China digs in on trade as tariffs near, economy deepens slowdown

China reiterated its opposition to new curbs on investment in the U.S., as White House officials tussle over trade policy and the imposition of tariffs approaches.

Restrictions on U.S. exports to China – of sensitive technologies that the government wants to protect – will backfire, hampering President Donald Trump’s intention to lower his nation’s trade deficit, according to statements made yesterday by Commerce Ministry spokesman Gao Feng yesterday.

Beijing is monitoring the impact of the proposed strengthening of the Committee on Foreign Investment in the U.S., after Treasury Secretary Steven Mnuchin won an internal fight to stave off an even tougher approach to curbing Chinese investment in U.S. technology. Even so, there’s little sign of a broader detente between the two sides, as a July 6 start-date for tariffs on USD34 billion of Chinese imports approaches.

“The U.S. wants to expand its exports and narrow the trade deficit. It has huge potential in high-tech products and services trade. However, the move to restrict exports can only backfire,” Gao said. He also argued that a protectionist U.S. has become a major drag on global cross-border investment and economic growth, and repeated the threat that China will fight back with “quantitative and qualitative measures” should the U.S. roll out a new tariff list.

China looks more exposed to the impact of worsening trade relations with the U.S. than just a few months ago. Economic data for May came in below expectations, and the slide looks likely to continue in June.

A sharp deceleration in credit expansion may have weighed on the economy, according to Fielding Chen at Bloomberg Economics, who aggregates the earliest available indicators into one reading. The impact of slower credit growth amid a government campaign to clean up the financial system has, along with the escalating trade war, hurt sentiment for smaller companies as well as stock and property investors.

Trade frictions and concerns about whether the economy is slowing down more have sent Chinese stocks into a bear market and its currency sliding past 6.6 per dollar for the first time since December. The central bank has intervened verbally to calm markets, and also increased policy support for the economy by cutting the amount of money banks have to lock away, letting them lend more.

“Authorities are supporting smaller enterprises and keeping liquidity sufficient to react to the downward pressure,” Chen said. “The trade war has hurt market sentiment, but its impact on the economy hasn’t yet materialized.”

China’s yuan fluctuated yesterday, for the longest run of declines in more than a year. The MSCI Asia Pacific Index sank 0.4 percent to the lowest in almost nine months.

Relations between Washington and Beijing have deteriorated, with both sides now threatening to increase tariffs from early July and also retaliate for the other’s actions. The two nations are promising to impose tariffs on $34 billion of each other’s exports from next Friday, with more to come.

China issued a stout defense of its trade and business practices yesterday, responding to the persistent accusations from the White House that it steals American technology and shuts foreigners out of its economy.

“China has been a strong advocate for free trade,” according to the white paper entitled ‘China and the World Trade Organization,’ issued by the State Council Information Office. “China has comprehensively fulfilled its commitment to the WTO, substantially opened its market to the world, and delivered mutually beneficial and win-win outcomes on a wider scale.” Bloomberg