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AB 2000 studies

Alain Boublil Blog


Beijing-Washington : the long march

In Paris, commentators are discussing about the order of arrival of candidate lists to the European elections. In Brussels, it is questioned about how the institutions will function with the fragmentation of the political forces which are assigned to have seats; But in Beijing as in Washington, they are thinking about the next possible steps in the rising tensions between the two countries. The communication mode of their leaders is reflecting their cultural differences. The American president is alternating avenging tweets denouncing Chinese Authorities attitude with conciliatory remarks explaining that, at the end, they will find a good agreement. Following that, if they reach it, he will take advantage with the success and he will explain that he forecasted it and, in the opposite case, he will be able to reject the responsibility on Beijing. From the Chinese side, they stay calm, they communicate the least possible but they replicate through hitting back and in avoiding going beyond the point of no return. The increasing number of confronting issues between the two countries will make an agreement conclusion long to obtain.

The first one was about trade with the instauration of tax duties. Financial markets, worried at the beginning, seem to have integrated the point that consequences for companies will be less heavy as initially expected. Exchanges between the two countries represent less than 5% of the world trade. If a high level of tax is instituted and upheld, it will be the American consumers who will pay the bill through a price increase of the targeted products. Big companies supply chains are so complex and integrated that they will think before re-localizing inside the U.S. the taxed activities. It will be much easier to pass the costs on their customers. Atop of that, as the Adidas and Nike joined step asking Donald Trump to renounce to the instauration of tax duties shows it, companies belonging to the same sector, have adopted the same supply strategies. They will avoid launching a price war. So the American administration along with financial markets seem to have understood that the consequences of a failure of current discussions will be less serious than initially expected but that the United States will be more penalized than China. To exit from this situation, it will be enough to find, on some limited issues, concessions by Beijing, in order to put an end to these trade tensions without anybody losing his face.

The second issue is about technological competition. American assaults against Huawei constitute a first episode. The Chinese company is impossible to get away for the putting in activity of 5G networks which will allow transfer quicker and with a larger volume data and this is worrying. States, due to the presence of Chinese components in networks are dreading not being able to guarantee the secrecy of their exchanges and, even worse, and they are afraid to be the target of cyber attacks. The decision to forbid to American companies and to foreign companies having in their products more than 25% of American components to deliver them to Huawei will weaken the Chinese company which imports a lot of semi-conductors. But that will incite China to become self-sufficient in the long term and, inside the worst scenario, to institute retaliatory measures. The country has a dominant position in rare earths. President Xi Jinping visit to a mine where they are extracted, is not a coincidence. Export restrictions would hurt the whole sector. It is why the American Association of semi-conductors producers has put the White House on guard about that. If the trade war will mainly hurt consumers, the technological war has a lot of chance to weaken American companies and to encourage China to develop its own tools. The industrial power of the country would be increased in the future, which is the opposite of the wanted objective.

After the confrontations about trade and technology, finance, through exchange rates and the financing of American deficits, may become a new ground for tensions. Ten years ago, China has decided to transform its currency, the Yuan, to make it an international one which would play, for the Chinese economy, the same role the dollar plays for American economy. Several steps in this process have been cleared: progressive removal of the different exchange controls, liberalization and opening of Chinese financial markets, management of the dollar-Yuan parity. This march has not been a bed of roses. During 2015 summer, a wrong interpretation of the Chinese Central Bank decisions has been near to provoke a major market crash. The lessons have been learnt and the Chinese currency has been included in the IMF currencies reserve basket in 2016, which has constituted the official recognition of the country will to make its currency an international one. This ambition has been reinforced by the admission that the dollar status was giving a large extraterritorial power to the American justice and by the trade and technological war context which exists today. Could a third part be opened in the confrontation between the two countries ?

To offset a part of the consequences of the tax duties affecting its exports, Beijing could generate a Yuan fall. The Chinese currency has been rather stable since the beginning of the year, oscillating between 6.70 and 6.80 Yuan for one dollar. For a week, along with the rebound of tensions, it fell back to 6.90 and is approaching the 7.0 level, considered as symbolic by exchanges markets. It is all the same unlikely the fall become more pronounced because a strong country, and such is the ambition of China, could not have a weak currency. The other possible arm in an eventual monetary war would be the progressive sale of the American Treasury Bonds, accumulated for twenty years by China central bank. The country has over passed Japan as the biggest creditor with 1 100 billion dollars.

For several months, the level of these assets is diminishing. So, in March, net sales for an amount of 20 billion dollars have been registered. Facing the growing internal and external deficits of the U.S., a China withdrawal from this market would unavoidably provoke a tension on American interest rates. This issue is especially sensitive in Washington where Donald Trump publicly worried about the Federal Reserve inclinations in this field. The argument generally put forward against such an eventuality is that China, which is the biggest creditor of the U.S., would be the first to be hurt in putting its debtor in difficulties. This point is not convincing because if these sales are very progressive and well managed, they will allow the country to support its own currency on the exchanges markets and to give an answer to the eventual accusations regarding the management of its currency. Through the diversification of its reserves and the acquisition of gold or of assets denominated in euro, Beijing would contribute to the reduction of the role of the dollar in international transactions and would definitely receive the support of many countries.

In visiting the museum dedicated to the Long March, an episode of the Chinese civil war during the Thirties which lead to the victory of the country against Japan and the domination of the Communist Party, the Chinese president has wanted to show that, as a good reader of Lao-Tseu and Sun-Tzi, he knew the way and he had time to solve the current conflicts. A lasting showdown was not scaring him. He has an advantage on Donald Trump who, himself, must run in front of voters in eighteen months from now.                


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