26 January 2020

Global Research: Prospects for China-US Relations After “Phase 1 Trade Deal”

Last week the US and China finally signed phase 1 of their long awaited trade deal. Despite Trump’s hyperbole financial markets reacted in a rather muted way to the ‘deal of the century’.

[...]The current deal does not address any of the major structural issues that the US wants China to make concessions over. Those thorny issues seem insurmountable unless China is willing to make major compromises over its national sovereignty reminiscent of the unequal treaties it was forced to sign with Western imperialism during the 19th and 20th centuries.

The second round of the trade war will be much more protracted and problematic and is likely to greatly exacerbate tensions between the two largest economies in the world pushing their relationship to breaking point.

Having said this, Trump has extracted a series of concessions from the Beijing government led by the misnamed Chinese Communist Party (CCP). Effectively, China has conceded the first round of the trade war to the US. giving Trump’s re-election prospects a major boost.

This begs the question: why has China signed a trade deal, that makes so many concessions, with a country that is unrelentingly aggressive towards it?

The phase 1 trade deal will also create domestic problems for the CCP leadership which has played the nationalist card for all its worth over the last year and ramped up its anti-American propaganda claiming that it would,“fight to the end”. The CCP leadership is in danger of boxing itself into a corner having raised public expectations that it would resist any trade deal which stifled China’s economic prospects. [...]

Concessions made by China in the ‘Phase One’ trade deal

The mainstream media has widely reported the $200 billion of agricultrual goods, manufactured goods, energy products and services that China has agreed to purchase during the 2020-2021 period.

The ability of China to purchase this amount of American imports has been questioned by many financial experts, never mind the fact that the EU is threatening WTO legal action stating that the phase 1 deal violates free trade.

Under the terms of the phase 1 deal China’s exporters will still be suffering under $360 billion worth of US tariffs that cover two thirds of all goods that Americans buy from China. Conversely, these tariffs will also hurt American shoppers who will pay more for their consumer goods and cut into the profits of many US importers.

If we get into the meat of the 96 page agreement we shall see how the concessions that China has made go much further than these headline catching figures. [...]

Financial Services

The most perilous part of the phase 1 trade deal is the section concerning the further opening up of China’s financial markets to foreign capital. Over the last 10 years China has been very cautious in reducing capital controls and allowing foreign banks and hedge funds to invest in its capital markets.

The 1997 Asian financial crisis was caused by south-east Asian economies allowing foreign speculative capital into their tightly controlled financial markets. Forbes magazine has summed up the dangers posed by this process:

“Once a market deregulates, there’ll be lots of speculative investments that go after higher interest rates. But as a result, with excessive amounts of foreign money stacking up, along with hot sectors and hot money, the economy ends up screeching to a sudden halt.

Thailand, Malaysia, Indonesia, the Philippines and other South-east Asian countries …. sought soaring stock markets, higher property prices and increased consumer lending, [just as China currently does-LT] they forfeited control over their financial systems.

Whenever the free-market gets mixed up in a closed controlled financial system, then something will go wrong.’’

Economists Fengjuan Xiao and Donald Kimball in examining China’s capital controls have concluded that there are many dangers to opening it’s economy to international financial markets:

“As it now stands, there is considerable risk that the outcome of quickly liberalizing capital account transactions will be costly for China. As demonstrated during the Asian financial crisis, there is no stronger, quicker, or more unforgiving punisher of poor financial practices than the power of free capital markets.’’

Despite these warnings from history the phase 1 trade deal mandates China to granting banking licences to the “too big to fail” banks of Wall Street. The same banks that created the 2008 financial crisis. Since 2008 they have engaged in a massive crime wave fleecing American consumers and small-medium businesses helping to create the greatest increase in wealth inequality in over a century.

To add insult to injury, the trade deal allows American owned credit rating agencies to operate in China. These are the same credit rating agencies (Standard and Poor’s, Fitch Group and Moody’s) which gave triple A ratings to sub-prime mortgages that triggered the global financial crisis of 2008. Incredibly, China is now giving them the power to rate Chinese bonds sold to domestic investors and international investors.

The phase 1 trade deal also allows American banks to provide securities investment, fund custody services and to serve as underwriters for all types of non-financial debt instruments. You can imagine the hedge funds and “too big to fail” banks of Wall Street drooling at the prospect of the massive fees they can extract from investors in China.

The phase 1 trade deal also allows American payment processes such as MasterCard and Visa to operate in China. No doubt they see China as a lucrative market in which they can extract large amounts in fees from heavily-indebted consumers.

The phase 1 trade deal gets even worse when it comes to allowing American capital to conduct its parasitical activity within other key areas of the Chinese economy.

China will now allow American financial services providers to acquire non-performing loans directly from Chinese banks. Shareestates a New York investment firm notes the lucrative opportunities of this particular financial market, particularity in real estate where China has seen a massive boom with the growth of its ‘ghost cities’. [...]

Prospects for the next period

Many financial pundits argue that China’s strategy in the trade war is to wait and see if the U.S. presidential election in November produces an incumbent who is less hostile to its interests.

This would be a huge mistake as recent votes in Congress reveal how the political establishment (both Democrat and Republican) share the same world view when it comes to China. Congress keeps voting unanimously for anti-China measures such as the Hong Kong Human Rights Act.

Regardless of who wins the presidential reality show in November China cannot expect any change in the hostile stance of the American empire.

China’s relations with America over the next period will be shaped above all else by developments in the global economy.

The weak economic growth experienced by the world economy since the 2008 economic depression has been fuelled by a gigantic increase in debt the likes of which have not been seen before in human history. According to the Institute of International Finance global debt grew to “mind-boggling” levels from $173 trillion in 2008 to $253trillion by 2019. Global debt to GDP hit an all time high of over 322% in 2019. Global debt it set to continue growing rapidly in 2020 largely driven by China and the United States.

Yet this has not been matched by a corresponding growth of the real economy in goods and services.

Central banks across the globe, including China’s, have taken a series of crisis measures in a desperate attempt to stave off the next economic depression. These measures range from the 67 interest rate cuts carried out by 46central banks to the huge stimulus measures i.e. money printing on a scale that was last seen during the depths of the 2008-9 financial crisis. The U.S. Federal Reserve, the ECB and the People’s Bank of China have all been forced to print digital cash in huge quantities – yet it’s not working.

Numerous metrics indicate that there is a ‘synchronized global economic slowdown’ due to the limits to debt-fuelled growth. The Institute of International Finance estimates that, “Over 60% of the world’s countries expected to see below-potential growth in 2020,…’’ Global manufacturing activity is hovering barely above the recession at 50.1. The Baltic Dry Index (which monitors bulk commodities shipping) is a closely watched indicator of future trading activity has fallen 50% during 2019. Meanwhile, the DHL Global Trade Barometer indicates that a global economy in serious trouble. [...]

Full analysis on Global Research

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