China: Preparing for a Trade War

Published on June 26, 2018

President Xi Jinping presided over a meeting of China’s highest decision-making body, the Standing Committee of the Communist Party of China, in Zhongnanhai, Beijing on June 21. It was the first time Xi has ever chaired a top decision-making body meeting focused on China-US relations since taking over as top leader.

That meeting was subsequently followed by an equally unusual two-day meeting of the Central Conference on Work Relating to Foreign Affairs, which since 1989 has traditionally been held in December. There, Xi reportedly spent over two hours again talking about US-China relations.

At this meeting, President Xi called on all provinces and ministries to be prepared for a full-scale trade war with the United States.

*** Chinese officials have concluded it appears inevitable the US will impose tariffs on $34 billion worth of Chinese goods on July 6, and so will respond accordingly with tariffs of their own. The PSC (Politburo Standing Committee) has also endorsed the State Council plans, if Washington were to follow the tariffs with new restrictions on Chinese investments, to take “extreme measures” in response that would restrict the expansion of new businesses by US companies in China, especially in the financial sector. ***

*** And contrary to reports floated last week, from what we understand there have been no talks between the respective Commerce Departments of the two sides at or above the lower, deputy ministerial level. If and when the US were to reach out for a new round of talks, China will be ready to negotiate, but that outreach has not yet happened, and will not be initiated by Beijing (see SGH 6/19/18, “China: Digging in for a Trade War”). ***

*** Senior Chinese financial officials also commented on Beijing’s financial response to the looming trade threats. The widely anticipated reduction in the RRR (Reserve Requirement Ratio) on Sunday by 50 basis points is expected to release up to 500 billion yuan to the commercial banks, with another 200 billion yuan set for easing credit strains for small and micro businesses. And as borrowing costs are still high, and uncertainty over trade expected to persist, the People’s Bank of China does not rule out another two or three RRR cuts of 50 basis points each through the remainder of the year. ***

*** With trade tensions still looming, officials also expect – or perhaps warn – that the currency will continue to depreciate against the dollar in the short term. The PBoC will not intervene in the FX markets, and, as emphasized by Premier Li Keqiang, will allow markets to determine the RMB exchange rate, while assuring that short-term currency devaluations will not lead to “massive” capital outflows. ***

*** And, “with a trade war looming,” the PBoC will also refrain from increasing its holdings of US Treasuries, and on the contrary, will seek to reduce them “appropriately.” The PBoC nevertheless has no intention, officials assure, of dumping large quantities of treasuries suddenly (see SGH 4/6/18, “US-China Trade: Playing with Fire”). ***

A Strained Future for Sino-US Relations

Reflecting the importance of the meeting, the June 21 session of the Politburo Standing Committee was attended by members of the Central National Security Council and the Central Financial and Economic Commission as well, as non-voting participants.

President Xi and meeting participants noted that the US regards China’s achievements in science, military and defense, trade, and other fields as damaging to America’s strategic national interests.

They noted the threat perceived by the US from China’s policy to encourage more overseas ethnic Chinese to do business or live in China, and the characterization by the Trump administration of China’s “One Belt and One Road Initiative” and cooperation with Africa as a provocation to the US-led existing world order. And perhaps most directly germane to the current trade tensions, the participants noted that the US has stated clearly it regards “Made in China 2025” as a direct threat to America’s national interests.

All in all, the meeting concluded, the US has identified China as its biggest potential adversary, or perhaps even its biggest potential enemy. For that matter, the PSC believe regardless of who sits in the White House, China will face more challenges and threats from the US for the next two decades or more, and China-US relations will be even more difficult than they are now.

Preparing for a Break or a Stand-off

The PSC meeting also stressed that China aims for a possible trade truce with the US: as long as the US is willing, China still wants to resolve tensions through bilateral negotiations.

But for now, China’s leadership sees Trump as attempting to intimidate China in hopes they “fold,” and the only counter to that they believe is a tit-for-tat response at every stage. It is in Washington’s hands whether to continue, and China, the PSC concluded, must prepare for the worst with the US.

Not surprisingly, the subsequent Central Conference on Work Relating to Foreign Affairs, attended by the heads of all the ministries, provinces, military, and Chinese embassies, came to similar conclusions.

At that, more open, conference, Xi made it clear that China does not want a trade war with the US, but that the US appears to want a trade war with China, and if so, China must fight back forcefully.

Xi is then reported to have said China in response must make America feel more pain, and to reiterate China would never offer concessions on anything considered to be a “core interest” – Taiwan, the South China Seas, Diaoyu (Senkaku) Islands, the “One Belt and One Road Initiative,” and “Made in China 2025.”

It was at this meeting that Xi called on all provinces and ministries to be prepared for a full-scale trade war with the US.

Premier Li then stressed that a Sino-US trade war is “highly likely” to start on July 6. He is reported to have said the State Council predicts the US will levy tariffs at that point on $34 billion of Chinese goods, and that China will impose tariffs on US goods on the same scale and strength following Washington’s announcement.

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