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  HOME | Business & Economy (Click here for more)

Debt, Yuan or Damage to Manufacturers: China’s Possible Weapons in Trade War

BEIJING – China exerts a major influence over the economy of the United States, and so possesses a number of options to launch countermeasures after the US ban on Huawei, the latest in a series of exchanges in the ongoing trade war and the apparent breakdown in trade negotiations between the two sides.

Just when a deal seemed near, a series of disagreements led to US President Donald Trump carrying out his threat of raising tariffs on imports from China, in addition to banning Chinese telecom giant Huawei from accessing technology and markets in the US.

Beijing responded with “necessary countermeasures” in the form of tariffs, but the question remains whether China will take other steps to pressurize Trump, who has maintained that he would impose other taxes if no agreement is reached.

Many analysts have said that China’s main weapon against the US could be the amount of sovereign debt which it controls as the biggest foreign creditor of the US, holding 17.3 percent or $1.12 trillion worth of US treasury securities.

Since the 2008 financial crisis, China has been the main foreign owner of US debt, but its share of American holdings is currently at its lowest level in the last two years.

Between March 2018 – the month when Trump kicked off the Trade war – and March 2019, Beijing reduced its holdings of US debt by 5.7 percent or $67.2 billion.

Official Chinese media, such as the daily Global Times, have said that this trend could continue in order to help Beijing cut economic and political risks by diversifying its reserves – which mainly consist of US dollars – and help the national currency, the yuan.

However, Shi Yinhong, director of the Center for American Studies at the Renmin University of China, told EFE that China would not dispose of its US debt holdings as such a move would also harm Beijing.

Shi said that even though the economic interdependence between the two countries had declined considerably in recent months, a complete economic separation between the two sides would take time and require difficult adjustments in China, even if Beijing was prepared for the possibility.

Global Times warned on Thursday that if trade relations with the US continued to deteriorate, “all options are on the table.”

“If China dumps US debt, it’s possible some other countries might follow, triggering a hike in its interest rates that will greatly affect the US economy,” Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, told the Global Times.

The Chinese influence goes deeper than just the macroeconomics, which is reflected in the trade conflict’s effects on companies using technologies whose production chain passes through the Asian country, such as Apple, Intel or Qualcomm.

During the current month, the stock value of Apple has dropped 15 percent, Intel’s shares have dropped more than 12 percent and Qualcomm’s nearly 21 percent.

Although other sectors such as toys or sports equipment have also been affected, the other pieces on the chessboard are key sectors which are already being pointed out as the locations of a “technological cold war” by Chinese media, such as chip manufacturing.

Chinese President Xi Jinping, indirectly suggested the possibility of using rare earths – elements key to manufacturing semiconductors – as a move in the trade war recently, and an article published in state media warned that if Trump blocked the sale of high-end chips to China, “a large number of US chip makers would have to face bankruptcy.”

Chinese commerce ministry spokesperson Gao Feng was a bit less specific on Thursday and said it was possible that the US practice of “discrediting and suppressing” Chinese companies might cause significant damage to American companies’ customers.

Another cause for concern for the US is the trajectory of the yuan, with its value falling more than 8.5 percent compared to the US dollar since the conflict began.

Trump has claimed that the devaluation of the Chinese currency is a deliberate strategy by Beijing to make their products more attractive in the global market.

It is important to note another consequence of the dollar strengthening against yuan: it could make it difficult for big Chinese companies – especially real-estate developers – to pay off their massive debts, denominated in US dollars.

An excessively weak yuan could also lead to capital flight, a cause of concern for Beijing, which has taken measures to prevent it in recent years.

It is not in the interests of China, the second biggest economy worldwide, to get involved in a full-fledged trade war, as despite its recent attempts to redirect its economy towards internal consumption, nearly 20 percent of its GDP comes from exports of goods and services, with the US functioning as the principal client, buying around 19 percent of all exports.

The country is also facing an economic slowdown, with major international organizations expecting growth to continue in the same vein as 2018 – when it registered its lowest growth rate (6.6 percent) since 1990.

 

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