The U.S. Treasury Department took two actions today that dialed up the financial stakes of the U.S.-China trade war.
First, it initiated a toughened investment regime, approved by the U.S. Congress this summer under the Foreign Investment Risk Review Modernization Act (Firrma).This act “expanded the purview of the Committee on Foreign Investment in the United States” to be “able to review a much wider array of deals, including joint ventures and smaller investments by foreigners in American businesses that make technology deemed critical for national security reasons,” according to the New York Times(porous paywall).The regime will remain a “pilot program” for one month, and will become formalized on November 10.Second, it warned China against currency devaluations. Steven Mnuchin, the Treasury secretary, told the Financial Times (paywall) “that the Treasury monitored currency issues ‘very carefully’ and noted that the Chinese renminbi had fallen ‘significantly’ during the year, adding that he wanted to discuss the currency with Beijing as part of trade talks.”This comes as the Chinese yuan, also known as the renminbi, approaches the “key psychological level” of seven yuan per dollar, a level it “hasn’t breached in a decade,” Bloomberg reports (porous paywall). Right now, one dollar buys about 6.92 yuan — only half a year ago, a dollar bought about 6.3 yuan.But China is “not purposefullydevaluing the currency,” write the economists at Trivium, as devaluation is instead a natural outcome of “the trade war and diverging monetary policy in the two countries.” Reuters even reports that “China is suspending approvals for a niche overseas investment product in Shanghai,” which can be seen as a precaution against capital outflow and another of many protections put in place against rapid devaluation.
All the financial doom and gloom hit stock markets today — “Stocks suffered their steepest drop in eight months,” the New York Times reports (porous paywall):
“The Standard & Poor’s 500-stock index dropped 3.3 percent, bringing the broad equity benchmark down 4.4 percent for the month. The yield on the 10-year Treasury note, a key measure of borrowing costs, inched up to more than 3.24 percent during the trading day before declining.”