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Iris Pang, Economist at ING, points out that China has eventually retaliated with tariffs but this retaliation is far from the last. They expect American companies to be included in China’s unreliable entity list and think USD/CNY could move closer to the 7.10 level or even cross 7.10 briefly.  

Key Quotes:  

“China has just announced it will impose 5% to 10% tariffs on $75 billion of goods (including frozen pork and nuts) along with resuming the 25% duty on US automobiles and auto parts from 15th December. Some tariffs will come into effect on 1 September while others will kick in around 15 December. What’s interesting to note here is that the market was not expecting this tariff retaliation given that China did not immediately react to the 10% US tariffs on $ 300 billion goods and President Trump’s unexpected tariff delays to 15 December.”

“But even though China’s tariffs are smaller than what the US has imposed, the sudden surprise element of it all should cause a risk-off to asset markets globally.”

“As China has allowed USD/CNY to cross 7.0, we think it is possible that this tactic is reused to weaken the yuan further to surprise the market again. We expect USD/CNY to move closer to 7.10 level or even cross 7.10 briefly if the trade talks in September don’t make any progress like the last round.”

“If the US retaliates harshly, then we expect China to really kick off its unreliable entity list. But if it doesn’t, it will be on the back foot during the upcoming trade negotiations in September – and given President Trump’s latest tweets, that seems improbable. In our view, one thing is for certain, this is a lose-lose situation for both China and the US in this trade and technology war.”