The RMB is falling and China stocks are falling, in spite of a predictable upward move on Friday – one can imagine the instructions that went out on Thursday night. If anything has emerged from the confusion that has been the US-China trade face-off so far, it is that China has more to lose from this than the US or the West in general. And also that the problem for China is not the direct impact of tariffs and trade issues, but the underlying weaknesses and inconsistencies of the Chinese system itself, which could – maybe, possibly – be pushed into crisis with the US trade spat being the trigger.
While Trump’s erratic approach is ridiculous and long-term hugely damaging to US interests, it does have the short-term impact of exposing nervousness among Chinese investors with regard to a number of more fundamental domestic economic imbalances and issues. The Shanghai stock market has entered a bear market, we are told, and the RMB could be heading back towards 7 to the USD. That may help offset US tariff implications for China, but it is also a huge negative in terms of Chinese companies with debt and obligations overseas and also in terms of Chinese investor sentiment.
Overall, it feels like the last few weeks have exposed weaknesses in the China system that would allow the United States and other countries to make progress on their key requirements – reciprocity and playing by the same set of rules. But only if the West, and particularly the US, acts in a clear and consistent way. The Chinese atmospherics are already changing – references in the state media to Made in China 2025 have virtually disappeared in the past few weeks. The opportunity exists for a re-working of these relationships in a way that will be good for China as well as the world. We remain cockeyed optimists.