The bankruptcy threat
That’s the headline in the South China Morning Post. Here’s what they write:
In an opinion piece published on Wednesday by People’s Court Daily, Du Wanhua, deputy director of an advisory committee to the Supreme People’s Court, said that courts needed to be aware of the potential harm the tariff row could cause.
“It’s hard to predict how this trade war will develop and to what extent,” he said. “But one thing is sure: if the US imposes tariffs on Chinese imports following an order of US$60 billion yuan, US$200 billion yuan, or even US$500 billion, many Chinese companies will go bankrupt.”
As Chinese courts have yet to have any involvement in the trade dispute, the fact that the newspaper of the nation’s top court, ran an opinion piece – for a judiciary-only readership – suggests concerns might be rising in Beijing about the possible socioeconomic implications of the row.
Du said the judiciary should also quickly familiarise itself with the possible complexities of such cases, which are probably unlike those they have handled in the past.
“Preparedness ensures success. Unpreparedness spells failure,” he said. “Our courts need to look into these possible Chinese corporate bankruptcies as early as possible.”
I’m not a China expert. So I don’t know how far-fetched this is. I do know that the state has been helpful in preventing bankruptcies of Chinese state-owned enterprises. So I am a bit sceptical that this is a reasonable worst case scenario in the event of an all-out trade war.
I am presenting this to you because the South China Morning News is a good English-language paper to read to get a better view of what’s going on in China.
Chinese spending and devaluation
Here are two other stories they are touting:
- China to speed up US$199 billion of domestic spending to protect growth during US trade war
- Chinese money pours into Brazil as US trade war bites, with US$54 billion across 100 projects
Again, the facts are clear but it’s unclear regarding the spin that this is all trade war related. Even so, I think these stories do illustrate the fact that China has many weapons at its disposal to retaliate against the US. We’ve seen the soybean issue cause the White House to apply ‘temporary’ use of a Depression-era subsidy program to the tune of $12 billion. We have also seen the Chinese devalue their currency and block a merger between a US technology company and a Dutch one.
If the Chinese want to go to war, they’re not going to sell Treasury bonds. I’ve explained why. But these other tactics make sense. And turning on the fiscal taps will help ease the pain. So I do believe the first story. The second story is spun with a trade war headline. But China was already invested heavily in Latin America.
In the end, everyone is going to lose in a trade war, despite what US President Trump says. The question is whether we see recognition of losses and de-escalation and negotiation as we did with the budding US-EU trade war yesterday. At this point, with the farmer subsidy in the US, the answer looks to be no. Escalation looks like the more likely outcome.
And if a US escalation causes a wave of bankruptcies in China, likely the Chinese will shore up those companies, increase monetary and fiscal stimulus and escalate against the US in kind.