Articles
2 November 2018

China: Trade war and geopolitics

Trade war and geopolitical tensions continue to escalate between the US and China, but increasing concerns around Taiwan could risk intensifying the situation

The US administration has threatened China that if there is no constructive outcome from the Xi-Trump meeting in the upcoming G20 gathering, then the US would expand tariffs on Chinese imports to a total of $505 billion, though it has not mentioned the tariffs rate yet.

In terms of what we already know on future tariffs, from 2019, the tariff rates on $200 billion of Chinese imported goods is set to increase to 25% from 10%. We expect China to reciprocate on imports from the US, (i.e., to 25% as announced earlier in August). See our trade teams piece on the impact the US-China trade conflict could have on world trade next year.

Xi-Trump meeting is likely to be a stalemate

It seems that the US would like to get some concessions from China during the Xi-Trump meeting. But this will be primarily be determined if the two sides insist on their points on trade such as:

If the US continues to emphasise that Chinese imports are the driver of the US trade deficit, but China reckons narrowing the deficit won't really help. Or if the US continues to express displeasure at how it doesn't like how China gets its technology from business partners but China insists that is just business. And finally, if the US continues to send military vessels around Taiwan, then China is bound to lose its patience after a while.

Trade war has damaged the Chinese economy

Source: ING, Bloomberg
ING, Bloomberg

Using the Taiwan card could prove to be foolhardy

As we have emphasised, the trade war doesn’t end with just tariffs and is now increasingly tied to geopolitical tension.

The US is increasing hurdles for its trade allies including Mexico and Canada to sign trade agreements with China. Moreover, two US warships sailed through the Taiwan Strait providing military arms sales to Taiwan.

According to the Chinese media, Xi has ordered the military to be prepared for war and we think this should be considered with caution. The One China principle means Taiwan is part of China, and this is a foundation stone for China’s Taiwan policy.

The US administration could end up in a pickle if it uses the Taiwan card to get more chips for negotiation as we think China is very unlikely to give any concessions on trade if the US continues to send military forces around Taiwan.

After the yuan cross the 7.0 handle it will continue to depreciate slowly

Source: ING, Bloomberg
ING, Bloomberg

USDCNH crossing the 7.0 handle is a high probability

If the outcome of Xi-Trump meeting yields no improvement, then we see the yuan edging lower and USDCNY crossing the seven handle won't be a surprise. Recently, the central bank has allowed the USDCNH to test the 7.0 mark. This would increase market expectation that USDCNH could cross 7.0 anytime soon.

After crossing 7.0, the yuan would continue to depreciate slowly. The yuan has slowed down in its depreciation speed. The fastest depreciation happened in June (3.28%) followed by July (2.96%), and has moderated since then to around 1.43% in October. But crossing the 7.0 mark doesn't imply a fast depreciation will follow.

The claim that if the yuan passes the 7.0 handle, then there will be massive capital outflows doesn't add up because if that were the case, then the regulator could tighten capital outflows as the yuan continues to weaken.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).