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How China Could Ruin 2019 For Apple, Tesla, Boeing

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It was 27 years ago when Deng Xiaoping observed that “Saudi Arabia has oil; China has rare earths.”

Talk about a prescient observation. In the early 1990s, China’s then-supreme leader had zero inkling of the iPhones, Tesla cars, drones, robots and high-tech fighter jets yet to come. Yet China’s dominance over these vital inputs is more relevant than ever as the trade war intensifies.

There is a pervasive view that President Xi Jinping’s government has less leverage over Donald Trump’s. Why, then, is Xi the one walking away from a truce? With Trump increasingly desperate for a win, any win, on the global stage, China could get off cheap.

Xi’s team could be misreading the moment. Or putting testosterone ahead of geopolitical peace. A more interesting reading: Beijing reckons it has more cards to play in this game than investors recognized.

In May, Xi made a pointedly-timed visit to a rare earth facility. Though not quite Saudi oil, China’s massive store of elements vital to myriad tech products gives Beijing considerable leverage over Silicon Valley.

It’s but one example of how China may have Trump over a barrel. What other cards are up Xi’s sleeve?

Louis Gave of Gavekal Research just put out one of the more intriguing lists of possibilities. On it: banning rare-earth exports; making life “impossible” for U.S. executives operating in China; devaluing the currency; dumping huge blocks of U.S. Treasury securities; engineering a plunge in global energy prices; sharp drops in orders of goods across the board.

There are a couple of other options. One, dissuading mainland consumers from visiting America. Two, pull a Huawei Technologies on pivotal U.S. companies. This latter step could wreak immediate havoc with the Dow Jones Industrial Average.

Imagine the blow if Xi’s government suddenly closed off Boeing’s access to Asia’s biggest economy. Or if General Motors found its cars parked at Chinese customs. Halting Apple Inc.’s sales would send its own shockwaves through corporate America. Curbing Chinese imports of American soybeans would do the same in agricultural circles.

So far, China has kept retaliatory moves to a minimum. Xi seems to be rolling the dice that Trump will get distracted or impatient and move on to another target—like Japan. His calculation also seems aimed at 2020. Why give away the store to Trump when Americans might elect a less erratic leader?

Weaponizing rate-earths minerals might be Xi’s first real shot across Corporate America’s bow. The U.S. has other sources, of course. If U.S. deposits don’t suffice, companies could turn to Australia, Myanmar, India, Brazil or Thailand. And Trump seems tight enough with Vladimir Putin to score some stock from Russia. But the supply chain disruptions would surely have top CEOs — who tend to be big campaign donors — calling Trump to register their dismay.

It could backfire, too. In 2019, Beijing deprived Tokyo of rare-earth metals and China’s market share has never been the same since. “Unfortunately,” Gave says, “this would give China a ‘feel-good’ boost, but be as productive as landing a mild blow on Mike Tyson’s nose. Such an export ban would undermine China’s long-term production capacity, for the simple reason that rare earths are not that rare.”

The dumping-dollar-debt option could be especially dangerous. Just like an “uncontrolled currency depreciation,” says Michael Hirson of Eurasia Group, selling huge blocks of U.S. Treasuries would “threaten blowback to China’s economy.”

Any surge in bond yields could devastate the American consumer. The shockwaves would quickly zoom from Wall Street to Shanghai. Xi might be hinting at such a move, though, as Beijing buys fewer and fewer Treasuries. At present, China has more than $1.1 trillion of U.S. government securities. Xi seems to think that’s more than enough.

Even so, markets may live in semi-constant fear of a massive bond route bearing Chinese fingerprints. Or any number of ways in which China would ratchet up tensions with Trump and vice versa.

“The path to a potential de-escalating deal is fraught with challenges as both sides dig in, and how markets react will likely help determine the outcome of talks,” say analysts at Fitch Ratings. “Over the longer term, we maintain our long-held view that protectionist trade policy led by the US is likely to persist in the years ahead, marked by cycles of escalation and de-escalation.”

Roughly a week after Xi’s rare-earths pilgrimage, he visited Jiangxi Province, the starting point of Mao Zedong-era 1934-1936 “Long March.” There, Xi called for a new one as Trump’s America does its worst to halt China’s march to the top of the economic rankings.

That hardly sounds like a Chinese leader who’s going to cave to Trump. More like one who’s in this trade battle for the long haul.

Chinese President Xi Jinping visits a memorial hall marking the departure of the Long March by the Central Red Army in Yudu County, Ganzhou City, during an inspection tour of east China's Jiangxi Province.

Chinese President Xi Jinping visits a memorial hall marking the departure of the Long March by the Central Red Army in Yudu County, Ganzhou City, during an inspection tour of east China’s Jiangxi Province.

Xinhua/Xie Huanchi

I am a Tokyo-based journalist, former columnist for Barron’s and Bloomberg and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.”

Source: How China Could Ruin 2019 For Apple, Tesla, Boeing

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Scary! Rising US-China Trade War Tensions Could Take 10% Off the S&P

Global markets continue to digest the impact of President Donald Trump’s Sunday evening tweetstorm. Meanwhile, analysts from some of the world’s biggest investment banks including UBS and Bank of America Merrill Lynch have detailed their forecasts for what a full-on trade war between the U.S. and China would look should the worst happen.

Among the many hair-raising projections is the prospect of the S&P 500 entering a correction by losing 10% of its value, which would almost certainly trigger a long-feared recession. That particular forecast was made by UBS analyst Keith Parker, according to CNBC. Parker specified that key European and American cyclical markets would bear the brunt of the declines.

S&P 500

| Source: Yahoo Finance

“FASTEN YOUR SEATBELT AND DON’T HOLD YOUR BREATH”

There is an old saying that when two elephants fight, it is the grass that suffers. In this case, both elephants will also sustain a significant amount of damage if Parker’s projections hold true. He predicts that a full-scale trade conflict between the world’s two biggest economies will see China shed anything from 1.2% to 1.5% of its GDP, which is equivalent to a drop of between $132 billion and $165 billion.

If China responds to Donald Trump’s threatened 25% tariff with a tariff increment of its own from 7% to 15% on approximately $60 billion worth of American imports, this could see the U.S. shed 0.1% of its GDP, or about $14 billion. In the ensuing scenario, Bank of America projects that China may hike tariffs on U.S.-made vehicles and reduce its soybean imports from the U.S. Meanwhile, Chinese imports of American soybeans have already fallen off a cliffsince 2017, dropping roughly 98% last year as China looks toward less antagonistic partners like Brazil.

According to a Bank of America report also cited by CNBC:

“Fasten your seatbelt and don’t hold your breath. The latest escalation of the trade war was completely unexpected, despite the strength of the economy and the markets. This is evident from the immediate negative reaction of U.S. equity futures to the news.”

As the two elephants knock heads, the amount they are erasing from each other’s economies is equivalent to the GDP of mid-sized nations. European and Asian economies will also feel some pain, according to UBS.

IS TRUMP BLUFFING?

According to the White House, the new 25% tariff regime that could potentially kick off this entire sequence of events will come into effect just after midnight on Friday. Expectedly, markets have been in virtual freefall since Monday, with the NASDAQ and S&P 500 both shedding close to 1% on Monday alone. The miserable market conditions continued through Tuesday, with little sign of respite as investors react with horror at the thought of a damaging 20th-century-style trade conflict between economic superpowers.

Dow

The Dow Jones Industrial Average continues to trend downward following Sunday evening’s shock announcement. | Source: Yahoo Finance

Not everyone believes that the panic is warranted, however. JPMorgan CEO Jamie Dimon, for example, believes that the shock announcement by Trump was nothing more than a way of cornering a formidable opponent and forcing them to negotiate. Speaking to CNN Money’s Poppy Harlow, Dimon stated that regardless of the market’s reaction, Trump will count it as a win because it has become the only successful way of getting the Chinese to the negotiating table on his terms.

Whether this is a considered masterstroke of strategy or simply a typical Trump action, it certainly appears to have done the trick. Chinese Vice Vice Premier Liu He will be part of a trade delegation to the U.S. later in the week, which at the very least is a sign that China is willing to give ground so as to avoid a damaging trade war.

Source: Scary! Rising US-China Trade War Tensions Could Take 10% Off the S&P

How Chinese Products Went From Cheap & Cheerful To Weapons In US Trade War

Tensions are escalating between China and the US over trade. The Chinese government has announced retaliatory measures on a range of American products including cars and some American agriculture products after the US listed 1,333 Chinese products to be hit by punitive tariffs of 25%.

Yet a trade war does not make economic sense for either side. Bilateral trade between the US and China was worth about US$711 billion in 2017 and Boeing’s single deal with China signed during Donald Trump’s visit to Beijing in 2016 was worth about US$37 billion alone.

The jobs and livelihoods at risk are huge. So why is there no particular desire, especially from Trump, to ease the tension and find a new solution?

There has been much talk about the US trade deficit with China and allegations that China steals US intellectual property. But the answer could lie in US fears of the Chinese government’s “Made in China 2025” initiative and how it signals the growing threat of China as an economic rival. That the official US Trade Representative’s recent investigation into Chinese trade practices mentioned the Made in China 2025 initiative more than 100 times, suggests this is the case.

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Made in China 2025 was launched by the Chinese government in 2015 to upgrade the country’s manufacturing capabilities. It is a plan to transform what China produces from a low-cost, labour-intensive model to advanced and smart manufacturing. Certain key industries such as aerospace, robotics and high-tech medical equipment have been prioritised. The hope is that China will gradually match developed countries’ manufacturing capabilities and become industry leaders.

A lot of the products from these key industries, such as industrial robots, aviation and aerospace equipment, new energy and power supplies and advanced rail machinery were all included in the tariff target list published by the US Trade Representative. So it would seem that the current situation is not simply a trade issue aimed to reduce America’s trade deficit with China. Instead, it is likely targeted at the future competition China will pose.

Made in China 2.0. shutterstock.com

China’s Made in China 2025 strategy makes perfect sense in my field of research, which concerns where products are manufactured and how this effects their popularity in the global market place. A strong and positive image of a country can generate what economists call “halo effects” on its products. So, Germans have built good reputations for their cars and engineering, France and Italy for their wine and fashion, and the US for their innovative products.

This worldwide reputation brings with it prestige and higher price premiums. Although there is still debate around whether brand origin could be more important than where the product is produced (Apple, for example designs its products in the US but manufactures them in China), there is no doubt that “Made in China” suffers from an image problem.

Chinese products have long been associated with a cheap and cheerful perception that they are not good in terms of quality or ingenuity. The Chinese government has long been aware of this view and keen to change it.

At the turn of the 21st century, it set up a policy called “Going Out” to encourage leading Chinese firms to expand internationally, acquire new technology and the tools to innovate. The two big examples were IT firm Lenovo’s takeover of IBM’s personal computer division in 2005 and Geely automotive’s purchase of Volvo in 2010. Made in China 2025 serves the same purpose – to boost China’s technology and innovation capabilities and to improve the image of Chinese products.

Impressive growth

There is no doubt that China has come a long way since the 1990s. It has built 22,000km of advanced high speed rail network within the last decade, which is more than the rest of the world combined. It is also considered as the global leader in renewable energy and technology, patent filings, commercial drones, industrial robotics and e-commerce and mobile payments.

China is already a leader in some tech. shutterstock.com

Chinese telecommunications company Huawei typifies the transformation of Chinese products in recent years. Within the last decade, Huawei has surpassed Ericsson and Nokia to become the world’s biggest telecom equipment supplier and has just overtaken Apple as the world’s second largest smartphone maker, behind Samsung.

What’s more remarkable about these statistics is that Huawei has transformed itself from a cheap phone maker to an accepted premium brand that can compete with Apple and Samsung. Its latest releases the top of the range Huawei P20 Pro will retail for US$1,100 and its top end model Huawei Porsche Design Mate RS will sell for US$2,109 – even more than the iPhone X.

There is no doubt that some in the US are uncomfortable with China’s impressive growth and feel threatened by it. It suggests the current trade dispute is not just about imports and exports, but also an incumbent superpower feeling the threat of a growing challenger.

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