South China Morning Post
Advertisement
Advertisement
US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin pose for a photo with Chinese Vice-Premier Liu He in Shanghai on July 31. Within 48 hours of this picture, when progress in negotiations was apparent, the trade war between the US and China escalated with the announcement of fresh tariffs. Photo: AFP
Opinion
The View
by Hao Zhou
The View
by Hao Zhou

China is tightening and the US is easing, but both show signs of digging in for a long trade war

  • China pushes ahead with deleveraging and tightening standards to avoid systemic risks, while the US seeks stimulus
  • These approaches appear opposite, but both are about girding up to maintain an advantage in the trade war
Hao Zhou
Hao Zhou
Why you can trust SCMP

When China’s Vice-Premier Liu He invited US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin to take a picture together in Shanghai on the evening of July 30, it was hard to image how much trade tensions would escalate within 48 hours.

On August 1, US President Donald Trump tweeted that he would impose tariffs on all Chinese exports to the US, resulting in a big shock globally, including probably to Liu.

The media reported that Trump made this decision in the Oval Office in front of Lighthizer and Mnuchin, and Mnuchin suggested he needed to at least tell Liu about the new tariffs.

A call was placed, according to some media reports, but nobody in Beijing picked up the call.

It is a bit hard to imagine that Beijing did not pick up a call from a senior US official. Whatever the case, at the end of the day, the tariffs were a slap in the face for China.

I believed China prepared very carefully for the Shanghai talks. The American delegation was welcomed by their Chinese counterparts at the Fairmont Peace Hotel, located in the riverside Bund, which is also famous for its Old Jazz Band.

The band, with six local players all aged over 70 years old, has been playing in the Peace Hotel since the 1980s.

I am not sure whether US trade negotiators spent some time in the bar that evening, but surely the selection of Shanghai and the Peace Hotel indicates China had high stakes on the trade talks.

However, as a result of the Shanghai talks collapsing, hardliners from the Chinese side have taken centre stage.

Members of the Old Jazz Band perform at Shanghai's ornate Fairmont Peace Hotel in Shanghai in August 2017. Photo: AFP
On August 5, the Chinese currency breached the 7 yuan to the dollar mark, which the People’s Bank of China had defended for years, and on August 23, China announced that it would impose retaliatory tariffs of 5 to 10 per cent on US$75 billion of American products.

All this suggests that China is preparing for a protracted trade war with the US and, more importantly, is prepared to pay the cost in the coming years.

Why China’s bond market is well placed to ride out global economic storm

Some explained that Chinese President Xi Jinping sees no point in signing a deal with Trump, who simply has no credibility. But Mexico, at the end of day, still sought a trade deal with Trump, and Japan is doing the same at this moment.

That said, the most important thing is not who China is going to sign a deal with, but whether China still holds the bargaining power at this juncture.

China seems to firmly believe so, and the Chinese policymakers have taken swifter actions in recent weeks. The trade war has somehow helped to accelerate the policymaking process.

For instance, China has blocked the financing channels to the shadow banking and property sectors. Over the past half-year, three medium-sized and small commercial banks have been taken over or recapitalised.

Furthermore, China has massively tightened property financing for both developers and homebuyers.

Clearly, both property tightening and financial deleveraging are typical de-risking processes, indicating that China sees the importance of containing systemic financial risks amid ugly trade tensions.

The US and Chinese economies need more than a trade war truce

This might be equally important for the US. Trump continues to put pressure on the Federal Reserve to cut interest rates to sustain economic growth, and every time the stock market drops, Trump pays special attention on Twitter.

To be blunt, the trade war will terminate should a financial crisis take place in either country, or both countries, as a crisis will destroy everyone’s confidence. Under such circumstances, nobody will be interested in addressing external imbalances.

Put simply, to have a sound position in a prolonged trade war, both China and the US have to find a new balance between growth and risk management. And the bottom line is to prioritise financial stability ahead of economic growth.

Hence, it does not matter whether China takes a soft or hand line in the trade talks. As long as it can manage the financial risks embedded in the real economy, it can still hope for a turnaround in the trade talks in the future.

The same applies to the US: as long as the equity rally continues, it still has the upper hand in the trade spat.

However, to achieve the same target, China and the US have to adopt very different monetary policy approaches.

For China, monetary policy will be eased towards the manufacturing sector, but tightened in the shadow banking and property sectors to prevent another round of debt piling.

As for the US, it needs an extraordinarily relaxed monetary policy to support financial markets.

Hao Zhou is senior emerging markets economist at Commerzbank

Post