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If Donald Trump is the new George Soros, history shows confidence is China’s best weapon in a trade war

Jiaxuan Lu says China should be boosting market sentiment amid the trade dispute, rather than dampening it with moves that signal to investors that it’s time to panic

PUBLISHED : Tuesday, 03 July, 2018, 2:02pm
UPDATED : Tuesday, 03 July, 2018, 10:29pm

Twenty-one years ago, George Soros decimated currencies in Southeast Asia with his hedge fund, but Hong Kong authorities managed to underpin confidence by using its vast foreign exchange reserves, foiling speculators’ fierce assault against the Asian financial centre.

While today a trade war seems to have replaced a currency war, and US President Donald Trump has replaced Soros, confidence is still the best defensive weapon that Beijing has to minimise casualties.

Recently, a series of market reactions have revealed Chinese investors’ bearish attitude to the ongoing trade frictions between Washington and Beijing: the Shanghai Composite Index has been the worst performer among the world’s major markets and the renminbi experienced the biggest ever fall against the US dollar in June. The Chinese market has already been affected, even though the trade war has barely begun.

In the face of this unprecedented challenge, the Chinese government has taken constructive measures: notably, it has loosened monetary policy by cutting the reserve requirement ratio by 50 basis points on June 24 to offer the authorities sufficient money to keep the market from collapsing.

However, this seems inadequate, and even counterproductive: China’s stocks dropped further the next day, as the cutting of the reserve requirement ratio, to some extent, confirmed investors’ anxiousness. Fear has gripped the Chinese market.

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This suits Trump’s purposes exactly. In enforcing his isolationist policies, Trump has to be ready for the risk of collateral damage, for example, the planned relocation of some production facilities by Harley-Davidson, once the emblem of the American spirit.

Just as the Hong Kong authorities … defeated Soros’ initiative in 1997, so today the Chinese leadership should prioritise boosting confidence

However, fear is a toxic gas which the attacker is immune to. In other words, instead of tit-for-tat confrontation, injecting panic into the Chinese market is the best way for Trump to weaken Beijing’s economic power without inflicting harm on the US itself. Through this strategy, Trump eventually aims to substantially reduce his country’s trade deficit as well as maintain its hegemonic role on the global stage.

Just as the Hong Kong authorities, backed by the central government in Beijing, defeated Soros’s initiative in 1997, so today the Chinese leadership should prioritise boosting confidence.

The People's Bank of China governor Yi Gang’s interview responses, posted by the Shanghai Securities News, have already demonstrated the determination of the Chinese authorities to safeguard investors’ benefits.

Beijing also announced its retaliatory tariffs and sent out the message that it was considering regulatory measures against US investment and business operations in China.

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This is far from adequate, though. Beijing also needs to build up confidence in more effective ways. Rather than tightening market controls and enacting policies tailored for crisis management, such as cutting the reserve requirement ratio or interest rates, the government should focus on generating positive sentiment in the market, possibly by extending tariff reductions in the automobile industry to other sectors and strengthening economic ties within existing blocs from the “Belt and Road Initiative” to the Shanghai Cooperation Organisation.

As the expectation is that China cannot hold out in the long run, the longer things go on, the more restless Washington will become

These measures could help China in its efforts to replace American demand with that from other parts of the world. This would bolster the conclusion that a trade war would only have a limited impact on the world’s second-largest economy. And that would help subdue uneasiness in the Chinese market.

Furthermore, confidence should also be China’s weapon in a counter-attack. As the expectation is that China cannot hold out in the long term, the longer things go on, the more restless Washington will become.

As long as China’s market remains stable, it will be Wall Street’s turn to experience great waves of turbulence. In addition, Beijing could wield its influence over North Korea and its leader Kim Jong-un as a diversionary tactic to eventually frustrate Trump and the American public.

To survive a trade war, China needs confidence most of all, not retaliatory measures.

Jiaxuan Lu is a freelance writer based in Shanghai and Los Angeles