By DAR Wong

In early October, WTI Crude prices traded at US$76 /barrel and stirred up the optimism among traders that market might break above US$80 /barrel in due time. In much dismay, demand wound down right after the US ratcheted up trade war rhetoric against China and crude prices dived down to US$65 /barrel on final day of October!

When trade conflict erupted between the world’s two largest economy, demand for energy and commodities would dwindle. On the other hand, the Dollar Index (USDX) has climbed to 97.00 benchmark, challenging the 3-month high. Stock markets dive and funds flowed back to Gold as investors seek haven.

The US Government has threatened to impose another round of tariff on Chinese import worth US$267 billion before the year ends, unless the Chinese leaders are willing to talk on the table. As G20 meeting will be held in Argentina during early December, President Trump aims to resolve the trade friction with leader Xi of China by assuring that a mutual negotiation is ideal to iron out differences.

For past 6 months, many people have been asking who the winner in this trade war would be. Strictly speaking, while there is no clear winner, China will definitely face a slowdown in growth if the government cave to Trump’s demands.

Over the past 2 decades, US manufacturers made a huge fortune by making China as their backyard factory for garments, toys and electronics. On the flip side, China has earned huge trade revenues for many years. On macro-economy, the Chinese Government has re-invested huge monies in US Treasury Bonds. Until April, the accumulated holdings estimated to be around US$1.2 trillion, ranking the biggest creditor of US.

Currently, the US proposes China to cut its trade surplus by US$100 billion every year. In doing that, China has to appreciate its value of the Renminbi against the US Dollar in order to increase the capacity to buy more American goods. However, this would greatly jeopardise the Chinese cost of living. The impact will also affect the flow of Foreign Direct Investments as investors see higher producer costs. Eventually, this would lead to higher unemployment.

On technology, China has produced the world’s fastest supercomputers. The technology in mobile networks is also ranked amongst the best in the world but pricing costs are conversely amongst the lowest. In September, Huawei unveiled its nanometer mobile chipset that is the first and fastest in the world with 5G support. Frankly speaking, most of the hi-tech Chinese companies that have poured hundreds of millions into Research & Development are either state enterprises or Quasi-government entities.

In the proposed treaty over resolving trade war, US demands the Chinese Government to stop state subsidies and funding for Hi-tech developments to level the playing field. If the Chinese concedes, they are effectively allowing themselves to be “handcuffed” from competing in the global markets for selling their newly modernised products!

Another demand from the U.S. Government is to liberalize the Chinese financial market and the e-commerce marketplace. By statistics, the Gross Merchandise Volume (GMV) of China’s online shopping market charted Rmb6.1 trillion (est. US$880 billion) as of 2017 and is projected to hit Rmb7.5 trillion (est. US$1.1 trillion) by end-2018.

Given that the Chinese makes up the most online transactions in the world, opening up the e-commerce market means that many American online merchants or foreign sellers will be able to reap rewards in China while paying very little taxes. In addition, the opening-up of financial markets in China finally allow foreign market operators target Chinese investors.

Ultimately, China could fall prey to the classic case of Japan in the late 1980s. Back then, the US forced the Japanese Government to prop up the Japanese Yen to make up the burgeoning US trade deficit. Soon after, a rapid collapse in property demand plunged the Japanese economy into a recession that lasted for more than two decades!

Looking at the current situation, the Chinese Government will need to exercise their wisdom in wading out of this plight. This is a very typical power struggle between the 2 giant economies which only one could win the trophy. If both parties could not reconcile for a peaceful solution, it could become the reason that plunge the global economy into the next great recession. Thereafter, whoever is the first to recover will be the ultimate leader in the global economy!

DAR Wong is a professional in the global financial market based in Singapore. The opinion is solely at his own. He can be reached at dar@bainpm.com   

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