Caixin View: U.S.-China Trade Standoff Goes Beyond Tariffs

The administration of U.S. President Donald Trump announced on June 15 that it will go ahead with a plan to slap an additional 25% duty on about $50 billion of Chinese imports, targeting high-tech industries, with the levies on some goods to take effect as soon as July 6. China quickly responded with a decision to impose tariffs on U.S. imports of the same value from the same date. Trump responded with a threat of new taxes on a further $200 billion worth of Chinese goods, saying he would pursue duties on yet another $200 billion of goods if Beijing retaliates again. Commerce Department data show China exported $505.47 billion of goods to the U.S. last year, so the tariffs could in total cover 89% of those sales.

The market turmoil that ensued in China unnerved the authorities. The A-share market dropped sharply on June 19, with more than 1,000 stocks, one-third of those listed on both the Shanghai and Shenzhen exchanges, dropping by the 10% daily limit. People’s Bank of China Governor Yi Gang called for investors to stay “calm and rational”, saying China's economy could withstand external shocks, and the central bank was prepared with policy tools. The benchmark Shanghai Composite Index recovered slightly after Yi Gang’s reassurances, dropped again on Thursday, and showed a marginal gain on Friday.

We think the tariffs by themselves will have a limited direct effect on the broader Chinese economy. The short-term macroeconomic impact will likely be a minor dip in GDP growth and potentially a small bump in unemployment; the surveyed urban unemployment rate stood at 4.8% in May. China’s retaliatory tariffs on U.S. imports would likely lead to a slight increase in domestic inflation. The CPI was running at 1.8% year on year in April and May, well below the government’s targeted ceiling, so that shouldn’t be too much of a concern.

What has the potential to be significantly more damaging is the U.S.’ attempts to hinder China’s advanced manufacturing industry, one of the main complaints of the Trump administration. The issues of technology transfers, intellectual property theft, and China’s industrial upgrading strategy, Made in China 2025, are not going to go away. On the contrary, the U.S. is likely to pump up the pressure even further and may step up efforts to work with European countries to try to isolate China in these areas.

The bilateral trade dispute will also accelerate two broader trends that are already occurring. The first is the shift away from offshoring, as developed countries start moving some of their manufacturing industries back home. From 2015 to 2016, the share of global GDP contributed by world trade shrank from 60% to 56.4%, reflecting this slow shift. Technologies like 3D printing, the “internet of things,” and artificial intelligence significantly reduce the need for labor-intensive manufacturing, allowing developed countries to “reshore” manufacturing, reversing a trend that started in the 1970s.

The second is the decline of China’s competitive advantage in labor, as domestic wages rise to a level that makes it less attractive than India and some economies in Southeast Asia. Even though China’s labor costs are still far below those of the U.S., manufacturing, especially at the lower end of the value-added chain, is already moving away from China and toward cheaper countries — this is a key reason behind China’s strategy to upgrade its manufacturing industries in the first place. So even if Trump’s trade policies don’t bring manufacturing back to the U.S., they will likely increase the attractiveness of countries in Southeast Asia.

Weekly Roundup

Macro & Finance

China reshuffled its central bank monetary policy committee, naming three new academic members and making Governor Yi Gang the 14-member panel’s chief, the cabinet said on June 15.

The yuan weakened to its lowest level against the U.S. dollar in more than five months Thursday as concerns over the trade war between China and the U.S. took a toll. There’s little sign that the People’s Bank of China has taken action to stabilize the currency.

China’s State Council outlined a series of policies Wednesday to improve credit availability to small companies, reflecting concerns that liquidity tightening is weighing on business.

The National People’s Congress, China’s top legislature, revealed in a report that 1,195 firms and 2,775 infrastructure investment projects submitted fudged official statistics to the government from 2017 through to the present.

Private investors have placed about 70 billion yuan ($10.8 billion) in six government-appointed equity funds mainly for the purchase of Chinese depositary receipts (CDRs). This fell short of what they were allowed to raise, Caixin learned from multiple sources.

Chinese mainland stock exchanges have issued detailed rules for the trading of Chinese depositary receipts (CDRs), including capping the voting rights of special shares, clearing the way for foreign-listed Chinese tech titans like JD.com to list at home.

An upcoming tax overhaul is expected to lift China’s personal income-tax threshold by around 43% to 5,000 yuan ($777) per month from 3,500 yuan per month, according to state media. In addition, incomes from wages and salaries, labor service payments, author remuneration, and royalties would all be subject to an integrated tax for the first time.

China has created a nationwide property registration platform in a move to consolidate data that has been spread across a large number of local databases.

Two of China’s largest commercial banks and units of state-owned financial conglomerate Citic Group Corp. violated regulations that prohibited lending to local government financing vehicles, property developers and companies in polluting industries, according to an investigation by the National Audit Office (NAO).

Companies

Shares of ZTE Corp. plunged on Tuesday in Hong Kong and Shenzhen after the U.S. Senate passed a bill that would reimpose a ban on American component purchases by the Chinese telecom-equipment maker.

China’s debt-ridden conglomerate HNA Group made its first successful bond sale in nearly half a year to help ease its capital strain. But the market reception was lukewarm and the issue raised half as much as planned.

The CEO of Hexindai Inc., one of China’s biggest peer-to-peer (P2P) lenders, has estimated the number of companies offering such loans could shrink by about a fifth by the end of this year even though regulators have pushed back a registration deadline to weed out noncompliant players.

Smartphone-maker Xiaomi Corp. aims to raise up to $6.1 billion in its upcoming Hong Kong initial public offering, while postponing plans to sell at least half of its shares through Chinese depositary receipts (CDRs) on the mainland until after its listing. The Beijing-based smartphone-maker previously planned to raise around $10 billion through a dual offering on both the mainland and Hong Kong.

Meituan-Dianping, China’s largest group discount platform and on-demand online services provider, is set to submit an initial public offering application to the Hong Kong stock exchange Friday, two sources close to the matter told Caixin.

Tongcheng-Elong Holdings Ltd., a Chinese online travel service provider backed by Tencent Holdings and Ctrip.com International Ltd., filed for an initial public offering (IPO) with the Hong Kong Stock Exchange on Thursday.

Calendar

June 27: National Bureau of Statistics (NBS) releases May data on industrial profits

June 30: NBS releases manufacturing Purchasing Managers Index (PMI), non-manufacturing PMI, and Composite PMI Output Index for June