Thursday, May 23, 2019

The situation of U.S.-China trade conflict has further deteriorated, and the two countries have continued to impose tariffs on each other. This has greatly increased the uncertainty of the future. In particular, the U.S. government has just recently banned American corporations from doing business with Huawei. This is clearly an act of "encirclement and suppression" by the United States on a Chinese technology company.

The situation in the past few days has taken a turn for the worse. Firstly, Google has suspended business with Huawei that requires the transfer of hardware, software and technical services except those publicly available via open source licensing. Since then, Qualcomm, Intel, Broadcom and other semiconductor giants also announced that they will cease cooperation with Huawei. Moreover, the U.S. ban on Huawei also includes restriction on products made outside of the U.S., though the products can generally be supplied without the permission if the percentage of U.S.-derived parts and software does not exceed 25% by market value. Affected by these stipulations, Germany's Infineon also said it will stop its cooperation with Huawei.

The U.S.' suppressive measures against Huawei have to do with the trade negotiations, and this is its first round of assault in the trade conflict. This action also increased the uncertainty of U.S.-China trade. Sources quoted by CNBC stated that that the U.S.-China trade negotiations are now at a standstill. Despite the United States saying that it will soon send a delegation to Beijing for negotiation, so far it is not known when the next round of said negotiation will be held, nor has the content to be negotiated been finalized.

Given the two countries have not officially announced a breakdown of the negotiations, how then will the situation of U.S.-China trade conflict continue to develop? On the basis of tracking and researching the development of events, Anbound's scholars have made the following assessments:

First, there will be disputes followed by negotiations between the United States and China. The possibility of further talks between the two countries is relatively high. Judging from a series of recent developments, we believe that the two countries do not have a systematic response to the current chaotic situation. Both sides appear to be in a constant cycle of disputing and subsequently engaging in negotiations. It is possible that the both countries might reach an agreement after experiencing negative effects arising from the disputes.

Second, although both sides have insufficient systematic responses, but judging from the actions taken by the United States and taking into account the advantages and disadvantages, as well as the resources of the two sides, the United States appears to be taking measures against China in three aspects, namely tariffs, 5G and financial sanctions. The first is of course to impose tariffs. The second is the United States' measures against Huawei with its restrictions on 5G. If the United States can delay the deployment of Huawei's 5G facilities globally, then it would be achieving one of its goals. The third is by imposing financial sanctions on China, including sanctioning Chinese banks and taking measures against the Chinese financial markets.

Third, the focus of the U.S.-China economic dispute always returns to the exchange rate. This will be the most direct blow to China. This would cost the least, yet its impact can be quite substantial. It will not only affect the depreciation of the RMB exchange rate, but also bring about asset depreciation and increase the pressure of capital outflow in China.

Fourth, the U.S.-China trade conflict will cause losses to both countries. Because of the differences in economic strength and economic structure between the two, with China being production-oriented China while the U.S. consumer-oriented, China stands to suffers more losses than the United States. Comparing and estimating the losses between China and the United States in the trade conflict, the loss of the United States will probably account for one-third of the total loss, while the loss of China will be two-thirds.

Fifth, with the deterioration of the U.S.-China trade conflict, the debt of U.S. will be an unresolved risk to the country. This not only because of the Chinese factors, but also how other countries view the U.S.' credit. A United States that has waged a full-scale trade conflict with China and is preparing to confront with the EU and Japan will have reduced credibility because it is undermining the rules that govern the global markets. Once the confidence of the market in the United States drops to a certain level, the risk levels of U.S. debt credit will increase.

Sixth, the U.S.-China trade conflict is a bad thing for China, but we should not discount the fact that China has a huge domestic market. Hence, it is almost impossible for the United States to fully suppress the Chinese economy. With the resilience and adjustive ability of the Chinese economy, it will be able to adapt to changes in situations under pressure and promote internal changes. There may even be an unexpected consequence, where China is being forced to become a consumer-oriented economy. If this happens, it would be more advantageous for China in the future.

Seventh, the U.S.-China trade conflict will continue to hit the Chinese stock market. If the trade conflict stretches out into the long-term, the Chinese stock market will be in a constant state of fluctuations due to uncertainty. However, the opening-up of the stock market is slightly better than leaving it to stagnate.

Lastly, given the U.S.-China trade conflict's deterioration this year, a certain impact will definitely take effect on China's economy. However, due to special means and resource reserves of the Chinese government this year, the economic situation shouldn't be too unacceptable. If China and the United States are fortunate enough to reach an agreement after negotiating, market confidence will be stabilized. The real critical period is next year, where the emergence of the effects of trade conflict coupled with the inertia of the economic downturn might lead to a sharp downward economic slope for the year.

Final analysis conclusion:

The U.S.-China trade friction is in full swing, bringing uncertainty to both the Chinese and global economies. The United States may make a move on China in trade matters, 5G and financial sectors, intensifying the risks of China's economy in the coming year.

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