Tensions between China and the US are about technological leadership.The Chinese, whose technological catch-up has been rapid in recent decades, is now rather ahead of 5G and Artificial Intelligence.The US does not accept, rightly, this change of equilibrium. The standoff will continue and I can not imagine a quick trade agreement because it would assume that one of the two countries accepts the leadership of the other.This seems totally illusory and that is why the global environment will remain volatile. The US is pressuring its allies to limit Chinese influence.To be convinced, read this article of the Wall Street Journal published this afternoon (March 11).It indicates the pressure of the Americans on the Germans in the adoption of a Chinese 5G technology for the renewal of their mobile network.
The article “Drop Huawei or See Intelligence Sharing Pared Back, U.S. Tells Germany” is available here Here is the first paragraph “BERLIN—The Trump administration has told the German government it would limit the intelligence it shares with German security agencies if Berlin allows Huawei Technologies Co. to build Germany’s next-generation mobile-internet infrastructure.”….
Growth in China slowed again in 2018, with an average of 6.6% across the year vs. 6.9% in 2017. This remains a respectable figure, but it is the lowest since 1989 and 1990 as shown in the chart opposite. The 10-year average is also at a low, at around 8%. The 10% that had previously been typical of the Chinese economy is now a thing of the past, and expectations of a shift back to this trend are unrealistic. The Chinese economy is changing, setting the stage for a slower pace of growth.
A weighty challenge for the world as a whole Slowing Chinese growth often sets off the warning bells on world growth as a whole. Having hinged on developed countries during the period after the Second World War, growth is now dependent on the situation in China, which has displayed exceptional expansion since the start of the 1990s, creating strong and long-lasting impetus for the world overall.
The world growth driver is now China, rather than developed markets, and this shift is particularly vital as potential growth in developed countries has been on the wane since 2008. Right across the globe, from the US to France, growth that can be sustained in the long term while not generating permanent imbalances is weaker than before the 2007 crisis, and none of these countries can drive strong and self-sustaining growth from within their borders. Meanwhile, China managed to fuel momentum, taking over the role of developed economies – particularly the US – and benefiting the entire world economy.
So China managed to set the stage
for stronger growth the world over on a long-term basis, either by sparking
fresh competition on the Western markets, developing relationships with other
emerging countries (Asia, Africa, Latam) or attracting capital to take
advantage of Chinese growth, even if the price to pay for this was the transfer
According to IMF data (in current
dollars terms), Chinese GDP has gone from less than 2% of world GDP in 1991 to 6%
ahead of the 2007 crisis and then 16% in 2018, reflecting an astounding
acceleration and putting it on a par with the euro area.
Chinese GDP as measured in
purchasing power parity – a more coherent price and exchange rate system than
the dollar-denominated assessment – has been higher than the US figure since 2014
and above the euro area figure since 2011.
More generally speaking, an
increase in the weighting of China was achieved primarily at the expense of
Europe and Japan, while the US maintained its strong representation. This also
explains why the tension surrounding technological leadership is a Chinese-US
matter and excludes Europe, which was not sufficiently involved in supporting
China’s swift development.
A final point worth keeping in
mind is that Chinese imports equated to close to 80% of US imports in 2017. A
domestic Chinese shock affecting its imports would have a similar effect to a
shock on US domestic demand and hence on its imports, and the worldwide impact
of a shock on Chinese growth would be closer than many would expect to the
effects of a shock on US growth.
The Chinese’s retaliation measures have a strong impact on soybean.
The US price of soybean has dropped dramatically while at the same time its price in Brazil is surging.
Brazil which is already the main soybeans’ exporter will take advantage of the current mayhem between the US and China How a crop used in hog rations and cooking oil got caught up in a huge trade war — Read here www.bloomberg.com/graphics/2018-soybean-tariff/
Interesting remark from Bloomberg @economics. After Chinese retaliation measures, Trump has decided to extend tariffs to USD 200bn of Chinese imports in the US. What will be the Chinese reaction as US imports in China have not this level. The trade war will damage growth for sure
The world balance is changing under the influence of China as it seeks to establish a different path for globalization. America is trying to stage a response at Davos with the White House realizing that America needs its partners in order to be great again. Meanwhile, French growth is running into physical obstacles: the 2% trend is a peak, at least in the short term.
. . .
We saw a surprising development in Davos last week when the US President backtracked on world trade and his global economy model, as the White House indicated that it no longer sees the economy as a zero-sum game, contrary to its stance so far. Continue reading →
This week, the Chinese bond market has again been under selling pressure. The yield on 10-year Chinese government bonds once again flirted with the 4%, the highest in 3 years.
The Pboc (the Chinese Central Bank) intervened twice this week by injecting liquidity into the market, for a total amount of 810 billion yuan or USD 122bn , the largest injection since mid-January.
Should we worry? No. The movement began just after the end of the C.C.P congress (end of October) when the Chinese authorities signaled clearly that they would continue their fight against high leveraged finance, ie shadow banking.
This has resulted in massive sales from Chinese government bondholders notably from mutual funds that are the second largest holders of Chinese state bonds. They feared a tightening of financial conditions. China’s interest rates have been low so far because of the loose Pboc’s monetary policy. The orientation has not changed but the action of the Chinese monetary policy is now more focused.
The Pboc intervened in the market by injecting liquidity in order to reduce volatility and it will continue to intervene if necessary to correct the excesses of the financial markets.
The Chinese central bank must find an equilibrium between its deleveraging campaign and the stabilization of Chinese financial markets so as not to penalize economic activity.
Does this question the attractiveness of the Chinese bond market for international investors? and the willingness of the Chinese authorities to open their bond market?
At 4%, Chinese government bonds remain attractive compared to their counterparts in developed countries, helped by a stabilized yuan. China’s deleveraging campaign is rather a positive signal sent to international investors. China will not come back on the opening of its bond market to international investors because of the internationalization of the yuan. China’s economic activity remains sound. This is only a moment of turbulence to pass …