As China’s top leaders huddled on their annual summer retreat on August 3, US President Donald Trump loomed large over their deliberations.
Just two days earlier, Trump administration officials had said they were considering taxing Chinese exports worth $200bn at 25 per cent — compared to a previously announced tariff of 10 per cent. The world’s two largest economies had formally started trade hostilities in July, when they slapped punitive duties on $34bn of each other’s exports.
Chinese officials hoped their unwanted trade war with the US would pause there, at least for the summer. “Everyone has been surprised by Trump,” said one Chinese economist who is close to Beijing policymakers. “Most Chinese officials assumed that Trump was just trying to push the boundary but would eventually back off.”
Mr Trump has instead pressed ahead with his efforts to turn up the heat on Chinese President Xi Jinping. Next week, the US will impose already announced tariffs on another $16bn in Chinese exports, which will be matched by Beijing.
In the face of this unprecedented economic and geopolitical challenge, Mr Xi’s administration has sought to stabilise China’s domestic economy, currency and stock markets, while also appealing to people’s patriotism.
In its most recent meeting on July 31, the Chinese Communist party’s politburo — comprising its 25 most senior officials — called for “stable employment, stable finance, stable foreign trade, stable foreign investment, stable investment and stable expectation”.
Days later at Beidaihe, a seaside resort near the Chinese capital, politburo member Chen Xi urged a group of the country’s leading scientists to “keep a patriotic heart” and help China “independently control core technologies”.
During the two months before the Politburo’s appeal for economic stability, the renminbi had fallen more than 6 per cent against the dollar to a low of 6.85 — a huge move for the carefully controlled currency. Since the Politburo’s statement, the renminbi has traded sideways.
The country’s stock markets, which Mr Trump gleefully noted on August 4 had dropped more than 20 per cent this year, have gained ground this week.
This week, China’s central bank guided interbank lending rates to their lowest levels since the country’s stock markets crashed three years ago. It also reimposed rules that make it more expensive to bet against the renminbi.
Chinese officials must strike a balance between their determination to reduce financial risks and ensuring that economic growth does not slow too sharply in the face of Mr Trump’s onslaught. “The authorities have not given up on [reducing] risk, but they also want to support the real economy,” said Andrew Polk at Trivium, a Beijing consultancy. “The two may not be compatible.”
Keeping the currency at less than Rmb7 to the dollar, which one prominent central bank adviser this week called an important “psychological barrier”, could prove expensive.
“In an environment where growth continues slowing down and the China-US relationship doesn’t improve, holding at seven would just raise a lot of other issues,” said one currency strategist. “You would have to burn reserves, tighten capital controls and tighten monetary conditions, which runs against your current monetary policy.”
In its quest for stability on all fronts, the Chinese government has had to calibrate its response to Mr Trump’s escalating tariff threats. “Beijing is de-emphasising ‘retaliation equal in intensity and scale’ because that is difficult to execute without unacceptable pain to the Chinese economy,” said Yanmei Xie, a China political analyst at Gavekal Dragonomics.
When Mr Trump’s second round of tariffs takes effect on August 23, only 10 per cent of China’s exports to the US — or 2.2 per cent of its total exports — will have been affected. As the official China Daily newspaper said in a commentary this week, “the two countries’ trade conflict is merely push and shove at the moment”.
But if the Trump administration follows through on its most recent threat against an additional $200bn worth of Chinese exports, bringing the total value of affected goods to $250bn, about half of China’s exports to its largest trading partner — and 11 per cent of its total exports — will be taxed at 25 per cent. Last year China exported goods worth $505bn to the US.
In contrast China, which imported US goods worth $130bn last year, has already taxed — or threatened to tax — US exports worth $110bn.
In its response to Mr Trump’s latest 25 per cent tariff threat, China’s commerce ministry said it would respond with duties ranging between five and 25 per cent. Products that are harder to source from countries other than the US will be taxed at lower rates. Chinese officials have, for now, have exempted US oil exports from retaliation.
Having hoped in vain for the best, they are also now girding themselves for the worst. “Some people are loath to see a lion awaken or a dragon take off, feeling uncomfortable with a population of more than 1.3bn living a better life,” the Communist party’s flagship newspaper, People’s Daily, said in a commentary on Thursday. “We will stand firm.”