"Retaliation Is Imminent": Here Are China's "Nuclear" Trade War Options

  • Written by Zero Hedge
  • Published in Economics

Almost exactly one year ago, when the US-China trade war was still in its early stages and when conventional wisdom (wrong, as it usually is) dictated that the two sides would never escalate to the "tech cold war" stage we have now as it is in "nobody's interest" to launch an all-out trade war, we listed what were Beijing's five at the time "nuclear" retaliation options; these included currency depreciation, sales of US Treasurys, blocking of US services, curbing of oil shipments and a rare-earth metal export ban, crippling US supply chains.

Fast forward to today, when not only has trade escalated into a full-blown tech war, with the US constantly ratcheting up measures against China with the blacklisting of Huawei Technologies and discussion of similar bans for other Chinese tech firms, such as drone and video surveillance equipment makers, while China's President Xi inspected a rare earth factory on 20 May in Jiangxi province, and called for the nation to embark on a “new Long March and start all over again” (Jiangxi is where the Communist Party’s Red Army started the Long March in 1934), striking a nationalist tone and sending the message that China is prepared for hardship in the face of a worsening external environment.  

What is becoming increasingly clear, is that neither Trump now China are likely to make further concessions unless one side blinks, or from Beijing's standpoint, the US offers compromises which is certainly unlikely unless the market tumbles, something we pointed out earlier this week...

Ironically, all that needs to happen for the trade war to end is for the S&P to drop back to 2,300... but market won't let that happen as it is convinced Fed or Trump put will kick in first.

— zerohedge (@zerohedge) May 23, 2019

... and Deutsche Bank echoed today, when Jim Reid said that "Falling asset prices might be the only way for markets to get the [trade war] resolution they desperately want." Of course, for now stocks refuse to sell off, paradoxically on the expectation that once they do, Trump will fold and stocks will soar (yet without stocks first tumbling, Trump will never fold). As such, Barclays writes this morning that "the latest developments suggest a Standoff scenario is materializing and the Escalation scenario is becoming increasingly likely."

China's thinking is further encapsulated by quotes from Hu Xijin, editor-in-chief of China’s Global Times, whose tweets underscore Beijing's preparation for a protracted trade war and selecting retaliation approaches. Here's, in a few short tweets, is how China's trade war take is summarized:...

  • (18 May) “China will certainly retaliate for the barbaric suppression Huawei received. It’s a unanimous attitude of officials and ordinary people. I believe Beijing is selecting retaliation targets and approaches, minimizing damage to itself, and not weakening confidence in China’s opening up.”
  • (18 May) “Trump delays

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