'We're at economic war ': China is playing with fire in Trump battle

Discussion in 'Economics' started by themickey, Aug 3, 2018.

  1. themickey



    China's currency slide is moving from benign neglect to something more deliberate. Whether or not you deem it currency warfare, it is playing with political and financial fire.

    The yuan has weakened by 9 per cent against the US dollar since mid-April. This is the steepest fall for the micro-managed exchange rate for a quarter century.

    This week's blow-off to Y6.84 has been a move too far for Washington. The retort is a cannon shot across the bows. The Trump administration is now threatening to more than double punitive tariffs on a further $US200 billion ($270 billion) of Chinese goods, lifting the rate from 10 per cent to 25 per cent. It smacks of an embargo.

    The weak yuan is no longer just a strong US dollar story. The currency has been tumbling against the other big world currencies, the euro and the yen.

    China's leaders have breached their pledge to hold the country's currency basket "generally stable". The People's Bank (PBOC) commands $US3.1 trillion of foreign exchange reserves. And it has chosen not to use this firepower to stabilise the yuan.

    What we do not yet know is why Beijing has taken this fateful step. Is it in order to undercut Donald Trump's earlier round of trade tariffs, triggered in early July on the first $US34 billion of Chinese goods? Or because the authorities are losing control, caught between a rock and a hard place as defaults rise and the economy flirts with a hard landing?

    Perhaps it is both. Either spells trouble.

    "It is a strange mix of a trade war and currency war, and is on the verge of becoming a very unstable situation. It is the biggest topic for global markets right now," said Jens Nordvig, from Exante, in New York.

    "China has been hit by several shocks. They still have a few bullets left to fire but they face a tricky balance. They can't stomach a strong currency. It needs to be even weaker," he said.

    Nordvig said the pressures pushing down the yuan are obvious: the economy has wilted; interest rates are tumbling. The yield spread between US and Chinese five-year bonds - a key driver of currency moves - has shrivelled to almost nothing.
    Policy pirouette

    The reserve requirement ratio has been cut three times this year. On Tuesday, the politburo flagged a policy pirouette, effectively suspending its campaign to deflate the credit bubble. It is a return to fiscal stimulus as usual.

    Beijing may have let its ferocious crackdown on shadow banking go too far. "The financial deleveraging campaign since early 2017 has resulted in a severe negative shock to aggregate credit supply. The real economy has begun to feel the pain," said Wei Yao from Societe Generale.

    "We think that the Chinese government has a good chance of avoiding a financial meltdown in the short term. The more likely risk scenario, to which we assign a 20 per cent probability, is an economic downturn that is deeper and more extended than expected," she said.

    Capital Economics said the pattern from China's stop-go cycles is that it takes 12 months for fresh stimulus to feed through, and it will be a less powerful dosage this time. The economic mood music will get worse before it gets better this year.

    China faces a variant of the "impossible trinity". If it loosens monetary policy in these circumstances to shore up the economy, it risks capital flight and a further slide in the currency. Foreign investors have extracted $US100 billion already through the Hong Kong/Shanghai Connect pipeline.

    Capital controls are tighter than they were during the Chinese currency crisis of 2015-2016, when the country was losing $US25 billion a week, but they are still leaky. The danger for Beijing is that by letting the yuan fall so far, so fast, it will set off a fresh rush for the exits.
    Parallel universe

    As this drama unfolds, Washington is in a parallel universe. The Trump administration has seized on the currency warfare hypothesis for the weak yuan. Donald Trump accuses the country of stealing a competitive edge, grouching that the yuan is "dropping like a rock".

    The White House counterattack has sharpened this week. Officials are briefing that the threatened rise in tariffs on the next tranche of Chinese exports - televisions, washing machines, clothes, etc - is pitched high enough at 25 per cent to disarm Beijing's currency weapon.

    Chinese leaders are struggling to come up with a response to the Trump phenomenon. They have got nowhere trying to fob off Washington with purchases of grains, oil, or liquefied natural gas - fungible commodities that shift the patterns of global trade without changing anything.
    The bigger picture

    The suspicion is growing that Trump does not really want a trade deal, but rather wants to provoke China into tit-for-tat retaliation in order to carry out a pre-emptive assault on the country's technology-industrial complex before China is fully established as a rival superpower.

    Trade policy cannot be separated from the geostrategic clash. The US national security strategy report this year names China for the first time as an adversary that seeks to "challenge American power, influence and interests, attempting to erode American security and prosperity".

    Tariffs may just be a smokescreen. The fight is over control of artificial intelligence and the technologies of the 21st century.

    Trump has largely purged the China "doves" in his inner circle, lending his ear instead to the quartet of hardliners.

    Their view is that the Communist Party has been engaged in systematic cyber theft of Western know-how - "unprecedented larceny" in the words of secretary of state Mike Pompeo - and that its "Made in China 2025" blueprint is a hostile attempt to dominate 10 strategic sectors.

    It relies on a nexus of subsidies and cheap state credit, with party officials lodged on the boards of private companies. It is national mobilisation with a wartime structure.

    This was bound to provoke trouble, and it has. "We're at economic war with China. One of us is going to be a hegemon in 25 or 30 years," says Trumpian ideologue Steve Bannon.

    All evidence suggests that this is in fact the Trump doctrine.

    China is in a bind. Its 35-year phase of catch-up growth is exhausted. It is no longer a particularly dynamic economy. The "middle income trap" looms and it is grappling with a post-bubble hangover. Now it faces Trump.

    Du Wanhua, a grand justice at the People's Supreme Court, wrote an extraordinary piece for China's judicial newspaper last week saying the country must prepare for mass insolvency.

    "It's hard to predict how this trade war will develop and to what extent. But one thing is sure: if the US imposes tariffs on Chinese imports following an order of $US60 billion, $US200 billion, or even $US500 billion, many Chinese companies will go bankrupt," he said.

    The Telegraph, London
  2. Trump should go in jail for kissing with Putin.
    SarahRish likes this.
  3. What should be done with HRC for making a porno with obsidian pipe laying?
  4. themickey


    You've lost me
  5. Humpy


    Trump is going all out to ruin the Chinese economy and make sure it doesn't become THE world leader. It was now or resign the US into the dustbin of history.
    One of the worst managed countries that ever has been. Wasted its economical advantages by pounding away uselessly in the Middle East.
    Run by the rich for the rich, so what else can you expect ?
    Last edited: Aug 3, 2018
    elitenapper likes this.
  6. Humpy


    The Us's old allies look on aghast as it commits hari kiri.
  7. R1234


    the Chinese snakes seem to be getting a taste of their own medicine ... it took Trump to call them out for what they rally are: deceitful / thieves/ duplicitous. I hope it becomes a permanent policy stance of the US, whether GOP or Dems are in office.
  8. In the current world, information is instantaneous i.e. supply vs demand. China buy from US about $200B and US buy from China about $500B. If China could find other customers for the $500B, they would sell in an instant. So is the US. Everything is in a steady state. It all boils down to a $200B pain vs a $500B pain.
  9. "The trade war between the U.S. and China has had one major effect – losses in Chinese equities have taken their cumulative value down to $6.09 trillion, according to data compiled by Bloomberg, below the $6.17 trillion value of Japanese equities.

    China’s stock market overtook Japan’s in 2014. The U.S. has the world’s most highly valued stock market, worth a little more than $31 trillion.

    China and the U.S. have been engaged in a tit-for-tat trade war since the spring, and this is pressuring Chinese stocks as well as the country’s currency. Relatively, U.S. equities have been more resilient.

    More from FOX Business
    China’s Shanghai Composite index is down over 17%, year to date, with domestic stocks taking a hit amid trade tensions with the U.S. Japan’s Nikkei 25 index is down about 1%. Stateside, the Dow Jones Industrial Average is up almost 15%."

  10. Mary Cobb

    Mary Cobb

    But Trump does have a large amount of support in his trade war in the USA regardless of his stupid behavior
    Last edited by a moderator: Aug 8, 2018
    #10     Aug 8, 2018
    cresa maugh likes this.