"Hit Their Stocks": Chinese Press Warns Of "Ample Weapons" To Win US Trade War

While the main event this week will be the official start of Q1 earning season which is expected to blockbuster, if mainly at the EPS level thanks to Trump's corporate tax cut...

... the biggest risk overhang remains the escalating trade war with China, and specifically Beijing's retaliation to the unexpected Trump escalation in which he told the USTR to consider an additional $100BN in tariffs for a $150BN total.

As previously discussed, one potential complication in the Chinese retaliation is that the US does not have $150BN in exports to China, which means that Beijing will need to get creative in crafting its escalating response.

That said, China has no less than five options how to escalate, the problem being however that all five are what some have dubbed "nuclear" choices, and include:

  1. A Currency Depreciation. A sharp, one-time yuan devaluation, like the one Beijing unexpectedly carried out in August 2015, could be used to offset some of the effect of tariffs.
  2. Sales of US Treasurys. Chinese authorities could sell some of its large official-sector holdings of US Treasuries, which would lead to a tightening of US financial conditions.
  3. Block US services. Chinese authorities could limit access for US companies to the Chinese domestic market, particularly in the services sector, where the US exports $56 billion in services annually and runs a $38 billion surplus
  4. Curb US oil shipments. According to Petromatrix, China is one of the biggest importers of U.S. crude oil at 400kb/d, so any counter-tariffs on crude could become very heavy for the U.S. supply and demand picture. Such a move would weigh on U.S. prices and spill over to global oil pricing. As Petromatrix adds, the market would need to start balancing downward price risk of trade-war escalations with upside risk of Iran sanctions as oil flows could be about the same.
  5. Blocking rare-earth exports. China has a near global monopoly on the production of rare earths, which are a critical component in all high-tech devices such as cell phones, computers, fighter jets and cruise missiles. In national defense, there is no substitute and no other supply source available. When China blocked rare earth exports to Japan over a territorial spat involving the East China Sea in 2011/2012, the price of rare earths soared.

However, as pointed out previously, any escalation involving one or more of these countermeasures would assure an even more aggressive response by the US, which as we reported last week has deployed three carrier battle groups to the South China Sea, in a less than subtle message to Beijing.

Putting all of the above together, China watchers, traders, pundits, politicians and virtually everyone else wants to know just one thing: what will China do?

Conveniently, on Sunday China's state-owned Global Times newspaper, the tabloid where all nationalistic propaganda for mass popular consumption is printed, writes that Chinese authorities have "ample weapons to prevail if the US escalates trade war", explaining Beijing's strategy as follows: "the Chinese authorities will take all necessary measures to minimize the losses for Chinese companies and individuals. Nonetheless, the US, the world's largest economy with a GDP of approximately $19 trillion, has less endurance for a full-blown trade war."

Echoing the Chinese ministry of commerce, the article notes that while China does not want a trade war with the US, which is one of its most important trade partners, "if US President Donald Trump starts a trade war, China will fight to the end to defend its interests."

The Global Times author then explains what countermeasures China plans on rolling out in the immediate term, starting with export subsidies, offsetting the US tariffs:

In an all-out trade war, offense and defense are equally important to winning. The Trump administration said it will impose punitive tariffs on Chinese imports ranging from industrial robots and electric vehicles to locomotives and jet engines. If this measure is carried out, China can provide export-promoting subsidies for companies that export goods on the list.

Author Hu Weijia also claims that behind the trade dispute is the US concern over the "Made in China 2025" program, which aims to upgrade China into a manufacturing superpower. However, he claims, Trump's efforts will be in vain as "the Chinese government is highly able to mobilize resources and coordinate action to promote its strategy and protect domestic employment."

In this context, export-promoting subsidies are just one of several options for China "to use in tackling a trade dispute with the US" according to the Global Times. China also suggests that the asymmetric distribution of gains vs losses in the US, will make it easy for Beijing to win a trade war.

In the US, some interest groups such as steel companies benefit far more than others from trade protectionism, while the trade disputes potentially hurt exports of US farm products.

However the most notable suggestion in the Chinese propaganda outlet, is that the US stock market us the most important pain-transmission mechanism, something Trump himself appears to have realized with his Friday warning to investors to prepare for "pain" in the market. Here's how China sees its leverage, which can be simplified with the following: S&P500.

US stocks saw deep losses in recent days amid jitters about Sino-US trade tensions. While it is hard to win a trade war with punitive tariffs, it is more difficult to protect people from feeling pain in the fight.

In other words, instead of the Bernanke, or the Yellen, or the Powell put, traders now have something new to worry about: the Chinese call.

Which brings us to China's bottom line, and the reason why Beijing isn't contemplating a nuclear option, at least as of this morning: China is confident that given enough pressure, primarily in the form of falling stock prices, the US population itself will demand that Trump back off from the trade war:

Because of an uneven distribution of interests, US society is likely to be more and more split in its attitude to the trade war with China, making the trade war very costly for Trump.

China is probably right, the only question is how much pressure - in the form of S&P downside pain - can Trump withstand before he backs off. We may find out this week.

Comments

lester1 Sun, 04/08/2018 - 14:01 Permalink

The unaudited Federal Reserve could just do a back door/covert QE program and buy out China's US Treasury position! 

 

​​​​​​And if communist China wants to sell stocks to tank the US market no worries there either, the PPT and ESF and Swiss National Bank will just continue to buy stocks China is selling.

 

 

FireBrander Avichi Sun, 04/08/2018 - 14:08 Permalink

"Hit their Stocks!"

Yes, please do; that is the 1% of the population the other 99% would be better off without.

PS> "Float" the idea of blocking all Apple Product shipments out of China and watch Trump fall to his knees begging you to stop.

PSS> China, If you are ever forced to launch the nukes, just hit DC and all the sanctuary cities; the rest of us will welcome you as "liberators".

In reply to by Avichi

Inzidious The_Juggernaut Sun, 04/08/2018 - 20:35 Permalink

Brides probably cost way more than the wedding heh. Ironically (or not), the Chinese are trying to source girls outside of China now. I live in Thailand and the Chinese are here in deep - buying land, businesses, condos and the girls. The Thais are actually starting to get angry about it. Things are getting interesting here as they are in the west.

In reply to by The_Juggernaut

BeanusCountus silverer Sun, 04/08/2018 - 20:50 Permalink

Well, that’s interesting.  Numbers I have read say that they will get around 75% into “middle class” in next 5 years.  Which is defined for them as around $10k to $35k per year.  That’s “household” income btw.  For sure, that’s a ton of people in number.  But those folks are buyers of basic living stuff, no more.  Their consumers are worth nowhere near to us (today, anyway) what US consumers are worth to them.

I’m not for trade wars based on what I was taught.  Starting to wonder how valuable that was.  Any idiot can see our day in the sun is fading.  Those same idiots should be able to see that China’s will fade as well.  The sooner the better.  Think long term.  Maybe it’s time to stop their theft of everything on the planet as Donald proposes.  I say “do it”.  The problems we have with those folks are inevitable.  Only question is how imminent.  Fuck it, now is as good a time as any.

In reply to by silverer

Blankone The_Juggernaut Sun, 04/08/2018 - 14:34 Permalink

"Made in China" usually means "Made in China by US Company"
That cheap crap is crap because the US company who made it decided that is what it is to be.

Seeing as how it is US companies in China, Trump just needs to enact penalties onto those companies and to remove the their abilities to off shore profits and avoid taxes. FYI - a tariff does nothing for the people when the company making the item is a US company (off shored), it will not prompt that company to move back to the US unless the tariff is huge. That tariff is simply another tax on the US citizen.

In reply to by The_Juggernaut

Rutalkingtome skbull44 Sun, 04/08/2018 - 15:41 Permalink

Two things: 1) How if China just stops buying US debt? Problem #1 as I see it is that US is indebted to the very bone marrow. 2) Has the US any gold left or just empty yellow painted coke cans in Fort Knox?

Finally in a hot war with China there will be no winners. China is not Iraq, Libya or Vietnam for that matter. China has the capacity to hit the US in its very backyard. Maybe whole mankind will loose. To send carriers is just stupid the Russians and probably the Chinese too have missiles that have the capacity to take out these expensive toys.

In reply to by skbull44

FireBrander Arnold Sun, 04/08/2018 - 14:24 Permalink

You have, and will always have, an "overlord"...if you're happy with War-Mongering Big Fat White Men as your overlords, then that's your choice.

The way the world is shaking out, I'm looking at Russian or Asian "Overlords" as my new favorites.

In reply to by Arnold

JibjeResearch FireBrander Sun, 04/08/2018 - 14:55 Permalink

The IRS can be displaced :)  Some, if not completely :)

You have to be a global citizen and able to move capital globally to have a chance against those evil warlords.

Sometime it's sad because those fools don't do things to learn about the global reality.  We can't help them.

Just hope that they will be ok, and we have to be rich ourselves first so that we have the resources to help them later.

In reply to by FireBrander

bshirley1968 lester1 Sun, 04/08/2018 - 14:16 Permalink

If the narrative of the Chinese calling for the sale of US stocks to hurt America were to get traction, I could see Trump making it a "patriotic" duty for "true" Americans to support their country by going out and buying stocks.

Damn! I should of held that idea and took it to the WH this week. Bet I could get an office next to Kudlow. You know that idea is so like the bs going on today.

In reply to by lester1

Lumberjack Avichi Sun, 04/08/2018 - 15:01 Permalink

Farmers will take a hit...

oh, that’s right, family farms are extinct now....courtesy of Wall Street, not China.

Short major Ag conglomerates. 

They’ll be right behind the pension funds screaming for bailouts.

#nomoneyleftforhardworkingamericans.

https://www.rothschild.com/en/greater-china/

http://www.edmond-de-rothschild.com/site/International/en/private-equity/our-expertise/china-growth

In reply to by Avichi

Endgame Napoleon AtATrESICI Sun, 04/08/2018 - 14:23 Permalink

For most Americans, neoliberalism has been one long kick out of the middle class. Even the mommas that neoliberals keep up with their welfare-for-womb-productivity programs do not have the same prospects for middle-class prosperity in this system, and after their womb productivity dries up, they have to worry about covering the cost of rent that takes more than half of their earned-only income, like many of the mommas with grown kids who dominate the financial services jobs that pay $10 per hour. You need spousal income or free rent, free groceries and a $6,421 refundable EITC child tax credit to survive in those low-wage and often part-time / temp jobs.

In reply to by AtATrESICI

Endgame Napoleon Kayman Mon, 04/09/2018 - 14:47 Permalink

The US has an extensive, non-contributory social safety net for womb-productive citizens and noncitizens in single-earner households, when the breadwinner works part time to stay below the earned-income limits for a multitude of monthly pay-per-birth welfare programs that cover everything from groceries to rent—more and more with each birth—in addition to refundable EITC child tax credits up to $6,431. 

The US also has a contributory social safety net for the elderly. 

Everyone else is on his or her own. 

China has stronger familial traditions that have not been through the same value system reversal that Americans experienced after fake feminists started monetizing their womb productivity in the name of “careers.”

In reply to by Kayman