Trade War with China

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Hendrik_2000

Lieutenant General
China SMIC rally while the US economy show sign of weakness

It took a trade war to make SMIC rally
Mainland China’s largest chipmaker is benefiting from a trade war that has seen its US counterparts battered

ByDAVID P. GOLDMAN

Semiconductor Index had gained nearly 40% between the start of the year and late April, only to give back two-thirds of its gains during May as the White House imposed a ban on US high-tech sales to Huawei Technologies.

US tech stocks led the Wall Street session down in a whipsaw session that saw the Dow-Jones Industrial Average rise by 211 points before closing down by about 200 points. President Trump’s declaration in Japan that the United States was “not ready to make a trade deal” with China appears to have torpedoed the US stock indices.

Remarkably, China’s Semiconductor Manufacturing International, the mainland’s largest chip foundry, rallied while the US semiconductors sagged. SMIC has chronically underperformed its peers, but caught a tailwind from the tech war. The company delisted itself from NASDAQ last week, claiming that the decision had nothing to do with the ongoing tech war.


Compared to Taiwan Semiconductor Manufacturing, SMIC has been something of an also-ran in chip design and manufacturing, and its outperformance during May is a gift from the US Administration. By this point every major newspaper in the world has noted what I reported in this space on
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, The US ban on high tech exports to China won’t stop Huawei from dominating the 5G mobile broadband market, but it will touch off a commercial war in the chip business that will hurt US producers, some of them perhaps fatally.

China’s domestic chip design and manufacturing, meanwhile, will draw on the enormous reserves of the Chinese state. China expects to emerge from the war as the dominant player in semiconductors, the decisive industry of the 21st century.

SMIC-vs-Phila-semiconductor-index.png


Austria’s AMS AG, Huawei’s largest European supplier, announced last week that it would continue shipments to the Chinese company. Its stock is up 94% year-to-date, outperforming its US competitors.

Bloomberg noted that this is an opportunity for Europe:

“Huawei and other Chinese companies in Trump’s sights are likely to find partnerships within the region more attractive as a result of the US restrictions, according to Luigi Gambardella, President of Brussels-based business association China EU. ‘The current trade tensions can only lead to more investments and contracts between Chinese and EU companies,’ Gambardella said.”

Meanwhile, signs of weakness continue to bedevil the US economy. JP Morgan last week took its 2nd-quarter GDP forecast down to 1%, while the Atlanta Federal Reserve’s GDPNow model projects a gain of 1.3%. As I noted last week, Markit’s purchasing managers indices for both goods and services fell during May to the lowest levels in years, barely above the zero-growth mark of 50.

Markit-PMIs-1.png


Markit’s economists project second-quarter growth of 1.2%


The collapse in US bond yields has drawn more attention than equities. This is a sign of risk aversion as well as economic weakness. During May, inflation-protected Treasury (TIPS) yields were little changed, while nominal yields fell. TIPS yields have tracked expectations about the future federal funds rate, and the market has already priced in a rate cut for 2019. That sets something of a lower bound on TIPS yields.

The difference between TIPS and nominal yields gauges the market’s expectation for future inflation, and the drop in inflation expectations has been notable.

Economic-weakness-pushes-down-inflation-expectations.png


Breakeven inflation normally tracks commodity prices, but this gauge has fallen much faster than the main commodity price indices would have indicated. The chart below shows the residual of the regression of 10-year breakeven inflation on the S&P/Goldman Sachs Commodity Price Index. Something nastier appears to be at work.
 

Brumby

Major
First of all, America subsidizes the crap out of all its national industries with Trump actively threatening companies that don't follow his agenda with withdrawal of subsidies. That and the US is being called out by Airbus for refusing to follow WTO rulings on providing subsidies to Boeing. For the US to complain about Chinese subsidies is really a case of a fat person shoving burgers down his throat telling others to not eat.

Secondly, John Lee must be watching current events on rewind if he thinks that support for the US is increasing because it was quite higher at the beginning of Trump's administration when Europeans stressed that Europe and the US must work together to counter China and that Europe is not seeking new alliances and now, that's all silent. Europe is now focused on getting the deal they need from America and protecting their own interests with France saying that there should be a middle ground between Chinese and American style (in other words, they're neutral or moving there). Polls indicate that more Germans trust China than America and French newspapers are cheering the Chinese headlines on when China said it is now ready to dig in for the Long March. If anything, support for the US is waning by the day and one can only hope this goes through 2024.
I think it is laughable when you have to resort to polls to sustain your narrative.
 

gelgoog

Brigadier
Registered Member
First of all, America subsidizes the crap out of all its national industries with Trump actively threatening companies that don't follow his agenda with withdrawal of subsidies. That and the US is being called out by Airbus for refusing to follow WTO rulings on providing subsidies to Boeing. For the US to complain about Chinese subsidies is really a case of a fat person shoving burgers down his throat telling others to not eat.
...

Boeing gets sugar daddy deals by the US government on defense (see the tanker deal for example). They also get huge subsidies from Washington state and every single other place where they have facilities. Then there is the US EXIM bank, which is used to provide Boeing with loans when doing aircraft sales.

So why can't Chinese regions subsidize companies which operate there with low interest rate loans and the like when it is done in the US all the time?
Yeah, the US is full of crap.
 

Tam

Brigadier
Registered Member
The collapse in US bond yields has drawn more attention than equities. This is a sign of risk aversion as well as economic weakness. During May, inflation-protected Treasury (TIPS) yields were little changed, while nominal yields fell. TIPS yields have tracked expectations about the future federal funds rate, and the market has already priced in a rate cut for 2019. That sets something of a lower bound on TIPS yields.

Yield inversions are a sign of a coming recession.
 

zgx09t

Junior Member
Registered Member
First of all, America subsidizes the crap out of all its national industries with Trump actively threatening companies that don't follow his agenda with withdrawal of subsidies. That and the US is being called out by Airbus for refusing to follow WTO rulings on providing subsidies to Boeing. For the US to complain about Chinese subsidies is really a case of a fat person shoving burgers down his throat telling others to not eat.

Absolutely.
Not sure if it is as laughable as some might require though.




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manqiangrexue

Brigadier
I think it is laughable when you have to resort to polls to sustain your narrative.
It is laughable that you resort to one man opinion articles to say something that you cannot otherwise claim, and then dodge every other aspect of my response only to try to discredit polls, which reflect the opinion of many.

And now you see from the post above, EU fines Google $5.1 billion (increased from $1.7 billion) over its behavior right after its actions on Huawei, and you post your bogus article about how support is increasing for the US? If I were you, I'd never criticize other people's sources or lines of evidence again.
 
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Phead128

Captain
Staff member
Moderator - World Affairs
$16 billion Trump bailout to farmers following $12 billion bailout to farmers last year.

You know, that's a lot like socialism, taking US consumers dollars and subsidizng an un-competitive industry.

You know who does socialism and subsidizing industry the best? China. Trump can't beat China at this game of subsidization with stimulus and debt. China can stay solvent longer than Trump can stay in power.

Trump's biggest weakness is domestic elections. Just like Vietnam war, you only have to wait long enough till US domestic politics undermine itself via attrition of public opinion.
 
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Brumby

Major
China's scale of subsidies coupled with unfair trade practices of forced technology and restricted market access is well documented. What we are seeing is simply countries pushing back led by the US. Examples are
European Commission, ‘Joint statement on trilateral meeting of the trade ministers of the United States, Japan, and the European Union
Statement on Industrial Subsidies and State Owned Enterprises
The Ministers reviewed and confirmed progress regarding possible new rules on industrial subsidies and State Owned Enterprises so as to promote a more level playing field for their workers and businesses. The Ministers highlighted the importance of securing a level playing field given the challenges posed by third parties developing State Owned Enterprises into national champions and setting them loose in global markets – resulting in distortions that negatively affect farmers, industrial producers, and workers in the Ministers' home countries. The Ministers recognized the progress of their work, and the continued need to deepen their shared understanding, on the basis for strengthening rules on industrial subsidies and State Owned Enterprises, including how to develop effective rules to address market-distorting behaviour of state enterprises and confront particularly harmful subsidy practices such as: state-owned bank lending incompatible with a company's creditworthiness, including due to implicit government guarantees; government or government controlled investment fund equity investment on non-commercial terms; non-commercial debt-to equity swaps; preferential input pricing, including dual pricing; subsidies to an ailing enterprise without a credible restructuring plan; and subsidies leading to or maintaining overcapacity.
The trilateral partners continue exploring how to increase the costs of transparency and notification failures and how to strengthen the ability to obtain information on subsidies.
The Ministers also confirmed their commitment to continue working together to maintain the effectiveness of existing WTO disciplines. On that basis, they agreed to intensify discussions among themselves and expressed their intention to advance their respective internal steps before the end of 2018 with the aim of initiating a negotiation on more effective subsidy rules soon thereafter. The Ministers emphasized the need to ensure the participation of key trading partners in these future negotiations.

Statement on Concerns with Forced Technology Transfer Policies and Practices of Third Countries
The Ministers recalled their shared view that no country should require or pressure technology transfer from foreign companies to domestic companies, including, for example, through the use of joint venture requirements, foreign equity limitations, administrative review and licensing processes, or other means. The Ministers found such practices to be deplorable.
The Ministers again condemned government actions that support the unauthorized intrusion into, and theft from, the computer networks of foreign companies to access their sensitive commercial information and trade secrets and use that information for commercial gain. Recalling that forced technology transfer policies and practices create unfair competitive conditions for their workers and businesses, hinder the development and use of innovative technologies, and undermine the proper functioning of international trade, the Ministers will reach out to and build consensus with other likeminded partners. The Ministers also agreed to deepen their investigation and analysis of the full range of harmful technology transfer policies and practices and their effects.
The Ministers affirmed their commitment to effective means to stop harmful forced technology transfer policies and practices, and to this end, deepen discussions on enforcement and rule-making as tools to address these problems.

… and clearly not dependent on polls . LOL

HRUFSP, Joint communication to the European Parliament, the European Council and the Council: EU–China—a strategic outlook

China’s proactive and state-driven industrial and economic policies such as "Made in China 2025"14 aim at developing domestic champions and helping them to become global leaders in strategic high-tech sectors. China preserves its domestic markets for its champions, shielding them from competition through selective market opening, licensing and other investment restrictions; heavy subsidies to both state-owned and private sector companies; closure of its procurement market; localisation requirements, including for data; the favouring of domestic operators in the protection and enforcement of intellectual property rights and other domestic laws; and limiting access to government-funded programmes for foreign companies. EU operators have to submit to onerous requirements as a precondition to access the Chinese market, such as creating joint ventures with local companies or transfer of key technologies to Chinese counterparts. One of the sectors where the lack of reciprocal market access is particularly acute is financial services. While Chinese fintech and online payment companies, credit cards providers, banks and insurers are expanding their presence in the EU, European operators are denied access to the Chinese market.
Given the magnitude of our trade and investment links, it is important to develop a more balanced and reciprocal economic relationship.
 
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