China: Trade Retaliation Plans

Published on August 12, 2019
SGH Insight
Three weeks ago, China’s State Council reviewed and approved the National Development and Reform Commission’s (NDRC) plans for major industrial production output, as well as the joint NDRC/Ministry of Commerce plans for commodity imports and exports for the second half of 2019.

*** Perhaps of greatest immediate relevance to markets, both the NDRC and MOC planning is now predicated on the assumption that President Donald Trump will indeed impose the 10% tariffs on roughly $300 billion of Chinese exports to the US, as threatened, on September 1. ***

*** As such, from what we understand, three departments have recommended that the central government cease purchases of agricultural goods from the US — entirely — should that next round of tariffs, as now expected, be imposed. ***

*** Furthermore, China would significantly curtail exports of rare earth materials to the US and impose 25% price hikes on those that do go out, should the Trump administration proceed with its 10% tariff threat. And should Trump then escalate the tariffs from 10% to 25%, the proposal is to cut rare earth exports to the US entirely. ***

By this point, most all senior sources canvassed in Beijing do not expect a trade agreement with the US to be reached at all in 2019.
Market Validation
(Bloomberg 8/15/19)

Stocks Slide as China Vows Tariff Countermeasures: Markets Wrap

U.S. equity futures fell and European stocks
slumped on Thursday as China stepped up its trade-war rhetoric,
roiling markets that had been starting to calm. Treasuries and
European bonds rallied.
Futures for the three main U.S. stock gauges had jumped
during the Asian session in the wake of Wednesday’s rout, but
they reversed after Beijing pledged countermeasures to the next
round of tariffs threatened by the White House, saying they
violate accords already reached by Presidents Donald Trump and
Xi Jinping.
* Futures on the S&P 500 Index dipped 0.4% as of 7:02 a.m. New
York time.
* The Stoxx Europe 600 Index fell 1.2%.
* The U.K.’s FTSE 100 Index fell 1.6%.
* The MSCI Asia Pacific Index declined 0.7%.
* The yield on 10-year Treasuries fell six basis points to
1.52%.
* The yield on two-year Treasuries decreased seven basis points
to 1.51%.
* Germany’s 10-year yield declined three basis points to -0.68%.
* Britain’s 10-year yield dipped three basis points to 0.448%.

Three weeks ago, China’s State Council reviewed and approved the National Development and Reform Commission’s (NDRC) plans for major industrial production output, as well as the joint NDRC/Ministry of Commerce plans for commodity imports and exports for the second half of 2019.

*** Perhaps of greatest immediate relevance to markets, both the NDRC and MOC planning is now predicated on the assumption that President Donald Trump will indeed impose the 10% tariffs on roughly $300 billion of Chinese exports to the US, as threatened, on September 1. ***

*** As such, from what we understand, three departments have recommended that the central government cease purchases of agricultural goods from the US — entirely — should that next round of tariffs, as now expected, be imposed. *** 

*** Furthermore, China would significantly curtail exports of rare earth materials to the US and impose 25% price hikes on those that do go out, should the Trump administration proceed with its 10% tariff threat. And should Trump then escalate the tariffs from 10% to 25%, the proposal is to cut rare earth exports to the US entirely. ***

By this point, most all senior sources canvassed in Beijing do not expect a trade agreement with the US to be reached at all in 2019.

Trump is seen to be highly unlikely to accept China’s three conditions, and only if the US economy were to slow sharply or the markets to collapse does Beijing believe that dynamic would change (see SGH 8/7/19, China: “All Out Trade War”).

And even then, were the two sides to reach a deal this year, it would simply represent an expedient measure to avert a sharper collapse, and not a long-term solution.

Shrinking Sino-US Trade

The NDRC forecasts and plans, for what it’s worth, assume that China will hit a 6.2%-6.3% year on year GDP target for H2 2019. They also assume relatively unchanged global commodity prices, a 6.0% domestic industrial output level for that period, and that there will be no deflation in China.

China’s year on year trade with the US is expected to drop by 10-15% in the second half of 2019, with exports falling by 5%, and imports by 30% in that period. The pace of China’s export growth is expected to slow globally as well, with year on year yuan denominated exports slowing to 3.5% in H2 2019, compared with 6.1% comparisons for H1.

Total year on year Sino-US trade in yuan terms has dropped already by 8.1% through the first seven months of the year, to 2.1 trillion yuan, with exports to the US falling by 2.1% to 1.62 trillion yuan while imports over the same period fell 24.0% to 474 billion yuan. 

Ironically, that means China’s year on year trade surplus with the US has expanded by 11.1% from January to July, to 1.15 trillion yuan.

Highlighting the Plunge in Ag Imports

Beijing sources are also, not surprisingly, quick to emphasize the plunge in the US market share of China’s imports of the politically sensitive agricultural products.

In 2017, China reportedly bought 32.9 million tons of US soybeans, representing 34% of its total imports of 95.5 million tons that year. By 2018, soybean imports from the US dropped to 16.6 million tons, accounting for 19% of its total imports of 88.0 million tons. 

And for the first half of 2019, China imported 5.9 million tons of soybeans from the US, accounting for 15.4% of its total for that period of 38.3 million tons. For the second half of the year, total soybean imports are expected to go up only slightly, to 38-40 million tons, which would be about 3-5 million tons below last year’s 43 million level.

China’s year on year imports of cotton, corn, and beef have on the other hand soared during the first half of this year, by 59.5%, 39.1%, and 60.6%, respectively. Imports of cotton, corn, and beef from the US, however, have allegedly fallen by double-digit percentages over that same period.

Most dramatically, and we suspect with that dramatic intent very much in mind, Chinese sources also highlight specifically the plunge in China’s imports of sorghum from the US during the first half of this year, from 3.25 million tons, to a mere 10,000.

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