China: Beidaihe, Retaliation and Trade War

Published on August 5, 2019

Sources in Beijing maintain that the violent depreciation of the Renminbi below the psychological threshold of 7.000 USD/CNH that is roiling financial markets today has been completely driven by “market forces.” 

*** However, these senior officials warn in the same breath that if US President Donald Trump wants an all-out trade war with China, they will tolerate an orderly depreciation of the RMB, and let these “market forces” drive the depreciation of the RMB even further (see SGH 6/10/19, “China: Preparing for “Full Blown” Trade War”). ***

*** Furthermore, from what we have learned, at a meeting on Saturday of China’s leadership at the resort of Beidaihe, Premier Li Keqiang is said to have suggested that while Trump may impose 10% tariffs on $300 billion in Chinese goods, effective September 1, Beijing should not take explicit trade retaliatory measures against the US before then (see below). ***

*** China should, however, respond first to Trump’s threats by using flexible financial instruments, such as the RMB exchange rate, or even US bonds. ***

Xi Comments on Trump Threats

There typically is no formal announcement of the annual conclave of China’s leadership at the summer resort of Beidaihe, but President Xi Jinping presided over and addressed the US-China trade tensions directly at a meeting held there on Saturday.

At that Saturday meeting in Beidaihe, from what we understand, Xi Jinping noted this is the fourth time since February of 2018 that US President Donald Trump and his administration have backtracked on their commitments in the China-US trade negotiations. 

White House officials, for their part, have most recently of course accused Beijing of reneging on promises of agricultural purchases, leading to Trump’s threat last week to slap 10% tariffs on the final $300 billion worth of imported goods from China. 

Truth be told, those promised agricultural purchases were highly conditional to begin with, most immediately on the loosening of restrictions on Huawei, and never confirmed by Beijing (see SGH 7/1/19, “China G20: A Rocky Road to Chile”).

Each round of negotiations has resulted in a US breach of consensus, commitments, and backtracking, Xi stridently added, repeating that China will not accept any extreme pressure threat and blackmail, nor make any concession on issues of principle. 

The number one negotiating principle for Beijing has for some time now been a full removal of all tariffs, and this new tariff threat was described as yet another “bullying tactic” from Trump and his administration, and as a sign that “the Trump side” is indeed getting anxious to reach deal with China.

But Xi also warned against even partial concessions, saying by now they knew full well that if they were to give Trump an inch, he would try and take a mile.

Retaliatory Measures Reviewed

Xi went on at the conclave to assure that China has already prepared for a protracted trade war with the US. The fundamental solution to a trade war, he said, is to grow stronger through reform and a further opening of the economy. And in the near term, China is seen to still have room if needed for additional fiscal and monetary policy maneuvers.

Leaning on enormous demand from its domestic consumer sector, China can maintain sound momentum for sustainable and healthy economic development, Xi maintained, and its economic prospects are bright, an assessment that was dutifully reinforced earlier last week in the fourth of eight summer-meetings on Thursday August 1 of the Central Financial and Economic Affairs Committee (CFEAC). 

The CFEAC meeting concluded, for what it’s worth, that while US tariff hikes have had “some” impact on China’s foreign trade, domestic consumption has become the most significant driving force for China’s growth, and most of the products that are exported to the US were also suited for domestic consumption.

But just to be sure, Premier Li Keqiang added on Saturday that the State Council would take about 60 billion yuan from the secretive “Premier Fund” to help ease the impact of China-US trade war on Chinese companies, were the US to go ahead and impose, as threatened, the 10% tariffs on $300 billion of Chinese goods.

And as to retaliatory measures, according to high level sources in Beijing, China’s countermeasures will not be limited simply to slapping tariffs on US energy and big aircraft.

They will also include, as hinted before, a restriction or ban on the export of some critical natural resources and rare metals such as rare earths, graphite, antibiotics, and other material the US is seen to need, the release of an unreliable entity list, and the targeting of certain US companies doing business in China.

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