Why China could withstand the trade war far longer than Trump thinks
By DAVID J. LYNCH | The Washington Post | Published: September 13, 2018
WASHINGTON - President Donald Trump insisted Thursday that he was "under no pressure to make a deal with China," signaling a readiness to escalate his trade war with Beijing.
"They are under pressure to make a deal with us," Trump tweeted in reference to China. "Our markets are surging, theirs are collapsing."
The president's statement sought to downplay any hope that the United States would extend a hand toward reconciling the trade conflict, amid word that Treasury Secretary Steven Mnuchin had invited Chinese officials to return to talks.
Trump's view that the Chinese are suffering while the U.S. thrives helps explain his confidence that Beijing ultimately will buckle. But the president's expectation that financial hardship will prompt Chinese President Xi Jinping to cave in a fresh round of diplomatic talks is misplaced, analysts said.
"There's a lot of overly wishful thinking on the American side," said Jeff Moon, a former U.S. trade negotiator. "Every economy has problems. We have trillion-dollar deficits. That doesn't mean either economy is in fundamental danger. It's a massive miscalculation."
The Shanghai Composite Index, China's main stocks gauge, is down 23 percent this year, making it the world's worst-performing major exchange.
But unlike in the United States, the ups and downs of the Chinese stock market affect relatively few people, meaning sell-offs are unlikely to translate into pressure on Chinese leaders.
Less than 10 percent of China's adult population owns shares, according to Fraser Howie, the Singapore-based author of three books on the Chinese financial system. In the United States, the comparable figure is more than half, according to Gallup.
In addition, Chinese share prices move with little regard for what is happening in the real economy. In 2008, for example, stocks fell by more than 65 percent even as the economy grew by nearly 10 percent.
"It's wrong to think the market fully equals winning the trade war," Howie said.
Likewise, any wobble in the Chinese economy thus far has been modest. Though China has slowed from the double-digit growth rates it recorded earlier this decade, its economy grew by an annual rate of 6.7 percent in the second quarter.
"To the extent that Trump is looking at that and thinking he has China by the neck, he's wrong," said economist Andrew Polk, a partner at Trivium, a Beijing-based advisory firm. "China's economy has its own issues. It's slowing down, but it's not about to blow up. Trump has less leverage than he thinks."
Chinese Foreign Ministry spokesman Geng Shuang said at a news conference Thursday that officials had received the White House's invitation for talks and the two sides are working out the details.
"China has always held that an escalation of the trade conflict is not in anyone's interests," Geng said.
On Friday morning in Beijing, the front page of the state-backed China Daily read: "US offer for trade talks welcomed."
The president has imposed tariffs on $50 billion worth of Chinese imports, mostly industrial goods, and says he will soon slap levies on an additional $200 billion. American consumers will feel the sting of that move as prices rise for Chinese-made refrigerators, air conditioners, furniture and clothing.
Trump says the tariffs are aimed at compelling China to abandon a host of unfair trade practices, including forcing U.S. companies to surrender their trade secrets in return for access to the Chinese market.
The Chinese government has retaliated with equivalent tariffs, targeting American agricultural products in politically important states ahead of the November congressional elections as well as American multinationals with factories in China.
On Thursday, the largest U.S. business groups in China pleaded with Trump to cease fire. Nearly two-thirds of more than 430 U.S. companies in China say the duties Trump imposed this summer have damaged their businesses, according to a survey by the American Chamber of Commerce in Beijing and Shanghai.
Nearly half of the respondents - in retail, food and manufacturing - reported that their production costs have climbed, while 42 percent said sales were down. Just 6 percent, meanwhile, said they would consider moving factories to U.S. soil, an administration goal.
"The U.S. administration runs the risk of a downward spiral of attack and counterattack, benefiting no one," said William Zarit, the president of the American Chamber of Commerce in Beijing.
Most of the tariffs that have been imposed have hit U.S. companies, not the Chinese, according to economist Mary Lovely of Syracuse University. She found, for example, that 87 percent of the computer and electronics parts subject to Trump's levies were produced by American companies.
Trade-war uncertainty has contributed to a cloud over Chinese investing. But this year's losses in the casino-like Chinese stock market also are nothing new - the market fell by almost half over a six-month period that ended in early 2016.
Apart from trade worries, there are a number of domestic considerations that have hurt Chinese stocks.
China's market is closely tied to the amount of money available for investing. This year, Chinese officials have tightened credit in a bid to wean the economy from its dependence upon debt-fueled growth. That's meant allowing more Chinese companies to default on their corporate debt, a change from previous years when state-owned banks would have kept them afloat.
The collapse of several peer-to-peer online lending networks also spooked Chinese investors.
The market has been hurt by concerns about Chinese companies' use of their stock as collateral for loans, which leaves share prices vulnerable if they get into financial trouble and are forced to sell. Chinese financial institutions had nearly $220 billion in such loans at the end of July, down about 8 percent from the recent peak in January, according to Bloomberg.
"China's markets have dropped by close to 25 percent," Trump said at the White House last week. "Their markets have gone down. I don't like to see that. But I can tell you that the United States has picked up about $10 trillion in worth. And China would like to be in our position. They would like to be in our position."
But the president's repeated crowing about China's financial woes is contributing to a nationalist backlash that may prolong the dispute, with the Chinese concluding that Trump is seeking more than just a level playing field for trade.
"The way we're going about it makes it harder for Chinese leaders to make concessions," said David Loevinger, a former financial officer at the U.S. Embassy in Beijing. "The U.S. has a one-pronged strategy - keep raising the pain threshold until the other side cries uncle."
Some of the president's top advisers see the financial market slump as a reflection of broader economic problems in China. "What are these stock markets telling you?" Lawrence Kudlow, director of the National Economic Council, said on CNBC last week. "China is moving lower in their economy. The U.S. is moving higher. We're the hottest place in the world."
It is true that the U.S. economy is hitting on all cylinders. The 3.9 percent unemployment rate is approaching half-century lows, while the expansion that began in June 2009 shows no sign of losing steam. Optimism among small-business owners recently hit a 45-year record.
"The Economy is soooo good, perhaps the best in our country's history (remember, it's the economy stupid!)," Trump boasted earlier this week on Twitter.
China's gradual slowing comes as the government is attempting to engineer a shift from growth based on heavy investment in infrastructure and exports to an economy powered by domestic consumption, according to William Overholt, a senior fellow at Harvard University's Asia Center.
Uncertainty arising from Trump trade policies will lead to a global slowdown in growth next year, according to BNP Paribas. The bank's latest forecast, released this week, calls for China's economy to grow at an annual rate of 6.1 percent next year vs. 1.8 percent for the United States.
Many analysts point to drops in retail sales and investments as an indication that China's economy is downshifting. But Nicholas Lardy, a China expert at the Peterson Institute for International Economics, said he doubts the economy is genuinely slowing. The Chinese government is changing the way it collects and reports key economic data, including retail sales and investments, making it difficult to draw conclusions.
But China imported almost 19 percent more goods in August than it did in the same month last year.
"The underlying demand in the economy is fairly strong," Lardy said.
The administration's confidence that China is being hurt also overstates the country's dependence upon trade, he said.
Since the 2008 financial crisis, China has reduced its dependence upon trade by one-third, according to Lardy.
The Washington Post's Danielle Paquette in Beijing contributed to this report.