China And U.S. Inch Closer To Cold War

China and the U.S. are inching closer to a Cold War like nothing we have seen between these two key trade partners

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Vice President Mike Pence launched a cannonball across the bow of China’s ship of state last week. He said the country was meddling in the midterm elections. They want President Trump gone in an impeachment. If China was meddling, it sets the table for Washington to sanction them under two new executive orders signed by Trump and the August 2017 Countering America’s Adversaries Through Sanctions Act. The politics between Beijing and Washington are not improving.

Top diplomats on both sides said Secretary of State Mike Pompeo was getting nowhere with this Chinese counterparts. He said they were “fundamental disagreements” over a range of issues from trade to China’s domestic and foreign policies. Pompeo arrived in Beijing yesterday. Following a weeklong holiday in China, mainland equities fell by as much as 4.7% in some Shanghai stock indexes. On Monday, the main China ETFs were all down by a modest 1% to 2%. The China A-shares (ASHR) are down over 22% year-to-date, a sorry state of affairs for dozens of U.S. mutual funds benchmarked to the MSCI Emerging Markets Index and who have been mandated to reallocate a portion of portfolio funds to mainland China equities now that they are part of the MSCI EM. It’s been a losing bet.

Chinese Foreign Minister Wang Yi accused Washington of escalating the trade conflict, interfering with Taiwan, and leveling false accusations against China regarding election interference and inserting chips in Apple products in order to spy on U.S. companies.

“These actions [have hurt] our mutual trust, and cast a shadow over the future of China-U.S. relations," he was quoted saying yesterday by the South China Morning Post. “The charges you are leveling against us go against the interests of the people of both countries,” Wang told Pompeo.

China’s vice premier Liu He was supposed to come to Washington on Monday, but that was canceled for some reason. The two sides just cannot get their acts together. They are not only not on the same page on trade matters, but they are also not even in the same book.

Beijing recently released a 36,000-word paper on representing the official view on U.S. trade frictions, published on Xinhua News Agency on Monday. They accused Washington of seeking “economic hegemony” and “intimidating” other countries through economic measures including tariffs. It has finally come to pass that China views Trump’s policies against it as economic warfare.

China policymakers are busy blocking tackle for Xi Jinping, a man whom many people believe has miscalculated Trump’s trade strategy. Finance Minister Liu Kun said that some provinces are feeling the impact of the trade war. He said China is equipped to handle it and would cut around $189 billion in taxes over the course of this year. He did not announce any new tax cuts.

Macquarie Capital economists Larry Hu and Irene Wu wrote in a recent note that Chinese policymakers “remain reactive, not proactive in conducting stimulus” and add that Beijing’s policy loosening “is still way behind the curve.” Someone must have been listening to them at the central bank. They promised to inject $110 billion into the economy. Some of that could go to help prop up China's retail investors in the A-shares.

For now, China's most outspoken ally is Russia, a country weakened by U.S. and European sanctions.

In another jab to Chinese leaders, Business 20, an international business advisory group affiliated with the Group of 20, blasted Beijing over the role of state-owned enterprises in the world economy. Forbes Global 2000 has Chinese banks among the top 10 corporations in the world. Investors and academics have argued for years that China distorts the global economy because on one side you have free market capitalism as the No. 1 economy and on the other, you have a largely closed market Communist economy as the world’s No. 2. Something’s got to give.

Business 20 issued a note last week calling for an end to state-related competitive distortions, but the wording met with strong objections from the China Council for the Promotion of International Trade, a semigovernmental trade advocacy group. They insisted that the B20 proposal should not be submitted to G20 leaders at the Argentina meetup in November. The China group demanded revisions to the sections covering state-owned enterprises and their role in global markets.

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