This practice of extreme pressure and blackmail deviates from the consensus reached by both parties on many occasions and is disappointing for the international community.
The United States has initiated a trade war that violates market laws and is not in accordance with current global development trends.
That’s from China’s Commerce Ministry and let me tell you something: they have had it with Donald Trump.
Monday evening’s announcement that the USTR has been instructed to look for an additional $200 billion worth of Chinese goods to subject to tariffs looks like it may have been a bridge too far for Xi.
“If the U.S. loses its senses and publishes such a list, China will have to take comprehensive quantitative and qualitative measures,” the Commerce Ministry added, suggesting that Trump is about to push this beyond retaliatory levies and into the realm of things like currency depreciation and UST selling. To be clear, we’re probably not there yet (China has other means of pushing back once they run out of goods to tax before they have to go the so-called “nuclear route”), but we’re getting there.
The problem for U.S. consumers here is clear. This is going to end up pushing up prices, because past a certain point, there’s no way to avoid subjecting consumer goods to the tariffs. Goldman went over this at length earlier this year when discussing Trump’s idea to push the envelope beyond $50 billion to $100 billion – last night’s order would appear to push that envelope even further. Recall this from Goldman:
The next list looks likely to be more consumer-focused. The first list of $50 billion in goods was concentrated to a surprising extent on capital goods and included only a few important categories of consumer goods, like flat-screen TVs. We expect the next list to have a greater share of consumer products. If so, this would increase the impact on measured consumer price inflation compared with the first list.
That was written on April 18 and there have been changes to the original list since then and we still don’t know definitely what would be on any new lists, but you get the idea.
As noted on Monday evening, Trump’s latest threat came as China and Hong Kong reopened after a holiday, which meant that shares would need to not only catch down to Monday’s reality, but also incorporate this new information. Sure enough, stocks plunged.
The Shanghai Composite Index fell a dastardly 3.8%, heading to the lowest since June 27, 2016. This was the second worst day since February 2016 when global markets were in a tailspin:
That’s the first close below 3,000 since September 2016. The poor ChiNext dove a truly egregious 5.8% to its lowest since January 2015:
All of this just further underscores the divide between global stocks and the onshore market since 2016:
“It is truly a bloodbath,” CMC’s Margaret Yang told Bloomberg, adding that “things may turn more sour should China retaliate.”
Right. And look, China is probably going to have to resort to an RRR cut soon. Their decision to hold off on further OMO hikes in the wake of last week’s hawkish Fed confirmed that they’re worried about softening data and the possibility that a trade war could exacerbate the situation. Here’s Goldman:
Recent credit and activity data surprised to the downside, and with at least the partial materialization of trade risks we now see scope for monetary policy to lean incrementally more dovish. We are therefore lowering our forecast for the 7-day repo rate again, from 3% to 2.75% at year-end. We also expect the PBOC to cut the reserve requirement ratio further. While the timing of RRR cuts will be driven not only by data but also by market developments, our baseline forecast is now for a 50bp reduction in RRR per quarter for the rest of the year. Tariffs could conceivably push policymakers to lean towards a slightly weaker CNY, other things equal; although we are not changing our forecasts at this time, we will be watching the daily USDCNY fixings (and implied “countercyclical factor”) this week with interest.
“China will probably have to manage a slow pace of yuan depreciation versus the dollar amid escalating risks of a trade war with the U.S. and strength in the greenback,” Standard Chartered Bank wrote on Tuesday.
You get the idea.
Hong Kong shares were similarly crushed, with the Hang Seng sliding 2.8% in what looks like its third worst day of the year:
Steel yourself. Or wait, find another adage. Because Trump can tax your “steel”.