After Trump’s victory last week, the Republican Party secured a majority in the U.S. Senate, and the possibility of controlling the House of Representatives is also increasing. This unexpected threefold victory continues to excite the capital markets. With the sharp rebound of the U.S. dollar, the possibility of the U.S. increasing tariffs on China has risen, with experts suggesting that the renminbi may fall by at least 50%.
Due to dissatisfaction with the Chinese Communist Party’s long-standing “unfair trade practices,” Trump began imposing punitive tariffs ranging from 7.5% to 25% on around $360 billion worth of Chinese imports since 2018 during his first term as U.S. President. These tariffs are aimed at addressing the trade imbalance between the U.S. and China, particularly the long-standing trade deficit the U.S. has had with China.
During his re-election campaign this year, Trump pledged to further increase tariffs on Chinese goods, possibly even raising the rates to 60%.
Since Trump’s victory last week, specific options trading patterns have emerged in the market, particularly with a large volume of trades involving the U.S. dollar appreciating against major currencies such as the renminbi and euro.
According to data from Depository Trust & Clearing Corporation (DTCC), a private equity financial company based in New Jersey, options contracts for “Euro/USD” and “USD/RMB” currency pairs have been very active in terms of trading volume, especially for the USD/RMB options.
The nominal value of the USD/RMB appreciation options trades is at least $100 million, with a 3 to 2 ratio in favor of betting on the depreciation of the renminbi, compared to bearish options.
Niraj Athavle, Head of Global Client Sales and Marketing for Asia Pacific at JPMorgan Chase Bank in Singapore, stated that due to the impact of the U.S. election results, many clients trading forex during the Asian session are considering using options to express their expectations of the U.S. dollar appreciating, especially against currencies like the euro, yen, and offshore renminbi.
Robin Rooks, a Senior Researcher at the Brookings Institution and former Chief Economist at the Institute of International Finance, analyzed in his article that if Trump implements tariff policies, the Chinese authorities may urgently need to devalue the renminbi to cope with the economic pressure resulting from the tariff hikes.
He cited the example of in 2018, when the U.S. imposed a 25% tariff on half of its imports from China, the yuan depreciated by 10% against the U.S. dollar, almost offsetting the impact of the tariffs. As a result, U.S. import prices denominated in dollars remained almost unchanged, and the tariffs scarcely caused inflation before the COVID-19 outbreak.
Rooks pointed out that assuming a 60% tariff on all imports from China, considering the tariffs already in place since 2018, the renminbi may need to devalue by 50% against the U.S. dollar to maintain stable prices for products exported to the U.S.
Furthermore, a significant devaluation of the renminbi would lead to a substantial outflow of capital from China once again. During 2015 and 2016, facing pressure from the devaluation of the renminbi, many Chinese citizens converted funds into foreign currency, causing a rapid decrease in foreign exchange reserves, resulting in losses of at least $1 trillion.
According to a report by Dajiyuan in 2019, experts analyzed based on data from the Chinese authorities that this loss was at least $2.3 trillion.
(This article is based on reports from Bloomberg and the Financial Times)