China’s Mr. Big won’t cave in to Trump for nothing

Shuli Ren, Bloomberg

President Xi Jinping has a nickname in China. Instead of calling him directly by name, people commonly use Da Da, or Mr. Big. After all, he is the nation’s most powerful politician in decades, serving a precedent-defying third term. He also dares to challenge the world’s biggest economy, and China’s only real rival, promoting a multipolar global order instead of unchallenged US dominance.

It should come as no surprise, then, that China is acting differently from Canada or Mexico as President Donald Trump imposes trade tariffs. Not willing to capitulate to what it sees as bullying, Beijing is taking the 10% extra levy in stride.

Compared to 2018, China may feel it can handle the heat better. Exports to the US account for only about 15% of the total, versus 19% at the onset of Trump’s first trade war. In addition, Chinese firms have been diversifying their supply chains, opening factories in nations such as Mexico and Vietnam that until recently looked less vulnerable to US tariffs and wouldn’t be drawing attention with “Made in China” goods.

Initially, Xi seems to be playing a gentle match, hoping to prevent tensions from escalating. Beijing’s retaliation, such as targeted tariffs on oil and liquefied natural gas, are narrower in scope than the 10% blank levy from the White House. An anti-trust probe into Google has no real bite, since the tech giant largely pulled out of China after 2010.

Even before Trump’s tariffs hit, exporters — the only bright spot in a deflationary economy — were feeling gloomy, judging by the latest Caixin PMI data.

A meltdown in real estate investment, as well as potential loss of export orders, are leaving a huge hole in aggregate demand. According to a back-of-the-envelope calculation from Alpine Macro, a financial research outlet, China needs to deploy a spending package of at least 4% of gross domestic product per year to get out of its deflationary trap, and more if harsh tariffs are imposed.

Second, a currency war may just be necessary. So far, the People’s Bank of China has been reluctant to weaken its daily fix, keeping it stronger than 7.2 per dollar over fears of excessive capital outflows. But if a big stimulus package doesn’t come about, interest rate cuts and a weaker yuan may be the only way to counter Trump’s tariffs.

Third, it’s time to give away some of China’s crown jewels. Trump has expressed interest in ByteDance Ltd.’s TikTok, saying that the US sovereign wealth fund he’s creating could end up buying the social media platform, which is not available in China.

While Beijing is reportedly planning to treat TikTok as a “commercial matter,” meaning the government intends to stay out of the way and let ByteDance’s investors negotiate a sale, some of the bids out there can be humiliating. One group of buyers, for instance, offered only $20 billion, even though analysts say TikTok could be worth well north of $100 billion. Beijing needs to swallow its pride and stay out of the way, however this deal plays out.

Dealing with an unpredictable, domineering Trump requires a strong leader that can make sacrifices and act in his citizens’ best interests. China’s Mr. Big, are you who they say you are?

[Abridged]

Courtesy Bloomberg/Shuli Ren