China: Signs point to storm ahead in trade conflict with US

• China – Xi to become lifetime sovereign?

• China – signs point to storm ahead in trade conflict with US

Chinese National People's Congress paves path for further terms for President Xi

The Chinese National People's Congress came to an end this week. As expected, President Xi Jinping may move up to become lifetime sovereign by Chinas National People's Congress removing the restriction of a maximum of two terms. Not unexpectedly, this step is being accompanied by increased surveillance (establishment of a national supervisory commission). From an economic point of view, the statements by Premier Li Keqiang, who held out the prospect of a slightly slower economic growth rate of +6.5% for 2018, were important.

We are increasingly skeptical about the long-term economic future of China. Since the economic rise of China (which began in the early 1980s) took place in a political phase of deliberate power sharing in connection with a rise of individual freedom, we are increasingly skeptical towards the long-term economic development of China in this changed political environment. The restriction of personal freedoms and increasing surveillance (key word: "Social Credit System") are, especially with regard to China's own history, not a good basis for rising prosperity, which is, above all, reliant on active and free citizens. In this context, announcements from the previous year must be viewed critically, according to which internal commissions of the Communist Party are increasingly asserting their influence on companies with foreign participation.

At least the newly appointed central bank governor, Yi Gang, and the new deputy head of government, Liu He – responsible for finance and economics – provide some hope due to their previous backgrounds. Both are economists who studied in the US and both are considered to be reform-oriented. However, it remains to be seen whether they will succeed in making their voices heard by Xi Jinping. Currently, China's economy is developing in line with expectations. The GDP indicator of Bloomberg allows us to expect a GDP growth rate close to 7% for 1Q18. The currency of China, the renminbi, further firms against the USD, an indication of ongoing capital inflows to China. In our view, this should support the immediate growth prospects of China, which should also further benefit Europe's foreign trade.

China – Trade conflict with US poses threat to short-term growth outlook

This week president Trump announced a comprehensive package of sanctions against China. Between China and the US, a conflict with regards to the lack of protection of intellectual property rights has already been smoldering for quite some time. The Trump administration wants to exert pressure on China via punitive tariffs as well as other measures (restriction of Chinese investments in the US seem to be an additional option). According to media reports, China's Premier Li Keqiang has already promised better protection of intellectual property rights. Thus, it seems as if the threats from the US have already led to a response. Nevertheless, the tone between China and the US will roughen.

Provided that the volume of Chinese exports hit by the sanctions does not rise above USD 60bn, they pose, in our view, only a very low threat to China's economic outlook. The threat would rise if the sanctions were to be answered with countermeasures and further escalation. Beijing has already countered the attack and announced punitive tariffs on 128 different product categories from the US worth around USD 3bn. Furthermore, Beijing enacted legal steps via the WTO against the measures taken by Washington. This relatively moderate response from China indicates that there is still hope for a reasonable solution to the conflict.

 

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