China’s Problems in the Spotlight as Trade War Talks Resume

China’s Problems in the Spotlight as Trade War Talks Resume

Protests in Hong Kong against a proposed extradition law that could send Hong Kong dissidents to Beijing for trial and Hong Kong’s loss of autonomy at Chinese hands have now lasted four months.

At each turn, authorities have sought to suppress or appease the protesters without result.

The protests have grown increasingly large and violent and have severely disrupted Hong Kong’s economy, property values and standing as a global financial centre.

Last week marked the 70th anniversary of the Communist victory over the Nationalists in the fight for control in mainland China (the Nationalists still control the island of Taiwan).

The Chinese government has hosted celebrations throughout Beijing and other cities around China.

These celebrations are intended to be orderly and festive and a way to show off China’s progress to the world.

The hope was that the Hong Kong demonstrations would have died down by now and that nothing would happen in Hong Kong to detract from the celebrations planned for the rest of China…

No good choices

That hope has now been abandoned.

Not only did the Hong Kong protests continue, but there is some danger that the demands for liberty from Beijing’s harsh rule could spread to other Chinese cities.

Some marches have started in Taiwan in support of the Hong Kong protesters.

So far, President Xi has not used the full might of the People’s Liberation Army to squash the protests.

Any such attack could result in thousands of casualties and be a repeat of the Tiananmen Square massacre of 4 June 1989, in which the Communist Party crushed a protest in the main square in Beijing with troops and tanks, resulting in an unknown number of deaths estimated by some to be in the thousands.

If Xi allows the protests to continue, he risks losing political control of Hong Kong and the possible spread of the protest movement to the rest of China.

If Xi cracks down, he risks another massacre and isolation from Western-style democracies.

Xi has no good choices.

On balance, he’s likely to favour control over accommodation and is likely to crush the protests by violence if needed.

Investors should prepare for more market uncertainty at best and an Asian market crash at worst.

Trade war talks resume

A new round of trade negotiations between the US and China is scheduled for later this week in Washington.

But there is little optimism that a significant deal will be reached.

Reports have surfaced that China is only seeking a limited agreement.

Bloomberg reported yesterday, for example, that China won’t be willing to negotiate ‘commitments on reforming Chinese industrial policy’ or ‘government subsidies’.

China may feel that Trump has lost some of his negotiating power now that an impeachment cloud is hanging over him.

A second ‘whistleblower’ has now stepped forward, which will only intensify the media spotlight.

But no matter what happens on the impeachment front, the trade war isn’t going away anytime soon.

The current global trade war has been raging and expanding since January 2018 when Trump imposed tariffs on solar panels and certain appliances.

But in my view, the trade war really started in 1994 when China did a maxi-devaluation of its currency…

Trade war really began 25 years ago

It escalated in 2001 when China joined the World Trade Organization (WTO) and proceeded to break every rule of that organisation.

For most analysts, Trump’s highly visible actions were the start of a trade war. But seen from this perspective, 2018 simply marked the beginning of US retaliation.

The trade war has since continued, of course.

China has imposed tariffs on almost 100% of its US$150 billion of imports from the US.

The US has imposed tariffs on over US$250 billion of Chinese imports and is poised to tariff the remaining US$300 billion of imports in a matter of weeks if upcoming China–US talks don’t result in a de-escalation of tensions.

But the trade wars are by no means limited to China.

Trump threatened major tariffs on all Mexican imports unless they helped with illegal immigration into the US (which the Mexicans did). Canada has also been subject to new tariffs on lumber and dairy products. The greatest escalation of the trade war will come soon with regard to Europe.

The WTO has allowed the US to impose US$7.5 billion of countervailing duties on Europe to compensate for illegal subsidies by Europe to Airbus.

The US has already implemented this ruling with new tariffs on French wine, British whisky, Spanish olives and cheese from many sources in Europe.

The WTO decision is based on an old case and is not specifically related to the new trade war.

Cracks in the market are forming

These ‘wine and cheese’ tariffs are just the tip of the iceberg compared with massive tariffs on German auto exports that Trump plans to impose next month.

I’ve said it before and I’ll say it again: The trade war is far from over and will increasingly weigh on global trade and global growth in the years ahead.

That’s bad news for stocks — something that is already showing up in recent stock market performance.

You should limit your exposure to the stock market, maintain a solid cash reserve and keep a portion of your money in hard assets like gold, silver, land and fine art.

I’m not issuing a specific forecast for a crash, but cracks are forming and you’d much rather get out a bit too early than one minute too late.

All the best,

Jim Rickards Signature

Jim Rickards,
For The Daily Reckoning Australia