US Economists Warn Washington: Don’t Play with the Stock Market

14/05/2019

The “no deal” between US and China was a cold shower for Wall Street. US-based tech giants lost wiped out more than US$1 trillion of stock market value on Monday. What’s next?

 

If trade war effects Chinese export, is also true that the escalating US-China turmoils is the last thing that giant such as Apple or Tesla need.  After China announced it would respond to US tariff increases with additional duties on US$60 billion of American goods, Wall Street lost more than US$1 trillion of stock market value on Monday, while European shares lost 1.2 per cent and emerging-market stocks wiped out around 1.7 per cent. Donald Trump hadn’t yet understood that his stance on trade could cause serious damage to the global economy, as warned by International organizations and US economists.

 

Why Trump’s ‘get tough on China’ policy is counterproductive? Economists remind White House that China is not Mexico or Canada. The naive and protectionist american administration is wrong on different counts.

 

What Washington don’t understand is that PRC is not directly dependent by US market. China exports to the US are a substantially larger share of its GDP than vice versa, at 4.1 %, against 0.7 per cent, in 2017. PRC’s bilateral surplus was about 3.1% of its GDP, which is far down from the 10.2 % in 2006. In the worst of hypothesis, imagine that Washington imposed prohibitive tariffs on all Chinese exports. One might think the effect would be to lower China’s GDP by almost 4%. One would be wrong.

 

 

US exports to China would also fall, as Chinese retaliation bites. Furthermore, Chinese exporters could also sell their goods elsewhere, as recent data had shown. In the end, the fall in China’s GDP in such a trade war would be less than 2 per cent, other things equal. This is about four month’s growth. Moreover, it would not be hard for China to offset such a loss of demand. Meanwhile, the overall US trade balance would probably not change a wit, since that is determined by domestic supply and demand.

 

But Trump’s administration has made other, even worse, mistake:  the stock market powers US domestic economy to a much greater extent than elsewhere.

 

US and PRC economy systems, have deep differences. If Chinese one is much more focused on real economy (only 3500 companies are listed in Shanghai board), for every consummate financial player is obvious that Wall Street is the beating heart of world largest economy. And US stock-exchange ups and down is a sword of Damocles that is a serious threat to global economy. Because still nowadays, where goes Wall Streets, there too, go other stock markets, as we noticed last week and last Monday.

Despite american economy’s good performances, debt has been rising reached US$243 trillion — more than twice the annual global GDP, according to the Institute of International Finance. Will China use its US$1.2 trillion of US debt as firepower to fight the trade war? Yes! And, maybe, already started.

 

 

Last T-bond sales performance (7-8 May) was the worse since 2016. Not only China didn’t participate, but all main countries where China has, now, deep political influence boycotted or reduce the amount of offers during last 7 and 8 May t-bond selling section.

Up until 2016, the People’s Bank of China was buying US dollars from exporters while selling yuan to them to prevent the Chinese currency’s excessive appreciation. Most of China’s US$3.1 trillion in foreign exchange reserves, the world’s largest, is parked with US Treasury securities, which have a safe haven status. But, US$1.2 trillion is by no means a small amount, it accounts for just around 5 percent of the US’ national debt. Plus american new economic boom is a a stock-market-driven economic growth.

As reported by SCMP, before last week’s plunge, US equities were valued at around US$40 trillion (the NYSE plus Nasdaq) — roughly double the size of the world’s largest economy. In contrast, China’s ratio of market to gross domestic product (GDP) is around 70 per cent and its leverage over the Chinese economy proportionately smaller. After 10 months of trade war, Wall Street didn’t follow White House risky policy.

 

 

Chinese export machine is moving up the value chain. Why America is still trying to contain it? Looking for a better dialogue between counterpart would be a win-win collaboration, but, instead of Chinese government, US administration’s stance on trade is not changing.

The spectacular rise of China over the past two decades and the relative decline of the US mean that sparks are bound to fly. PRC is in the way of surpassing the US economically. By one measure, 35% of world growth from 2017 to 2019 will come from China, 18% from the US, 9% from India, and 8% from Europe. By 2050, the top five largest global economies are most likely to be China, India, the US, Brazil and Indonesia. Is the west even remotely prepared for this kind of world?

 

Is the Is the global order changing? Public opinion in Western countries thinks that Beijing, nevertheless its internal political contradictions, is a more conscious alley instead of Washington.

 

China is not only the second economy in the world. Actually, the Middle Country is the second-largest spender on research and development (R&D) after the US, accounting for 21% of the world’s total of nearly $2 trillion in 2015.  But China’s investments on R&D grew by an average of 18%, more than four times faster than US spending.

The old global liberal order was purposefully designed by the US and its western allies. Washington helped to compose United Nations, the International Monetary Fund and World Bank, the World Trade Organization, the North Atlantic Treaty Organization. But the same country that built up the world as we know, is now moving back. The new is speaking Chinese. By the way, if the leaders of major countries and international organizations cannot see eye to eye, we are in for a very rough ride.

We are living in abnormal times, where international system itself is exposed to profound instability. But if some countries are asking a better dialogue to create a real international win-win collaboration, others are deaf and bling, moving forward instead hearing critics.  Populism and the rise of parochial economic nationalism are the gravest threats to future stability. Has Mr. Trump changed his idea about China? Difficult to say, but this truce is a first step.

 

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