U.S.-China Trade War Likely to Weaken Dollar vs. Yuan Over Time, Says MUFG Americas' Head of Trading
U.S.- Japan Trade Dispute in 1980s-90s Seen Offering Striking Parallels, Historical Precedent
NEW YORK, JULY 2, 2019 - The U.S. dollar will likely weaken over time against the Chinese yuan as a result of the trade war between the two nations, and it may take years before they reach a comprehensive trade deal, said Kuniyuki Hirai, Managing Director and Head of Trading in the Americas for Mitsubishi UFJ Financial Group (MUFG), Inc.
Mr. Hirai delivered his comments to financial journalists at a recent session of MUFG Explores, an issues-based media series featuring MUFG subject-matter experts, at the bank’s New York offices on June 20. He based them in part on the parallels between the current dispute and that of the U.S.-Japan trade conflict of the 1980s and 1990s.
Mr. Hirai stated that the greenback's value would probably decline versus the yuan in the foreseeable future despite the prospect of China's economy suffering more than America's as the trade dispute lingers. He believes that, if the Chinese economy weakens during the current trade dispute as significantly as Japan's economy during the U.S.- Japan clash, China could pull back from its investments abroad, including those in the U.S. "Such a retreat, resulting in a massive selling of dollars and its potential conversion to Chinese currency, could strengthen the yuan's value versus the dollar," Mr. Hirai said.
He also expects it will take years before the U.S. and China reach a comprehensive trade deal. He points to the U.S.-Japan trade row, which lasted more than a decade during a time when Japan was the world’s second-largest economy; China currently boasts the No. 2 economy in the world, behind the U.S.
"Trade wars are typically protracted, especially if they occur between trading partners that are the world's largest and second-largest economies," said Mr. Hirai. "They also tend to be complex, wide in scope, and driven not just by trade, but also by industrial policy, domestic politics, geopolitics and intellectual-property disputes."
"Periodic negotiations and agreements on matters such as tariffs would be positive developments in the interim, as we’ve seen in the progress made at the recent G20 Summit, but a comprehensive accord may still take time to achieve," Mr. Hirai added.
A weaker dollar preferred
Citing the Plaza Accord of 1985, in which the U.S. and four other nations agreed to jointly weaken the dollar as a result of the U.S.- Japan trade war, Mr. Hirai said: "In the decade following the Accord, the dollar depreciated nearly 70% against the yen. A similar currency agreement between the U.S. and China could lift the yuan to its highest level vs. the dollar in more than five years."
Mr. Hirai noted that China's economy has shifted its emphasis from growth driven by exports, in which a weaker yuan would be advantageous, to growth led by domestic consumption, whereby a stronger yuan would make imports cheaper.
"China has an interest in not letting the yuan weaken too much against the dollar," he said. "The U.S. shares that preference as a weaker dollar makes American exports to China more competitive.'
MUFG is the world's fifth-largest financial institution by assets, with approximately $2.7 trillion. It is also one of the biggest market-makers in the foreign-exchange business, with trading hubs in the U.S., Europe and Asia that execute and participate in large-scale transactions for its institutional clients. MUFG Bank recently became the first Japan-based financial institution to be designated a yuan-clearing bank by China's central bank.
About MUFG Union Bank and MUFG Americas Holdings Corporation
The U.S. operations of Mitsubishi UFJ Financial Group, Inc. (MUFG), one of the world’s leading financial groups, has total assets of $339.7 billion at March 31, 2019. As part of that total, MUFG Americas Holdings Corporation (MUAH), a financial holding company, bank holding company and intermediate holding company, has total assets of $170.7 billion at March 31, 2019. MUAH’s main subsidiaries are MUFG Union Bank, N.A. and MUFG Securities Americas Inc. MUFG Union Bank, N.A. provides a wide range of financial services to consumers, small businesses, middle-market companies, and major corporations. As of March 31, 2019, MUFG Union Bank, N.A. operated 351 branches, consisting primarily of retail banking branches in the West Coast states, along with commercial branches in Texas, Illinois, New York and Georgia, as well as 22 PurePoint® Financial Centers.
MUFG Securities Americas Inc. is a registered securities broker-dealer which engages in capital markets origination transactions, private placements, collateralized financings, securities borrowing and lending transactions, and domestic and foreign debt and equities securities transactions. MUAH is owned by MUFG Bank, Ltd. and Mitsubishi UFJ Financial Group, Inc. MUFG Bank, Ltd., a wholly owned subsidiary of Mitsubishi UFJ Financial Group, Inc., has offices in Argentina, Brazil, Chile, Colombia, Mexico, Peru and Canada. Visit https://www.unionbank.com or www.mufgamericas.com for more information.
About MUFG (Mitsubishi UFJ Financial Group, Inc.)
Mitsubishi UFJ Financial Group, Inc. (MUFG) is one of the world’s leading financial groups. Headquartered in Tokyo, and with over 360 years of history, MUFG has a global network of approximately 3,000 locations in more than 50 markets. The Group has over 180,000 employees and offers services including commercial banking, trust banking, securities, credit cards, consumer finance, asset management, and leasing. The Group aims to “be the world’s most trusted financial group” through close collaboration among our operating companies and flexibly respond to all of the financial needs of our customers, serving society, and fostering shared and sustainable growth for a better world. MUFG’s shares trade on the Tokyo, Nagoya, and New York stock exchanges. For more information, visit https://www.mufg.jp/english.