US Considering China Capital Limits?

Two Weeks To Go

With the US and China due to hold a further round of face-to-face trade talks in Washington on October 10^th, traders are hoping that both sides are able to find a compromise to put an end to the ongoing trade war. The US activated the first tariffs on Chinese goods in January of last year. The trade war (which has almost run for two years now) has blighted both the US and Chinese domestic economies as well as global activity as a whole. Once again, the latest headlines pose serious questions around the prospect of a deal being agreed. This comes just two weeks out from the scheduled talks.

Investment Limits Considered

Reports over the week indicate that the White House is considering implementing investment limits on capital flows into China as well as limits for Chinese companies listed on US exchanges. The move, which would fly in the face of China’s demand for tariffs and barriers to be reduced has been viewed as yet a further negotiating tactic from the Trump administration.

US Government Denies Reports

In a further twist, however, the US government issued a denial over the weekend. A spokeswoman for Steven Mnuchin, the US Treasury Secretary, issued a statement over the weekend saying that:

“The administration is not contemplating blocking Chinese companies from listing shares on U.S. stock exchanges at this time.”

Two Bills Introduced Already

The risks of such a tool being used remain despite the denial. Indeed, a pair of bipartisan bills were already submitted to Congress. These intend to ensure that Chinese companies listed in the US have to comply with US auditing rules and regulatory oversight or face de-listing.  The impact of these bills would be severe. The US has over 200 Chinese companies listed. All of these face restriction to US funding.

PBoC To Ease Further

On Friday, Chinese equities prices slid in response to the news. In response, the People’s Bank of Chian announced on Sunday that it would be increasing its adjustments to ensure “adequate liquidity” in the financial sector. This is to protect against further slowing of the economy. A statement issued by the PBoC said that it will “continue to implement a prudent monetary policy and increase the strength of counter-cyclical measures”.

Chinese Government To Open Up The Economy Further

The Chinese government has also been quick to reassure its citizens. Vice-commerce minister Wang Shouwen announced that the government would now be opening up some areas of the economy to foreign capital ahead of the next round of US/China trade talks due to take place a week after China’s week-long holiday to celebrate the founding of the People’s Republic of China.

China Manufacturing PMI Rises

Despite the announcement to further measures, there are some tentative signs that the Chinese economy is picking up. Data released overnight showed the Caixin China General Manufacturing PMI rose to 51.4. This was from 50.4 in August marking its highest reading since February 2018. Indeed, the breakdown of the data shows the rise was largely due to a jump in new orders.

Technical Perspective

With the market now two weeks out from the next round of trade talks, USDCNH continues to rise. Price is supported here due to expectations for further easing from the PBoC. Not only this but also from reduced rate cut expectations in the US.

USDCNH is once again challenging the 7.1393 level. This had been the initial 2019 highs over the summer. Above here, 2019 highs at 7.1967 will be the key resistance level to watch. To the downside, any fall lower is likely to find support into the retest of the 6.9861 highs. The rising trend line from Q2 lows comes in just ahead.