On Thursday, July 16, trading in the Chinese stock market closed with a sharp drop in quotations. The Shanghai Stock Exchange Index SSE Composite fell immediately by 4.5% to 3210 points, while the Shenzhen site indicator fell by 5.2% to 2144 points.
Investors reacted negatively to the next aggravation of relations between the United States and China. So, on the eve of the United States Secretary of State Mike Pompeo announced on Twitter the introduction of visa restrictions for employees of Chinese technology companies, including Huawei, for involvement in the "violation of human rights." As a result, stock market players began to massively sell risky assets, including China's securities.
“Donald Trump signed the Hong Kong Autonomy Act, which imposes sanctions on Chinese companies and individuals who allegedly put pressure on Hong Kong citizens. This document also caused a panic among investors who fear that Beijing will begin to introduce retaliatory measures and are hastily withdrawing funds from risky assets, ”said Vadim Yosub, senior analyst at Alpari Eurasia Information and Analytical Center, in an interview with RT.
In addition, on Wednesday, July 15, the head of the White House apparatus, Mark Meadows, announced the intention of the US authorities to take action within a few weeks regarding the TikTok Chinese application and WeChat social network, which allegedly are used by Beijing to obtain personal data of Americans. According to the official, at the moment, representatives of the administration "assess the risks to national security" of the country, writes TASS.
At the same time, US President Donald Trump said in an interview with CBS that he was not interested in continuing trade negotiations with China, and accused the Asian republic of the global spread of COVID-19. Note that earlier the head of the White House did not rule out the possibility of introducing additional duties on Chinese goods for allegedly untimely informing the world community about the appearance of coronavirus from the PRC.
- © Kevin Lamarque / Reuters
Recall that the trade confrontation between China and the United States began in 2018. Then Washington accused Beijing of illegally acquiring American technology and increased duties on Chinese goods imported into the country. China has introduced retaliatory measures.
Following a series of negotiations in May 2019, the United States began to aggravate the conflict: in addition to new duties, American technology companies began to stop cooperation with Huawei. In August, the countries once again failed to come to a compromise on the terms of the tariff agreement and since September have set new mutual restrictions. However, after this, the parties again returned to the discussion of the ceasefire and on January 15, 2020 signed the first part of the trade transaction.
“Now Trump is escalating the conflict to a greater extent to increase his rating before the upcoming elections. He wants to show voters that he is taking real steps to restore the US economy amid a pandemic. To do this, he uses the conflict with China, introducing another package of sanctions, which also hit the US economy, ”explained Peter Pushkaryov, TeleTrade chief analyst.
Counter attack
According to RT expert at the Academy of Financial and Investment Management Ilya Zaporizhsky, in response to U.S. actions, Beijing may impose mirror sanctions and, in particular, prohibit representatives of several American organizations from entering the territory of the PRC. According to the expert, in the first place, the companies of the US technological sector run the risk of being subject to restrictions.
“In the second half of 2020, a strong rise in high-tech production is expected due to the global introduction of 5G infrastructure and related devices. China and the United States want to gain market leadership, so they impose sanctions under the cover of political problems. As a result, the states are again entering the phase of an acute trade war, ”the expert noted.
Moreover, if the conflict escalates and Washington raises import duties on Chinese goods, the Chinese financial authorities may again resort to weakening the national currency, Ilya Zaporizhsky believes. Thus, the low RMB rate makes Chinese goods cheaper for American buyers, which allows Beijing to level the effect of US duties and successfully circumvent US sanctions.
“At the end of May, the People’s Bank of China has already depreciated the renminbi to a minimum over the past 12 years, thereby showing the White House its readiness to quickly take measures to protect national interests in a pandemic. The current exchange rate of the Chinese currency makes it possible to profitably supply goods to the US market and thereby mitigate the negative effect of US restrictions. But in the case of tightening the nuts, the Chinese regulator can lower the course even more, ”the analyst explained.
- Reuters
- © Kim Kyung-Hoon
Also, as a response to the actions of the United States, the Chinese leadership may limit the supply of American food to China. This point of view in a conversation with RT was voiced by an analyst at the Center for Civilization Strategies Vitaly Volchkov. According to him, in June, Chinese authorities demanded that state-owned companies suspend purchases of US soybeans and pork.
“Even Beijing’s mere statement about the search for alternative food suppliers has caused panic in the US agricultural market. For the United States, the Chinese food market is one of the key ones, and against the backdrop of a pandemic, the loss of such a large sales platform can seriously undermine the stability of the US agricultural sector, ”Volchkov believes.
According to him, at the same time, the PRC may begin to sell off the American public debt. To cover the budget deficit, the US Treasury Department issues special treasury bonds (treasuries). American and foreign investors buy securities and receive a steady income on them, in fact, lending their money to the US economy. At the same time, China is one of the largest holders of treasuries.
According to the latest data from the US Treasury, in April, Beijing owned $ 1.07 trillion in US debt. According to experts, the refusal of the PRC to invest in the US public debt can provoke a chain reaction in the financial market and lead to mass sales of treasuries by other investors.
“China’s investment in US government bonds is one of the most effective levers of pressure on the United States. Therefore, Beijing will decide on a massive sale of securities only in case of a serious threat to its economy. Meanwhile, even a small sales volume can create a strong panic among investors, ”the expert concluded.