Trade Wars: China On The Brink, US Gets Edge As Yuan Weakens Against Dollar

Trade Wars: China On The Brink, US Gets Edge As Yuan Weakens Against DollarNew York Stock Exchange on 24 October 2018 (Photo by BRYAN R. SMITH/AFP/Getty Images)

In a first, China is facing an embarrassing gap after at least two decades, with the yuan down 8 per cent against the dollar since April, and near its weakest in more than a year. A shrinking trade surplus produced a current-account deficit in the first half of 2018 and China’s growth is slowing at a time when America’s economy is expanding at its fastest pace since 2014. No wonder Trump feels he is on the right path, and that Chinese investors are jittery.

Bothering China even further is the whiplash effect. An agreement for China to buy more American natural gas and soyabean collapsed in June. Chinese officials are keenly aware of vulnerabilities; had America maintained its sanctions on sales of semiconductors to ZTE, the Chinese telecoms giant might well have gone out of business. Those with a conspiratorial mindset see things in a darker light. “The Americans don’t want a deal. They want to screw us,” says a fund manager.

China’s threatened retaliation, announced on 3 August, will be tariffs on $60bn of American imports. This would take the total under its tariffs to $110bn, with little room for more. This threat comes the backdrop of Trump instructing his trade team to consider 25 per cent tariffs on $200bn of Chinese imports as early as September, taking the total impact of its tariffs to about $250bn, with room for twice that amount.

As per reports by The Economist, China has other weapons at its disposal. It can disrupt the lucrative Chinese operations of American businesses, from Apple to Starbucks. But that would have downsides. Declaring bogus justifications (health violations, say) would reinforce foreign criticism of government meddling in China’s economy. And the nature of such interference, unlike tariffs, is that it will not be announced in advance, meaning it can take longer to register the impact.

Louis Kuijs of Oxford Economics, a research firm, says the divergence in their stock markets might reflect overconfidence in America and an evaporation of confidence in China. “Both reactions seem exaggerated,” he says. With no resolution to the trade war in sight, there will be time enough to test this proposition.