America Should Give China Room To ‘Fall’

America has the upper hand in the US-China trade war talks.

That’s according to a number of China observers, who see a bigger chance for China to blink before the US does.

One of them is Jeff Yastine, senior equities analyst at Banyan Hill Publishing.

Both have hard reasons to want some kind of a rapprochement on the trade impasse,” says  Yastine. “But I give the upper hand to the US side as they meet late this week, despite the Trump administration’s bungling. While China aims to move its economy towards one based on consumption, much like the U.S., it’s not there yet.”

Dan North, Chief Economist at Euler Hermes North America, agrees.

“Tariffs are having a detrimental effect on both economies,” says North. “But it appears to be worse for China. And in that sense the tariffs may offer leverage in the negotiations. That approach worked in the NAFTA 2.0 negotiations.”

China’s Terms of TradeKoyfin

Meanwhile, China’s central bank is running out of ammunition to help the country’s economy deal with an economic slow-down caused by the trade war. “It’s worth noting that China’s central bank is already in stimulus-injection mode,” says Yastine. “It injected $85 billion in a single day back in mid-January, which was considered something of a record by observers.”

That isn’t the case with America’s central bank.  “On the other hand, the Fed is only just getting around to hinting that it might not raise interest rates, or do so as fast as the market expected months ago,” he adds.

In addition, America has the technology advantage, according to Yastine.  “I believe the advantage still lies with the US with its entrepreneurial, risk-based economy,” he says. “That advantage remains, even with China’s endemic pilfering of US technology.”

And he warns investors not to forget that China is a top-down economy. “Investors tend to forget that China’s economy still has very much of a top-down, command-and-control aspect, weighted in massive amounts of debt and directed by party apparatchiks in Beijing and the provinces.” 

That means big bets have big rewards and big risks. According to Yastine, “when they make the right bets, it can lead to huge fast gains in their economic progress. The problem is, when they make the wrong bets, it can throw the entire economy off-track for years as whole sectors miss out on unexpected turns in technological progress.” 


This means that time is working against China.

“Every day that passes without a deal is another day where the Chinese economy loses ground compared to competitors in the US and allied countries,” he concludes.

Renee  Mu, a currency analyst for DailyFX, agrees. The longer China stays in this trade war, he says, “the more it will lose.”

Still, America must leave China with some room to “fall.”  Why? To allow it to lose the war gracefully, and appease nationalistic sentiment at home.

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