China's currency gamble adds fuel to fire

China's "fixing" of its currency at its lowest against the US dollar since 2008 is a gutsy move by Beijing at a time when giving its exporters a boost will only pour fuel on its increasingly strained – and combustible – relationship with Washington.

The curiously timed currency shenanigans, coming just ahead of a US public holiday on Monday, is the latest power play by Beijing to assert it interests knowing full well blowback will come from the increasingly hawkish Trump administration.

Think of it as the ultimate Chinese burn.

The veneer of normalised Sino-American relations following the inking of the phase one trade deal in January has been shattered by the economic chaos unleashed by COVID-19.

A worrying cycle of threats has racheted higher in recent weeks, as a sharp and deep economic contraction has added a nasty edge to global commerce and competition for a share of a smaller pie heats up.

Death, recession and despair has given birth to nationalistic blame shifting, with US President Donald Trump only too happy to dump on Beijing in a year where dumping on Beijing will become an increasingly popular pastime as November's US election draws nearer.

But therein lies the problem for global markets.

Investors are bookended – trapped may be a better descriptor – between the now of China's domestic political pantomime aimed at projecting strength at the National People's Congress, and the then of a US presidential year when both candidates will not go lightly on Beijing for fear of being accused of being weak on China.

That means the world's most important economic relationship will become a political plaything as the two largest economies shirtfront each other in an attempt to reshape the contours of global trade and technology supremacy.

It's hard to see how global markets will avoid renewed spasms of elevated trade and geopolitical volatility over the coming months.

Beijing's growing credibility gap

Relations between Beijing and Washington have soured in recent weeks. President Trump snubbed the prospect of talks with Chinese President Xi Jinping, given growing disquiet with China's willingness to make good on its phase one trade pledges.

That angst is well founded.

The Peterson Institute for International Economics, which last week launched a phase one trade tracker, showed that through March, China’s year-to-date total imports of covered products from the United States were $US19.8 billion compared with a pro-rated year-to-date target of $US43.2 billion.

Now there is the weakening of the Chinese currency less than three days after China's Premier Li Keqiang outlined plans to keep the yuan "basically stable".

Those comments didn't age well and highlight the growing credibility gap between what Beijing says and what it does.

There is good reason for China allowing the yuan to weaken.

The yuan, which trades in a 2 per cent band around the fix, will give a boost to exporters at a time when major markets in the US and Europe are either still contracting or in nascent stages of recovery.

The yuan is now about 4 per cent weaker than its mid-January high of 6.85 against the US dollar. On Monday, it was trading at its weakest since October.

But for Trump, who is eyeing a US Dollar Index hovering near three-year highs, the move by the People's Bank of China will be viewed as yet another example of currency manipulation.

And compounding the issue is the emerging flashpoint of Hong Kong.

Beijing's attempt to muscle a national security law through the National People's Congress raises questions about China's commitment to the financial hub's autonomy provided in the Basic Law, which it signed off on at the time of the 1997 handover.

China also says it is committed to the principle of "one country, two systems" – or is it?

Anyone who has spent time in Hong Kong will have seen its evolution into a more "Chinese" city as more mainlanders have started businesses and bought properties.

The secondary listing of technology giant Alibaba on the Hong Kong exchange last year, coupled with moves to allow it, mobile phone maker Xiaomi and food delivery giant Meituan Dianping to be included in the benchmark Hang Seng Index underscores the changing nature of Hong Kong and its market.

While street protests add to uncertainty now, the issue is whether it will be enough of a long-term deterrent for global capital in pursuit of high-growth Chinese companies.