Why China is Losing: Reading Between the Lines

China increasingly realizes that it’s playing a losing hand in the trade war, and its counter-moves have been made mainly for public consumption in China. __ Source

If you take the trouble to look at the items that China left off its tariff list — compared to the things it included in the list — you can see clearly into the deep weaknesses of Mr. Xi’s playing hand. China’s economic numbers are built upon technology theft and the overproduction of infrastructure.

China cannot make everything it needs because of the very nature of its top-down command economy. This is the same hobbling economic factor that brought down the USSR.

… based on what we know, what’s even more revealing about China’s choices are the U.S.-made products that haven’t made any tariff list. They include civilian aircraft and their engines and parts, which had a 2018 export total of $17.73 billion. They include semiconductors and their components, which last year had China shipments that totaled several billion additional dollars. They include the equipment needed to manufacture and inspect semiconductors and their parts, which racked up at least $850 million in 2018 exports to China; devices for conducting chemical and physical analyses (with $912 million in China exports last year); laser equipment ($304 million), motor vehicles, auto parts, and plastics resins and polymers (which each produced billions in exports to China); and billions of dollars’ worth of other products that the Chinese either can’t (yet) make or can’t make in the amounts that they need—or that consist of goods preferred by Chinese consumers over their Made in China counterparts. __ https://nationalinterest.org/feature/chinas-tariff-list-advertises-its-trade-war-weakness-58637

China will try to use Europe to relieve some of the trade pressure it is feeling from Trump. But will that be enough? I think not.

… the hit to China is long-term and directly on production, thus right across the economy right at the most difficult phase of economic transition. Chinese economists are talking about a 1-2% hit to GDP. I suspect much more plus increased domestic social and political tension. Xi is in more trouble than we think. __ ZeroHedge

A deeper-seated problem for China is its currency. China has been fearful of a true opening of its economy, because the yuan might not survive such a thing.

Why does China cling to state control of its currency’s valuation? The obvious answer is that China’s economy and global role are too fragile to absorb a major revaluation of its currency up or down: a major loss in purchasing power would raise the cost of energy and other imports, while a major strengthening of the yuan would crush the global competitiveness of China’s goods and services.

… If China wants superpower status, it will have to issue its currency in size and let the global FX market discover its price. Anything less leaves China dependent on the U.S. and its currency, the dollar.

If China is so powerful, why doesn’t it let its currency float on the FX market like other trading nations? Until its currency floats freely like other currencies and the yuan’s price is discovered by supply and demand, China’s global role in currency payments, loans and reserves will remain near-zero. That is a weakness that appears to be insurmountable. __ Of Two Minds

Trump Read Things Right

If outsiders do not give China the technology — and if they make it harder for China to steal it — then China must buy what it cannot make, for now. China cannot afford to play by the rules, for then its many weaknesses would be exposed.

… released in response to Trump’s recent—and perhaps least expected—escalation of the trade war, the latest Chinese tariff list undoubtedly aimed to underscore China’s economic strength and resilience. And in principle, there could be more to come from Beijing, both in scale and scope. The most accurate description of China’s new announcement, though, is a confession of weakness—and a confirmation that Trump has read the bilateral economic balance of power exactly right. __ China’s Tariff List

Chinese “society” is sealed off in compartments and unable to interact freely between its different units in such a way as to expand and grow organically. Economic decisions in China are not made on the basis of supply and demand, but rather on the basis of graft or military/political expediency. And while China’s workforce is beginning to shrink, its growing mass of aging dependents is not going away soon. China is not prepared for what is coming.

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4 Responses to Why China is Losing: Reading Between the Lines

  1. Improbus LIber says:

    It sounds like the best thing the US can do is dis-entangle from China and go on their merry way. Xi has really overplayed his hand.

    • alfin2101 says:

      Probably so, but the dis-entanglement will not be easily done. US corporations have invested a monstrous amount of time, money, and effort setting up production facilities and sales operations in China. Since all the other European and American companies over there were accepting sub-optimal terms and operating conditions from China, each one that made the leap decided to accept the short-term profits and hope for the best in the long term. They had already betrayed the workers and communities back home, so they were reluctant to admit they may have made a mistake.

      Trump upset the apple cart for many of those people, but at least he did try to warn them long before he was elected.

      Note: Trump does not seem to want to decouple the US economy from China’s. He merely wants China to deal in an honest, fair, and straightforward manner in international markets — and to stop bullying every company and every country it interacts with. It is not clear that Mr. Xi is capable of avoiding escalating hostilities.

  2. ddswaterloo says:

    Does escalating hostilities imply an economic war becomes a military war??

    If so, does it occur directly or will it be another proxy war?? And with where?? Africa???

    Or stopping the One Belt one Road agenda???

    • alfin2101 says:

      One cannot read Mr. Xi’s mind to explain why he would rather escalate hostilities than to reform his nation’s trade policies in such a way as to invite honest overseas investment and trade. But knowing Xi’s mind would help to better predict how far down that road the dictator will go.

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