Caixin
Jul 06, 2018 07:16 PM
OPINION

Caixin View: Buckle Up, It Could Be a Long Trade War

“The U.S. will be opening fire on the whole world, including itself,” Chinese Ministry of Commerce spokesman Gao Feng said on Thursday. His warning fell on deaf ears — the next day, the trade war finally arrived, with the U.S. levying tariffs on $34 billion of Chinese imports and China swiftly retaliating with sanctions on an equal amount of American goods. Here’s our take on what's coming next.

First, we think it’s unlikely that the two sides will find their way back to a negotiated compromise any time soon. Neither the U.S. nor China is showing any sign of wavering, and finding a solution that allows both sides to save face will get harder with each fresh set of tariffs. July 24 is the next date to watch for — a public hearing is scheduled in the U.S. to discuss imposing a 25% duty on an additional $16 billion of Chinese goods. Also worth keeping a close eye on are the positions of Canada, the EU and Mexico: all have their own trade disputes with the U.S. that could supply China with extra leverage if it manages to build a united front. But many of the U.S. concerns about China, particularly forced tech transfers and poor intellectual property protection, are also shared by these countries, so negotiating such an agreement would be very difficult.

In addition, the trade warriors will likely begin to use more flexible tactics than just tariffs on goods — especially the Chinese side, which has much less room to apply import tariffs given its large trade surplus with the U.S. Restrictions on trade in services and measures to make life harder for U.S. companies doing business in China are likely. The Americans are likely to slap more investment restrictions on Chinese companies and could also restrict exports of high-tech manufacturing products to China. Chinese telecom giant ZTE’s rough few months shows just how vulnerable some Chinese tech companies might be to this latter tactic.

Chinese stocks, which sunk into bear territory in the last two weeks on fears about the approaching trade war, are likely to bounce back somewhat as market sentiment starts to adjust to the new status quo. This might have already started: both the benchmark Shanghai Composite Index and Shenzhen Component Index edged up in afternoon trade on Friday, ending the session 0.45% and 0.55% higher respectively. However, the yuan continued to sink Friday, weakening to 6.6480 per dollar at the end of onshore trading, 0.16% lower than the previous day.

Weekly Roundup

Macro & Finance

The new session of the cabinet-level Financial Stability and Development Commission (FSDC), led by Vice Premier Liu He, held its first meeting Monday to assess progress in the ongoing battle against financial risks and outline its future policy agenda, according to a statement on the government’s official website.

Ma Jun, a member of the central bank’s monetary policy committee, indicated that policymakers may be shifting their approach to implementing the government’s campaign to cut debt in the Chinese economy. Just days later, central bank adviser Liu Shijin said that “China is entering a phase of stabilizing leverage,” signaling the government may be reducing the intensity of its deleveraging campaign.

The Caixin China General Manufacturing Purchasing Managers’ Index (PMI) stood at 51.0 in June, marginally lower than the reading of 51.1 in May. The index showed that manufacturing activity was stable overall in June, with rising domestic demand balanced by a deterioration in new orders from overseas amid growing trade tensions with the U.S. China’s official manufacturing PMI, released by the NBS on June 30, dropped to 51.5 in June from May’s 51.9.

The MasterCard Caixin BBD China New Economy Index (NEI) fell to 29.2 in June from 29.6 in May, indicating that new economy industries accounted for 29.2% of total economic inputs used to make goods and services during the latest month.

China’s financial regulators have released new rules for entities set up by banks to conduct debt-to-equity swaps, aiming to speed up a program to cut corporate leverage ratios and reduce lenders’ bad-loan risks.

China plans to launch a trading mechanism for defaulted bonds in an effort to beef up the country’s capacity to dispose of delinquent debt, a central bank official said on Tuesday.

More than 300 companies listed on the Chinese mainland have spent 13.5 billion yuan ($2.03 billion) on stock buybacks this year in an effort to prop up their share prices as a bear market loomed, official media reported.

Companies

One after another, China’s internet giants are growing less enthusiastic about issuing Chinese depositary receipts (CDRs), as the companies struggle to reach an agreement with regulators about how they should be priced under existing market rules.

Wintime Energy Co. became the latest Chinese company to default on a bond as the coal miner failed to pay interest Thursday on a 1.5 billion yuan ($226 million) short-term bond. The missed payment sparked concerns of further defaults.

Bridgewater Associates LP and Winton Group Ltd., two of the world’s top hedge funds, have been given the go-ahead to invest in China’s onshore securities such as stocks, bonds and commodity futures using money raised from domestic investors.

Embattled financial conglomerate Anbang Insurance Group stepped up asset transfers among subsidiaries, signaling a potential restructuring after the Chinese government took control of the company.

Legend Holdings Corp., parent of PC giant Lenovo, said it has closed its purchase of a 90% stake in Luxembourg’s oldest privately owned bank nearly a year after first announcing the deal, as part of the holding company’s move into financial services.

Calendar

July 7: The State Administration of Foreign Exchange releases foreign exchange reserves data for June

July 10: The National Bureau of Statistics releases the consumer price index (CPI) and the producer price index (PPI) for June

June 13: The General Administration of Customs releases trade data for June

The People's Bank of China may release money supply and total social financing data for June the week of July 9.

The Ministry of Commerce may release foreign direct investment (FDI) data for June the week of July 9.

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