US President Donald Trump waves next to Chinese President Xi Jinping after attending a joint press conference at the Great Hall of the People in Beijing in November. Picture / AP
US President Donald Trump waves next to Chinese President Xi Jinping after attending a joint press conference at the Great Hall of the People in Beijing in November. Picture / AP
A potentially disastrous trade conflict between the US and China is coming to the boil this week as a series of inflammatory documents are delivered to the White House and President Donald Trump prepares to impose sanctions.
Twin inquiries by the US Commerce Department could open the way for punitive measures against Chinese steel and aluminium shipments on national security grounds, while a highly-sensitive probe into intellectual property theft and cyber-espionage will deliver its findings on Thursday (US time).
Trump met his ultra-hawkish trade strategist, Robert Lighthizer, in Florida over the weekend to finalise plans, with the North American Free Trade Agreement (NAFTA) also in jeopardy.
Global assets markets have largely discounted the threat of a serious clash between the world's two economic superpowers, instead celebrating the cyclical recovery of world shipping and deeming Trump's bark worse than his bite.
They may have misread the political runes in Washington, underestimating lag-times as the complex machinery of the US government slowly shifts direction like a turning supertanker.
Lighthizer spelt out the new strategy in stark terms recently, accusing Beijing of predatory behaviour and abusive subsidies to capture global market share.
"The sheer scale of their coordinated efforts to create national champions, to force technology transfer, and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented," he said.
"Years of talking about these problems has not worked. So, expect change, and expect action," he said, warning that the White House would use "every instrument" available for a counter-attack.
The danger is that this could backfire horribly since the Chinese leadership are in no mood to heed lectures and believe they have ample means to retaliate.
Carefully-planted stories in Beijing last week hinted that China might cut off purchases of US Treasuries if trade tensions escalate, even though the claims were officially denied.
Sanctions against Boeing and soybeans are thought to be next on the menu.
"The genie is out of the bottle and, if it were ever in doubt, China has reminded the US that it has tools to hit back," said Allan von Mehren from Danske Bank.
US President Donald Trump waves next to Chinese President Xi Jinping after attending a joint press conference at the Great Hall of the People in Beijing in November. Picture / AP
Officials in Beijing are seething after the US blocked Ant Financial's purchase of MoneyGram, and pressured AT&T into abandoning a deal to sell Huawei's Mate 10 smartphone in the US over espionage concerns.
"The warning signs that some sort of tough trade action by the Trump Administration are unmistakable. There's a group of people supporting Trump that are real hawks," said David Russel, the US assistant secretary of state for East Asia until last March.
Russel told a forum at the South China Morning Post that a key test is whether the Trump Administration goes beyond redress mechanisms under the World Trade Organisation, opting instead to use sweeping presidential powers to act unilaterally.
The White House has dusted off Section 301 of the 1974 Trade Act giving Trump licence to take "all appropriate action". This is the nuclear option in trade policy.
What is striking is that Washington has been pressing ahead with an aluminium case even though there has been no formal complaint from the US industries most affected, suggesting that the White House is spoiling for a fight.
The National Security Strategy report issued just before Christmas took the fateful step of naming China - along with Russia - as a rival that seeks to "challenge American power, influence and interests, attempting to erode American security and prosperity".
The genie is out of the bottle and, if it were ever in doubt, China has reminded the US that it has tools to hit back.
Beijing deemed it a slap in the face.
"We urge the US side to stop deliberately distorting China's strategic intentions and abandon such outdated concepts as the Cold War mentality and the zero-sum game - otherwise it will only end up harming itself as well as others," said the foreign ministry.
The trade tensions come at a delicate juncture just as the two great economies start to diverge. A blast of fiscal stimulus at the top of the cycle is pushing the US towards an overheating boom, while China is clearly slowing as fiscal spending cools and credit curbs bite deeper.
This combination is toxic for trade equilibrium. China's trade surplus with the US rose 10 per cent to a record US$276 billion ($380b) last year even before this development. It is almost certain to jump further this year as US consumers suck in imports.
China launched a massive fiscal and credit expansion in 2016 and 2017 designed to prime pump the economy before the coronation of Xi Jinping at the Communist Party Conference last autumn. What is unclear is whether it will slow gently this year, or whether a deeper downturn is coming.
Imports of crude oil, copper, and iron ore fell by 12 per cent, 7 per cent, and 11 per cent in December, beyond what can be explained by season effects. The war on pollution is leading to closures of heavy industrial plants.
China's M2 money supply growth fell to a modern-era low of 8.2 per cent in December. New credit halved to US$90b as the authorities cracked down on shadow banking and forced lenders to deleverage, squeezing the private sector.
Capital Economics says its proxy gauge of economic output - unlike the "smoothed" official figures - has dropped to a growth rate of around 5 per cent.
Yang Zhao from Nomura says the latest policy meeting of the People's Bank showed "increasing worry over rapid debt expansion and high macro leverage. Financial stability remains a top priority. We expect a continued roll-out of tightening measures in the quarters ahead", he said.
If China does slow markedly in the 2018, the global effects will catch much of the investment universe off guard. Most funds are betting on accelerating world growth led by another year of Chinese fiscal expansion, accompanied by a rising commodity cycle.
They may instead hear echoes of 2015 when China tripped badly on its local government reform and tightened too hard just as the US Federal Reserves was turning hawkish. That episode set off US$100b a month of capital flight from China. The People's Bank was forced to sell US Treasuries.
What seems certain is that a full-blown trade war between the US and China would - if allowed to happen - bring Trump's triumphant rally on Wall Street to a screeching halt.
