US-China trade war: What could Beijing do next?

By Karishma Vaswani
Asia business correspondent

  • Published
.S. President Donald Trump takes part in a welcoming ceremony with China's President Xi Jinping on November 9, 2017 in Beijing, China.Image source, Getty Images

Donald Trump's book The Art of the Deal could give you some insight into how he is negotiating with China amid the current trade war.

One of his business philosophies is called negative thinking - anticipating the worst outcome, and preparing for it.

"I always go into the deal anticipating the worst," he writes. "If you plan for the worst - if you can live with the worst - the good will always take care of itself."

But is the US really prepared for the absolute worst China could do?

In a clip from China Central Television, that's now gone viral on Chinese social media, anti-US sentiment appears to be at a peak.

"China is not willing, but not afraid, to fight", says the presenter. "After 5,000 years of winds and storms - what kind of hardship has the great Chinese nation not weathered?"

Looking even further back in China's history, perhaps Beijing is taking a page out of China's ancient strategic manual The Art of War.

As author Sun Tzu advises: "If your opponent is of choleric temperament, seek to irritate him".

Here's what could China do to "irritate" President Trump's arguably "choleric temperament" in this trade war.

Sell US government bonds

China is the biggest foreign holder of US government bonds, known as Treasuries, but in March stepped up its sale of these bonds to the quickest pace in two and a half years - according to data from the US Treasury department.

And Beijing could keep doing this - although it would come at a cost.

Hu Xijin, editor in chief of the Global Times which is published by the Communist Party's official mouthpiece the People's Daily, has tweeted: "China may stop purchasing US agricultural products and energy, reduce Boeing orders and restrict US service trade with China. Many Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically."

But analysts say doing that would actually hurt China more.

In simple terms, if Beijing sold US Treasuries then it would drive down the US dollar - and that could potentially destabilise the US economy.

But that wouldn't be good for China in the long term. It needs a stable global economy as its economy weakens - so hurting the US in this way would, in effect, hurt China too.

Selling US Treasuries would also devalue China's holdings - effectively becoming an own goal.

Weaken the value of the yuan

China's currency is controlled, which means it's not freely traded. The central bank guides where the midpoint of the currency should be and then it trades within a narrow band around that midpoint.

It has already lowered it in recent days, which analysts say is a signal to the market that China is willing to use the currency as a tool to offset the impact of US tariffs.

Image source, Getty Images

The weaker the Chinese currency, the less expensive its goods are in the US. In theory, this means more people will buy them, and Chinese companies won't suffer as much.

But the downside is that China's imports will become more expensive too - which will affect goods such as oil, and other raw materials that it needs to keep its economy chugging along. It's a delicate balance - and a tough position to be in.

Clamp down on foreign investment

This is one area where China could really tighten the screws on the US.

Foreign direct investment (FDI) has been a key factor driving China's economic growth - and it's also reaped dividends for the foreign companies investing in China, despite the challenging business environment.

However, Beijing could decide to make the environment even tougher.

In 2018, China was the second largest recipient of FDI in the world and a large chunk of that money came from the US, even as the trade war between the two intensified.

However, according to reports, China's National Development and Reform Council - the country's central planning agency has taken over the responsibility of deciding who will be allowed to invest in the country based on national security criteria.

That's an important move, because now the council is the equivalent in some respects of the Committee for Foreign Investment in the United States, (CFIUS) - the entity tasked with evaluating which companies are security risks and which aren't.

Beijing will see the latest US moves to keep Huawei out of its markets as discriminatory - and could make it harder for American companies to get licences to operate in China, target the buying of American products as being anti-patriotic, and hold up goods at ports and customs.

Expect more American firms to see renewed scrutiny whilst investing in China.

Media caption,
Will a trade deal end US-China rivalry?

China has consistently said it doesn't want to fight - it says it's being forced into a corner by the US.

In fact even if you drill down into the $60bn-worth of US goods that Beijing raised tariffs on this week in retaliation, the scale of the tariff increase is less than what's being reported, according to Vinesh Motwani of Silk Road Research.

In December China suspended retaliatory tariffs on vehicles and auto parts, and that suspension has remained in place.

Analysts say this signals that Beijing wants to show some good faith in the lead up to the meeting between the two leaders at the G20 in Japan in June.

Still, Sun Tzu's Art of War prescribes: "Let your plans be dark and impenetrable as night, and when you move, fall like a thunderbolt."

Perhaps - if those talks in June don't go well - China is leaving room for itself to apply further pressure in the future.