China Doesn’t Need to Sell US Treasury Assets to Fight a Trade War – China is Simply Divesting From The US by Omission

It is true that one of China’s many long-term tools in fighting a protracted trade war with the United Sates is the fact that China owns $1.18 trillion worth of US public debt – more than any other single foreign power. China retains a medium-term strategy of gradually selling of US debt while more importantly in the longer term, China will de-facto de-peg the Yuan from the US Dollar, thus allowing the Chinese currency to float on the open market. As a result of this, in the very long term, the Yuan’s value will likely skyrocket thus improving Chinese purchasing power, but with the added detriment of making Chinese exports more expensive in Dollar-for-Dollar terms. However, even this later apparent disadvantage is something that can be easily managed.

After the 1985 Plaza Accords, the value of the Japanese Yen continued to rise against the US Dollar, Japan resorted to a trade strategy of selling goods at a Dollar-for-Dollar loss, while making up individual losses on a strategy which prioritised high volume sales over the value of individual transactions. Even when the Yuan floats, there is little danger of the Japan scenario, which nevertheless resulted in Japan’s economy remaining strong however stagnant. Unlike Japan which continues to maintain strict controls on both the inflow of goods and capital into the country, China is opening up its domestic markets as China seeks to become the next United States rather than the next Japan in terms of geo-economic dominance.

Crucially however, the Chinese market socialist system retains restrictions on unregulated capital outflow and domestic business strategies which will prevent the duel phenomena of a domestic money drain as well as that of limited resources for re-investing in domestic infrastructure, social programmes and industrial/technological innovation. Thus, as sure as China seeks to avoid the pitfalls of Japans strong but stale and closed marketplace, China also has a mechanism to avoid the pitfalls of a more open market. Because of this, China has found the perfect balance between the two strongest economies of the late 20th century in order to fashion a new moderately prosperous society fit for the 21st century.

The aforementioned long term strategy of China’s monetary policy will likely not be effected by Donald Trump’s tariff war in terms of the general timetable that Chinese policy makers have drafted long before Trump even declared his candidacy. Because of this, China is not going to strike back at the US through dumping US bonds, let alone through changing its monetary model. The reason for this is that in addition to counter-tariffs on US imports which will take a bite out of US exporters at a time when the rest of the world is seeing their goods and capital welcomed in the Chinese market, China has another far more direct short term strategy to bring Washington back to the table.

While Donald Trump has frequently complained about the dependence of US businesses and consumers on Chinese imports, what he has neglected to account for are the billions of Dollars in Chinese investment which annually pour into the United States. China continues to invest in the US property market, while countless major development initiatives of the last decade in America’s biggest cities have been financed entirely from China.

While this remains the case, the numbers tell a different side of the story. In 2017 Chinese investments in the US totalled $29.7. The year prior, when Barack Obama was still President, Chinese investments totalled $46.5. Thus far in 2018, Chinese investments in the US have only been $1.8 and it is not likely that they will exponentially increase through the remainder of the year to come anywhere near 2017 levels.

 

 

Therefore, as the US becomes more protectionist in its trade dealing with Beijing, Chinese investors are failing to invest in the US market. This divestment trend not only predates the modest rally in the value of the US Dollar that has been witnessed in recent months, but it is directly linked to China’s overall “soft” yet meaningful retaliation strategy against a protectionist US. Furthermore, it should be noted that rather than a traditional divestment (meaning withdrawal) of capital from US markets, China is merely softly divesting by omission – in this case by specifically omitting to invest its traditionally very large sums of capital on US soil. The current phenomenon could therefore be viewed as a benign divestment but one whose impact is no less apparent than an active withdrawal of assets.

Since most major deals that Chinese private sector investors do abroad must be first sanctioned by the Chinese authorities, Beijing is de-facto dis-incentivising its home grown billionaires from investing in the US market. The result will be that domestic American investors will see a devaluation in their own assets due to a decreased demand stemming from Chinese divestment by omission. Furthermore, the jobs and wealth generated from Chinese investment will also not be so easily replaced as some in the US might think. China is the major player in terms of international investment and only a select handful of nations can compete with the kinds of capital that China was erstwhile willing to invest in the large US market.

This is not to say that China will crash the US economy, but it does mean that those in Donald Trump’s own field of property development will suffer from a lack of demand resulting from Chinese divestment by omission. It would behove the US Treasury Department to understand that one’s overall trading relationship with a foreign power is not only measured by the amount of goods flowing in and out but by the overall added value that a bilateral trading partnership brings to the country.

 

 

While Americans are buying finished industrial goods from China, Chinese investors are buying hotels, skyscrapers, shopping centres and concert venues in the United States. As such they are paying the applicable taxes regarding these transactions into the US Treasury, while generating local wealth for the Americans employed in the building, operation and servicing of these Chinese owned facilities – including the famous Chinese Theatre in Hollywood which in a clear reflection of changing global realities, is now owned by the Chinese company TCL which poured millions into upgrading the cinema’s technological capabilities after purchasing the previously neglected venue.

While Trump continues to view America’s relationship with China in terms of a zero-sum game, in reality he is throwing away a win-win relationship that had potential to grow as China is now welcoming foreign investors from around the world into China’s vast domestic market. But because of tariffs, US investors and exporters in China are now losing out, all the while the American market has lost a great deal of Chinese capital inflow due to Washington’s current drive towards protectionism.

As China reserves its right to execute more elaborate strategies of monetary policy alteration as a means of changing the dynamic between the two countries, in the short term, China is resorting to something far simpler. If Trump doesn’t want Americans to buy Chinese televisions and smart-phones, Chinese investors won’t pump money into reviving America’s ageing big cities.

 

 

Since Trump is fond of saying that China and others have “screwed” the US, when it comes to eliciting strong reactions from a Chinese government and private sector who never wanted a trade war to begin with, one might be surprised at just who is actually “screwing” whom.

 


 

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