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To hook off the tie of trade and finance in between US & China. Is it possible?

17 Oct 2021

By Arthur Chen

The U.S. and China economies will soon be tied in again. However, the strategic materials will inevitably develop separately.

In the past few months, the Chinese government has started by stopping the IPO of Ant group, and later on put the hammer to crack down those business in e-commerce, remedial education, and real estate. The financial trap of Evergrande Real Estate has caused major harmful earthquakes in the Hong Kong, Shanghai and Shenzhen stock markets.  The Wall Street funds have been severely “cut from leeks” in the past few months. U.S. funds have suffered considerable huge losses. At the same time, the U.S. government placed high tariffs against certain Chinese commodities from Trump, suppressed Huawei's 5G equipment and prohibited the export of high-end producing equipment of chips into China. The Biden administration continues to implement this policy to be continued till present. The Sino-US trade war is still in full swing. The cold wars of economic and technological confrontation has been back. When it comes to military confrontation, it seems that the constant crisis of military exercises in the Taiwan Strait and the South China Sea is taking place every day.

 

The Trump administration proposed a policy of decoupling from the Chinese economy in 2018. From the beginning, most American companies in China have reacted coldly, especially Wall Street banks that have invested huge amounts of money in China. They still continue to invest a lot of money in the Hong Kong, Shanghai and Shenzhen stock markets and those Chinese unicorns equities, and they are also buying large-scale Chinese concept stocks in the US stock market. In fact, the policy of economic hook-off is inconsistent. In the financial market, it is still “running &dancing” as usual. However, it is true that a small number of American companies have moved their production bases from China to Southeast Asia, especially Vietnam. However, it is worth to be seen, many Chinese factories have also moved to Southeast Asia. To put it bluntly, many of these factories are low-priced products or because of the incentives of high-tariff products targeted by the United States, such as solar panels, steel products, etc., they have be forced to move to Southeast Asia. Of course, the basic reason for these Chinese and American manufacturers is that China is no longer a cheap demographic dividend country. They need to find low-wage countries to continue to maintain the competitiveness of their products. It is only sooner or later to leave China. However, after the strong implementation of the Hong Kong version of the National Security Law on July 1, 2020, this is a turning point for American manufacturers. More and more American businessmen have moved abroad. One of the important reasons is that the agitation of Chinese nationalism has caused unfriendly to the business environment of American companies. The attempt to decouple China and the United States has taken a big step forward. However, The Wall Street Investment Banks are still deeply stuck in China's attractive money game. Until Ant Financial was suspended from IPO a few months ago, they have become suffering heavily by investment losses in the US, Hong Kong, and Shanghai and Shenzhen stock markets as well as the equities devalued from Chinese unicorns. It seems the Wall Street has begun to be pragmatic about the idea of ​​hook-off and has begun to recoil. Financial giant Soros is a strong representative of them, but BlackRock Investment has reversed its investment to Chinese embrace. BlackRock believes that the Chinese government is now opening the door to the overseas financial industry as never before. It is the time to deepen the cultivation in China and enjoy a more open financial pie than before. The practice shows polarization. Some scholars say it is "selective decoupling." That is to say, American businessmen decide whether to stay in China -- a large consumer market with a population of 1.4 billion, from the perspective of their most advantageous position. For American businessmen focusing on China's domestic demand, of course they are reluctant to leave off this big pie. However, the semiconductor-related production equipment industry had to withdraw from the Chinese market because of the conflicts between China and the United States in technology strategies.

 

After taking office, the Biden administration made the control of the pandemic in the United States as its top priority, but at the same time it also launched a strategy of liaising with European and Asian countries to form a diplomatic encirclement. It seems to be tit-for-tat with China everywhere. However, the Biden administration is clearly moving towards "Re-coupling" against the direction of decoupling from the Chinese economy. It is said that the high tariffs left over from the Trump era should also be changed and reduced. It obviously showed up from the United States and China jointly reaching a consensus on global carbon reduction, to U.S. Trade Representative Katherine Tai arranging to return to the trade negotiation process, it has been revealed that both the United States and China have a strong desire to re-hook economically. China, the world's factory, needs the United States, the world's largest consumer market, and the US market needs high-quality and inexpensive Chinese products. In particular scenario, due to the coal shortage and electricity ration policy in China at the end of September, factories have been unable to produce goods for two weeks. According to the announcement of the local governments in China, the industrial electricity curtailment measures may be lasting to the end of this year. The sudden freeze of the production in supply side shall be undoubtedly affect to the American public that has been unable to make up for the merchandises caused by shipping congestion. What is more terrifying is that it will further push up inflation. The inflation rate in the United States has exceeded 5% ( 5.6% in Sep ) for five consecutive months. China has reduced its production of goods, and naturally, prices will continue to rise in the United States. If the Federal Reserve wants to control inflation, it has to reduce debt purchases and raise interest rates to reduce domestic demand and guide the market toward deflation. The inflation caused by the supply side and the deflation on the demand side are the perfect storm of “stagflation”. The re-coupling of the United States and China to the economy and the substantial reduction of tariffs by the United States can indeed reduce inflationary growth pressures. It seems that the US-China economic “hook-off” will soon be wiped out.

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