China worries about Trump

Three pieces that assume Donald Trump really will erect serious barriers to Chinese exports. (In other words, any attempts to manipulate him will fail.) The irony is that it would ultimately be good for the people of China – and the whole global economy – if the CCP leadership were forced to focus on demand-side reforms.

An SCMP op-ed – like hundreds in the paper and elsewhere over the years – hints at the demise of the US dollar… 

Ever since the US dollar cemented its role as the backbone of the global financial system following the second world war, it has been a weapon of choice for American presidents waging economic warfare.

But as the United States’ use of sanctions has proliferated in recent years, concerns have grown in China and elsewhere over whether the US dollar can remain a safe haven currency.

The theoretical ability of the US to impose sanctions – by freezing China’s dollar assets – is not something evil Americans have contrived, but a by-product of other countries’ behaviour. They could accumulate fewer surpluses, or park the wealth elsewhere if they wanted.

Michael Pettis responds…

…the problem for China isn’t whether or not it should continue holding most of its foreign assets in the US. It made the decision to reduce its dollar holdings long ago (probably in 2008-09), but that decision is proving impossible to execute.

That’s because switching out of dollars is only half the deal. The other half requires switching into something else, and what else is there? They can’t buy RMB assets, because that would cause the RMB to soar and China’s trade surplus to collapse.

They can try to buy yen, but the Japanese government would be furious once the trade impact were felt. The same is true of the euro, sterling, and Aussie and Canadian dollars. No one besides the US has shown itself willing or able to run the corresponding deficits.

They can try to invest in developing countries, but since 2016, when Venezuela showed them just how risky that can be, they have been reducing their investment in the developing world. At any rate the developing world simply cannot absorb that level of inflow.

The problem, in other words, is not whether or not they like holding dollars. The problem is that if the economy is heavily dependent on running large trade surpluses, what assets besides US assets can they acquire in exchange for those surpluses?

It is Beijing’s decision (as it is with Berlin, Tokyo, and others) to suppress domestic consumption in order to achieve big trade surpluses. Which brings us to George Magnus in The Wire China on the possible impact of Donald Trump’s policies on China…

If Trump’s tariff proposals, and other possible controls on goods, are implemented, they could clip at least 0.5-0.75 percentage points off Chinese economic growth in the first year initially, and go on to accentuate the decline in supply chain concentration on the mainland. Beijing is likely to respond more aggressively than the tit-for-tat measures it took in 2017-18. It could allow its currency to depreciate, impose sanctions on key American companies, tighten access to or ban the sale of critical raw materials, and emphasize its already uniquely substantial industrial policies. 

All of these could damage the US to varying degrees, but the first and last in particular would also compound China’s own economic problems. The thing is, without the US market, China is an overbuilt factory with far too few customers (especially if other countries erect trade barriers of their own as all this happens). As with Beijing’s need to buy up offshore assets, China needs the US more than the US needs China. 

Back at the SCMP, Chinese diplomats and ‘experts’ urge Brussels and Beijing to improve relations…

“No one wants to return to the law of the jungle, no one wants to go back to the era of confrontation and the Cold War, and no one wants to return to unilateral hegemony. This is the backdrop that China-EU relations are facing,” [Foreign Ministry deputy Europe head Cao Lai] said.

If China seriously thinks it can enlist Europe to create a bloc to challenge US protectionism, it is either audacious or plain naive. While some European companies do well in China, most of the continent would probably be better off joining the US in pressuring Beijing to get real about its massive economic imbalances. (Let alone China’s role in supporting Putin in Ukraine.)

Beijing’s immediate quandary: how should it handle Marco Rubio, Trump’s likely nominee for Secretary of State? In 2020, China’s government banned the Florida Senator from visiting the country as part of sanctions after he supported Uighur and Hong Kong activists. Awkward.