16 December 2019 FX Spotlight Currencies Global RMB: Limited US-China ‘Phase 1’ deal, limited upside risk China and the US have reached an agreement on a ‘Phase 1’ deal in which the US will halt the December tariffs and halve the 15% tariff rate on the September USD120bn list … … China will import more US goods and services over the next two years, at least USD200bn more than in 2017 US-China relations will remain a key RMB driver while the silver lining is structural portfolio inflows, in our view On 13 December 2019, China and the US have reached an agreement on a China and the US reaching an ‘Phase 1’ deal. The deal includes agreements related to intellectual property rights agreement on a ‘Phase 1’ deal (IPR), technology transfer, agriculture purchases, financial services and currency. In is an important step forward in particular, the US will halt the December tariffs and halve the 15% tariff rate on the US-China trade talks, in our September USD120bn list, while China will import more US goods and services over the next two years, at least USD200bn more compared to 20171, including annual economists’ opinion purchases of USD40-50bn in agriculture goods for the next two years. Our economists think this is an important step forward in US-China trade talks. First, it reduces risks of further escalation in US-China trade tensions for now, and offers some breathing room for companies that have been hit with relentless tariff threats. Second, this ‘Phase 1’ deal also opens the door for more substantial trade agreements in the future. USD-CNH went through a rollercoaster on 13 December 2019. It still closed lower The modest rollback of tariffs than on 12 December 2019, but it had markedly rebounded from its intraday low by the US seemed to disappoint level as both sides provided more details on the ‘Phase 1’ agreement. In our view, the currency market, in our the primary source of disappointment was the modest rollback of tariffs by the view US, as earlier news reports of 35%-60% of rollback (Bloomberg, 20 November 2019) and 50% of rollback (Bloomberg, 13 December 2019) turned out to be referring to the recent tariffs imposed in September only, rather than all the tariffs the US has placed on China since July 2018. Of the nine chapters in the agreement on the ‘Phase 1’ deal, we believe the We believe the ‘Currency’ ‘Currency’ chapter and ‘Expanding Trade’ chapter are particularly relevant for the chapter would have no RMB. Regarding the ‘Currency’ chapter, the United States Trade Representative directional impact on the RMB (USTR) fact sheet mentioned “high-standard commitments to refrain from competitive devaluations”, “significantly increasing transparency” and “providing mechanisms for accountability and enforcement”. Such language is very similar to the currency chapter (Chapter 33) of the US-Mexico-Canada Agreement (USMCA). 1 Source: USTR fact sheet Currencies ● Global 16 December 2019 We believe these terms would be manageable for China and would have no directional impact on the RMB. In our view, the US Treasury will likely lift the currency manipulator label placed on China on 5 August, but keep China on the monitoring list in its upcoming semi-annual report. The ‘Expanding Trade’ chapter is the one about China committing to import more We think the demand for China US goods and services over the next two years – at least USD200bn more than in to import dramatically more US 20172. According to the US statistics, its bilateral goods and services trade deficit good and services in a short with China was USD337bn in 2017, and that has shrunk to an annualized period of time, against the USD297bn in 1H 2019. In our view, it could be onerous for China to sharply backdrop of domestic increase its import demand and rebalance its trade position with the US over a headwinds, could be modestly short period, especially when China’s economy is facing some domestic negative for the RMB headwinds. This chapter could turn out to be modestly negative for the RMB – not only because of a possible shrinking of China’s current account surplus, but more importantly because the difficulty in fulfilling it might reignite tensions and raise uncertainty over subsequent negotiations and regarding tariffs. US-China ‘Phase 1’ deal may be done, but we believe the ups and downs of US- We still believe that the China trade relations will remain an important driver of the RMB’s outlook in 2020, developments in US-China albeit probably in a less all-encompassing way. We assume there would be limited trade relations will remain a key progress in further trade negotiations, due in part to some challenges in carrying RMB driver next year, albeit in a out ‘Phase 1’ and because of US elections, such that the threat of tariff reinstatement less all-encompassing way (or more tariffs) lingers through 2020. The silver lining for the RMB is that structural portfolio inflows should continue to be a source of some support, especially with China accelerating the opening up of its financial sector to the US (as per the ‘Financial Services’ chapter) and the rest of the world. 2 Source: USTR Fact Sheet 2 Currencies ● Global 16 December 2019 Disclosure appendix Important disclosures This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Information in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on it, consider the appropriateness of the information, having regard to their objectives, financial situation and needs. 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