. Beijing might use its dominant position as a supplier of the commodities to fight the trade war. Rare earth minerals are a group of 17 elements used in production of smartphones and Rare Earth Metal ETF to Surge on Chinese Export Ban ).
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