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After Yuan Devaluation, Likely Chinese Retaliation & ETF Ways

Sanghamitra Saha

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 could be increased beyond 25%.

Beijing has so far retaliated with tariffs on $110 billion of American goods, including agricultural products. But as a retaliatory move to the new round of tariffs, China devalued its currency to an 11-year low and stopped purchases of U.S. farm products. On Aug 5, China's central bank set the yuan’s daily reference rate below the politically sensitive level of 7 per dollar for the first time in over a decade. The move triggered a market bloodbath amid fears of a currency war. U.S. stocks witnessed their biggest loss of the year on Aug 5. WisdomTree Chinese Yuan Strategy ETF 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 ETF 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 published on CNBC, some U.S. sectors have the highest revenue exposure to China and are thus more susceptible to the trade war. These sectors include semiconductor, energy, auto and tech hardware and equipment (read: After Upbeat July, Will Semiconductor ETFs Slump in August?).

Per Morgan Stanley equity strategists, “semiconductor and semiconductor equipment companies have the highest revenue exposure to China at 52%” and are thus exposed to maximum risks on rising trade tensions. So, companies like iShares PHLX Semiconductor ETF (SOXXshould be watched closely (read: 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 EV batteries to missiles. There is speculation that China could make the minerals more expensive or unavailable if the trade war continues. VanEck Vectors Rare Earth/Strategic Metals ETF REMX should thus be in focus (read: Rare Earth Metal ETF to Surge on Chinese Export Ban).

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iShares PHLX Semiconductor ETF (SOXX): ETF Research Reports
 
WisdomTree Chinese Yuan Strategy Fund (CYB): ETF Research Reports
 
iShares 20+ Year Treasury Bond ETF (TLT): ETF Research Reports
 
VanEck Vectors Rare Earth/Strategic Metals ETF (REMX): ETF Research Reports
 
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