Category Archives: China

(CNBC) China just injected a record amount of money to stimulate its economy

(CNBC)

  • On Wednesday, the Chinese central bank injected a net 560 billion yuan ($83 billion) into the banking system, the highest ever recorded for a single day.
  • “At present, it is the peak of the tax period, and the total liquidity of the banking system is declining rather quickly,” the central bank said in a statement on its website.
  • In the afternoon, the yield on the 10-year Chinese government bond fell below 3.1 percent to its lowest in more than two years, according to financial database Wind.

Evelyn Cheng@chengevelynPublished 3 Hours Ago  Updated 2 Hours AgoCNBC.com

People walk past the headquarters of the People's Bank of China (PBOC), the central bank, in Beijing, China September 28, 2018. 

Jason Lee | ReutersPeople walk past the headquarters of the People’s Bank of China (PBOC), the central bank, in Beijing, China September 28, 2018. 

China’s central bank on Wednesday pumped a net 560 billion yuan ($83 billion) into its banking system — a record amount of money injected in one day — in a sign that the economy may be facing enormous stress.

The yield on the 10-year Chinese government bond fell below 3.1 percent on Wednesday afternoon, its lowest in more than two years, according to financial database Wind. Yields fall when bond prices rise, and a decline in yields typically signals expectations of a slowdown in economic growth.

“At present, it is the peak of the tax period, and the total liquidity of the banking system is declining rather quickly,” the People’s Bank of China said in a statement on its website. The central bank did not immediately respond to CNBC’s faxed request for comment on Wednesday’s record cash injection.

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Liquidity — or the ease by which assets can be turned into cash — is particularly important for companies needing to pay taxes while maintaining regular operations. For more than a year, many Chinese businesses have already been struggling with sluggish economic growth, increased financing difficulties and greater obligations to provide benefits for employees. The Chinese New Year holiday, when most companies shut down for at least a week, is also less than three weeks away.

Zhao Bowen, research director at Beijing-based Blue Stone Asset Management, said in a statement to CNBC that enterprises are expected to pay more than 1 trillion yuan in taxes this week, marking the peak period of tax payments. A historically low level of fiscal deposits and the expiration of 390 billion yuan in medium-term lending are also contributing to tighter financial conditions overall, he said.

“At the moment, the government’s position is to push back against the downward pressure on the economy, and take a good first step at that in the first quarter,” Zhao said, according to a CNBC translation of his Mandarin-language comments. He added the central bank is also working to loosen overall credit conditions and coordinate its moves with an expected large issuance of local debt.

“At present, it is the peak of the tax period, and the total liquidity of the banking system is declining rather quickly.”-People’s Bank of China

The central bank’s record cash injection of 560 billion yuan into the banking system on Wednesday came through “reverse repurchase agreements,” or buying short-term bonds from some commercial lenders so banks have more cash on hand. Sales of the bonds are called “repurchase agreements” and both measures comprise the central bank’s “open market operations.”

Records from financial database Wind showed the second-highest level of one-day net injections dates back to January 2016, when China’s economy was also experiencing difficulties.

At that time, the central bank gave no explanation on its website for why it was putting so much money into the system. But on Wednesday, it said the move was done “in order to maintain reasonable and sufficient liquidity in the banking system.”

“We do believe the PBoC is stepping up monetary easing, but we should not confuse seasonal (open market operation) moves with long-term liquidity injections,” Ting Lu, Nomura’s chief China economist, said in an email. “This reflects an increasing caution of the PBoC to stabilize interbank rates and bond yields to offset potential liquidity shocks.”

Chinese Premier Li Keqiang announced in January that the government is also cutting its reserve requirement ratio — the amount of cash that banks have to hold — later this month. There were four such cuts in 2018.

(BBG) China December Trade Slumps as Trade War, Economic Slowdown Bite

(BBG)

Chinese trade slumped in December, sending regional stocks and the Australian dollar lower, as an unexpected fall in both exports and imports underlined the impact of the trade war and economic slowdown.

Exports in dollar terms fell 4.4 percent from a year earlier, while imports dropped 7.6 percent. Both were the worst result since 2016, and left a trade surplus of $57.1 billion.

China ended 2018 on a soggy note, with factory gauges entering contractionary territory, producer prices closer to deflation, and a drop off in the front-loading of shipments that had seen companies race to beat tariff increases. The downbeat trade data reignited concerns over global growth, weighing on regional equity benchmarks and currencies tied to China’s fortunes, such as Australia’s and New Zealand’s.

“There is a clear downward trend,” said Zhou Hao, an economist with Commerzbank AG in Singapore who was among the few accurately forecast a December contraction in exports. “This is not just due to the trade war and tariffs. On top of those, the major drag is slowing global demand.”

Bloomberg’s Global Trade Checkup has been weakening, with most of the 10 readings used to check the pulse of global commerce at the lower end of their average ranges.

A Fragile Truce Keeps Global Trade on Edge

Negotiators from China and the U.S. expressed optimism after mid-level talks wrapped in Beijing last week, bringing some temporary relief to global investors. Chinese Vice Premier Liu He is scheduled to visit the U.S. for the next round of talks in late January, but a pathway to a lasting resolution remains unclear

“While we don’t expect China and the U.S. to reach a grand deal before March 2019, we see 50 percent chance of some progress and further delays in additional tariffs,” UBS Group AG economists Ning Zhang and WangTao wrote in a recent note. “That said, due to persistent threat of higher tariffs and other related uncertainties, the positive impact of further tariff delays on overall economic growth will be limited.”

China’s policy makers have rolled out measures to support the domestic economy including more accommodative monetary and fiscal policies, as evidence mounts of the worsening slowdown. Stabilizing trade is one of the goals the leadership set for 2019, on top of supporting employment, investment and the finance sector.

For the whole of 2018, the picture was rosier — exports rose by 9.9 percent in 2018 in dollar terms to $2.48 trillion, while imports surged 15.8 percent last year, leaving a trade surplus of $351.8 billion, the customs administration said Monday.

The surplus with the U.S. rose more than 17 percent to $323.3 billion in 2018, driven by an 11 percent jump in exports and flat imports.

(NYT) China Offers Trump a Trade Peace Deal. It May Not Be Enough.

(NYT)

A combine harvests soybeans on a farm outside Salina, Kan. China has resumed its purchases of American soybeans, but it is not clear whether Beijing’s recent concessions will lead to a lasting truce on trade with the United States.CreditChristopher Smith for The New York Times

A combine harvests soybeans on a farm outside Salina, Kan. China has resumed its purchases of American soybeans, but it is not clear whether Beijing’s recent concessions will lead to a lasting truce on trade with the United States.CreditCreditChristopher Smith for The New York Times

BEIJING — China is buying American soybeans again and has cut tariffs on American cars. It is offering to keep its hands off valuable corporate secrets, while also allowing foreign investors into more industries than ever before.

Beijing hopes all of that will be enough to let President Trump declare victory and end the trade war between the two largest economies. But the offer combines some real concessions, like lower tariffs, with nebulous promises, and it will be hard to ensure that China sticks to its commitments.

That could make it a tough sell in Washington. The Trump administration’s trade hawks are still pushing for a lot more, while even the doves fret that the new promises need effective enforcement to make sure that China follows through, according to people with a detailed knowledge of American policymaking.

Many American officials and businesses complain that China has long wiggled out of commitments — accusations that China denies. And the more hawkish wing of the administration contends that Beijing’s assurances have been so vague that it is hard to discern any meaningful progress, a position some analysts support.

Beijing’s effort so far adds up “to a modest adjustment of Chinese foreign economic policy,” said Scott Kennedy, a scholar at the Center for Strategic and International Studies in Washington, “but nowhere close to the great leap in liberalization that the U.S. and others are seeking.”

Midlevel trade talks this week in Beijing, which will continue into Wednesday, have been productive. But if negotiators do not come to a deal in the coming weeks, the administration is poised to raiseAmerican tariffs on $200 billion a year in Chinese-made goods on March 2, amping up the trade war at a time when China faces rapidly softening growth and the American economy is facing headwinds.

It is not clear whether the moves will fully satisfy Mr. Trump. The American stock market, one of the president’s favorite barometers, has slumped in part over trade tensions. And further market gyrations could prompt the president to declare victory, even if China does not give up too much.

On Tuesday, Mr. Trump said in a message on Twitter that the talks were “going very well,” a sign that Beijing was at least moving in what he considered the right direction.

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China added a complicated new variable to the trade talks on Tuesday by inviting North Korea’s leader, Kim Jong-un, to Beijing. The invitation could increase pressure on Mr. Trump to reach a deal soon, but it might also antagonize national security hawks in his administration who worry about North Korea’s ballistic missile and nuclear weapons programs.

The White House has said China is an unfair trading partner. Its tariffs are too high, it says. It forces American companies to give up important technology to Chinese partners as a price for doing business there. It offers subsidies and cheap loans to Chinese companies that hope to compete with American companies in strategic areas like jetliners, semiconductors and electric cars.

Chinese officials dispute those claims. They say higher Chinese tariffs and strict investment limits are justified because China is still a developing country and well behind the United States in many economic respects. China’s manufacturing capabilities, they say, need upgrading for the country’s continued growth. They have consistently denied that the government allows forced technology transfers, saying some companies willingly share and make big profits in China doing so.

Still, China has begun to budge. Last month, it dropped retaliatory measures on American-made cars and resumed purchases of American soybeans. It has also reduced tariffs on more than 700 categories of goods from around the world.

Beijing has said it is considering a law that would forbid local Chinese officials to demand foreign companies transfer their technology to Chinese businesses through licensing agreements or joint ventures. It has also promised to open up more fully some sectors of the economy, such as vehicle manufacturing and brokerages, to foreign investors. The efforts, Beijing believes, will help the Chinese economy even as they placate Mr. Trump.

On cars and soybeans, American negotiators can claim some measure of victory. Soybean purchases have yet to reach earlier volumes, however, while Chinese imports of American-made cars are quite small since many are already made in China.

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Catch up and prep for the week ahead with this newsletter of the most important business insights, delivered Sundays.SIGN UPIn addition to buying American soybeans again, China has cut retaliatory tariffs on cars made in the United States and made other efforts. A new round of trade talks begins this week.CreditChristopher Smith for The New York Times

In addition to buying American soybeans again, China has cut retaliatory tariffs on cars made in the United States and made other efforts. A new round of trade talks begins this week.CreditChristopher Smith for The New York Times

But China had imposed measures on soybeans and cars to retaliate against American tariffs last summer on $50 billion of Chinese goods. By dropping them, without requiring the United States to abandon theirs, China is signaling that for now it is willing to accept higher American tariffs on some of its goods, provided they are not applied more broadly.

China’s other peace offerings are more ambiguous.

Chinese lawmakers last month released a draft of a proposed law that would stop local officials from forcing foreign companies to transfer their technology as a cost of doing business. The Trump administration says that Chinese industries like cars and aviation have benefited from American technology.

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The law may not change things meaningfully, said Donald Clarke, a specialist in Chinese law at George Washington University. The draft is vaguely worded, he said, and doesn’t acknowledge that the pressure American companies face to share their know-how often comes from behind-the-scenes maneuvering rather than strict government requirements.

As with many laws in China, it could also be moot if local governments decide not to enforce it or if penalties are not stiff enough.

“These forced tech transfers that people complain about don’t occur because some government department issues an order saying, ‘Transfer this tech,’” Mr. Clarke said in an email.

“It’s done through the government department getting involved behind the scenes in the negotiations, or not granting discretionary permission to do something unless some tech is transferred. It’s very hard to stop through a specific rule.”

Still, Chinese analysts say the pledges are significant. Chinese laws and regulations are often succinct — only a page or two when American laws or regulations would require dozens or even hundreds of pages. The real work lies in carrying out the regulations, and Beijing is now prepared to impose the new rules diligently, Chinese analysts say.

The issue of forced technology transfer “is a longstanding complaint by American businesses in China, and we are addressing it through legal adjustments,” said Tu Xinquan, the executive dean of the China Institute for World Trade Organization Studies at the University of International Business and Economics in Beijing. “So no matter what, there will be a positive impact to some extent, that is, in reducing America’s dissatisfaction with China.”

Chinese officials are also taking steps to strengthen intellectual property protections against counterfeiters and piracy. Chinese officials last month submitted a draft amendment to the country’s patent law that would raise the level of damages and fines for willfully infringing on patents.

One of the biggest beneficiaries might be companies in China. Big Chinese players have increasingly shed their reputation as copycats and have developed sophisticated technologies, and complain that local businesses can too easily steal their ideas.

“To be honest, in many areas, there is still insufficient motivation for innovation,” said Ma Yu, a research scholar in foreign investment research at the Chinese Academy of International Trade and Economic Cooperation. “So I don’t view these moves to be concessions or compromises, let alone harmful to us.”

The biggest sticking point in China’s package of concessions to the White House may be Made in China 2025, a government plan for developing high-tech industries. The Trump administration has repeatedly criticized the plan, saying it is evidence that China unfairly supports its own companies over foreign competitors in the Chinese market.

China has played down the catchy Made in China 2025 name. But there’s no concrete reason to believe that Chinese companies have halted or reversed their plans, or that officials are any less interested in plowing money into its state-owned enterprises. China’s Ministry of Industry and Information Technology, which played a major role in the program, said last month that it would continue to support development of new manufacturing processes, without mentioning the policy by name.

Jake Parker, vice president for China operations at the U.S.-China Business Council, an American business group, said that “it’s positive that China is taking steps proactively.”

But he also said that China had yet to completely fulfill its promises on issues ranging from opening up its market to credit-rating agencies and American banks to accepting credit card companies’ efforts since 2001 to offer full, nationwide service.

“Are more statements going to be enough to move the needle for President Trump?” Mr. Parker asked. “I think it would have to be a lot more robust than another policy. I don’t think this meets that bar.”

(Nikkei) Trump and Xi eye next summit as trade war roils markets

(Nikkei) US-China officials meet Monday in Beijing to flesh out compromises

A police officer rolls back a fence in front of the Great Hall of the People in Beijing, China. A U.S. government delegation arrives on Monday for trade talks.   © Reuters

WASHINGTON/BEIJING — U.S. President Donald Trump and Chinese President Xi Jinping are weighing the possibility of another face-to-face meeting in the first half of 2019, sources say, if progress can be made in the trade talks that begin Monday in Beijing.

The talks come after a turbulent first week of the year, which saw stock markets across the world fall sharply in response to weak economic data, but also recover in some markets on hints of positive news. Both Trump and Xi are concerned about the trade war’s impact on their economies and will be looking for a way to break the impasse.

“The China talks are going very well,” Trump told reporters on Sunday at the White House, when asked about the upcoming talks in Beijing. “I really believe they want to make a deal,” he said, noting that the weakness in China’s economy “gives them a great incentive to negotiate.”

Monday’s talks will be the first direct negotiations between the two sides on trade since Trump and Xi met for dinner in Argentina on Dec. 1. The U.S. delegation will include Deputy U.S. Trade Representative Jeffrey Gerrish and David Malpass, undersecretary for international affairs at the Treasury Department.

China offered to import an additional $1.2 trillion worth of American products at the Trump-Xi dinner last month. The agenda for Monday’s meeting will include deciding what products China will import more of.

If progress is made in the talks, China will send Vice Premier Liu He to the U.S. later this month for more in-depth discussion of issues that the two sides have been far apart on, such as intellectual property, according to sources. The two countries have started coordinating another summit in the event that they make some headway, which will involve Xi visiting the U.S. as early as the first half of this year. 

The South China Morning Post reported that Trump may meet with Chinese Vice President Wang Qishan at the annual World Economic Forum in Davos, Switzerland, later this month. The Chinese side is said to be seeking a solution to the bruising trade war through direct talks with Trump, given the U.S. president’s fondness for negotiating deals.

The two leaders called a cease-fire last month, agreeing to hold off on imposing more tariffs for 90 days while they negotiate a deal. The U.S. said that it will raise its 10% tariff on $200 billion worth of Chinese products to 25% if a deal is not reached by March 1. A further escalation of the trade war could put downward pressure on global capital markets, which have recently entered a correction.

Both Trump and Xi have started to become wary of the economic impact of the trade dispute at home. Trump, who faces re-election in the autumn of 2020, is increasingly frustrated over the recent decline in stock prices and has instructed Treasury Secretary Steven Mnuchin and others to address that issue, according to a Treasury Department official. With business confidence among U.S. manufacturers having worsened by the biggest margin in about a decade in December, Mnuchin and other doves in the administration would like to ease concerns over the economy by putting the trade war on hold.

The Xi administration naturally wishes to avoid the additional U.S. tariffs. Business sentiment among Chinese manufacturers has plunged over concern that exports to the U.S. will drop, leading to pressure to lay off workers. The government is working hard to dispel the concerns of companies and investors, with a Commerce Ministry spokesperson noting that negotiators from both sides have been in close contact even over the Christmas holidays.

However, China hard-liners in the Trump administration, including U.S. Trade Representative Robert Lighthizer and trade adviser Peter Navarro, are pressing for a major change in China’s trade and investment rules, including ending industrial subsidies and forced technology transfers. The Chinese government is supporting the cultivation of advanced technologies that could have military applications, such as fifth-generation wireless technologies, artificial intelligence and self-driving automobiles. Many American officials are deeply distrustful of Beijing, arguing that China has stolen U.S. technologies through industrial espionage, cyberattacks and other means.

Beijing has pressed ahead with the “Made in China 2025” initiative to nurture high-tech industries with huge subsidies. Some trade negotiators are optimistic based on the view that China will concede, including by revising that initiative, but hard-liners within the Trump administration are against a simple compromise, arguing that a framework for verifying improvements in China is necessary.

(NBC) Taiwan president calls for international support against Chinese threats

(NBC)

“We might have to ask which country might be next?” Tsai Ing-wen said in response to Beijing’s claim over the island.

Taiwan president urges China to use peaceful means to solve differences in New Year speech

President Tsai Ing-wen, center, takes part in the national flag raising ceremony in Taipei on Tuesday.TAIWAN PRESIDENTIAL OFFICE / HAN / EPAJan. 5, 2019 / 9:35 AM GMTBy Reuters

TAIPEI — Taiwan President Tsai Ing-wen called on Saturday for international support to defend the self-ruled island’s democracy and way of life in the face of renewed threats from China.

Tsai’s comments came days after Chinese President Xi Jinping said nobody could change the fact that Taiwan was part of China, and that people on both sides of the Taiwan Strait should seek “reunification.”

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“We hope that the international community takes it seriously and can voice support and help us,” Tsai told reporters in Taipei, referring to threats by China to use force to bring Taiwan under its control.

If the international community did not support a democratic country that was under threat, “we might have to ask which country might be next?” Tsai added.

Taiwan is China’s most sensitive issue and is claimed by Beijing as its sacred territory. Xi has stepped up pressure on the democratic island since Tsai from the pro-independence Democratic Progressive Party became president in 2016.

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President Xi said on Wednesday that China reserves the right to use force to bring Taiwan under its control but will strive to achieve peaceful “reunification” with the island.

In response, Tsai has said the island would not accept a “one country, two systems” political arrangement with China, while stressing all cross-strait negotiations needed to be carried out on a government-to-government basis.

Tsai on Saturday also urged China to have a “correct understanding” of what Taiwanese think and said actions such as political bullying were unhelpful in cross-strait relations.

(BULL) TAIWAN TURNS TO INDIA AFTER CHINA’S UNIFICATION THREAT

(BULL)

Taiwan turns to India after China's unification threat

Chinese President Xi Jinping said this week that Taiwan “must and will be” part of China again. This talk seems to have already caused consternation in the formerly Chinese-owned country as it looks to assert its independence and show that it can hold.|

Chinese President Xi Jinping said this week that Taiwan “must and will be” part of China again. This talk seems to have already caused consternation in the formerly Chinese-owned country as it looks to assert its independence and show that it can hold its own on the world stage.

Last week, Taiwan said that it wants to be a part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)and watched from the sidelines in recent trade talks at the APEC Summit held in Papua New Guinea at the end of 2018.

Now, the country is issuing statements about being more independent, which has led China to say that Taiwan has to reunite with the mainland at some point, preferably sooner rather than later. However, it appears that this rhetoric has merely instigated Taiwan to push forward with its own trade plans.

Due to its positioning in the Asia Pacific region, and particularly in the South China Sea, Taiwan has seen shows of aggression on all sides. The US is even trying to tempt Taiwan to work with it on trade, which could well be one of the reasons why China is taking a firmer stance.

There are clear signs that China is looking to increase the influence that it exerts in the region at present, but in the face of its strong words, Taiwan seemingly has no intention of taking any threats lying down.

Taiwan is now looking to reduce its dependency on China. It has a fairly heavy reliance on the nation due to its proximity and past ties. Jinping said this week that he did not oppose using military force to bring Taiwan back under China’s control.

It would seem that Taiwan’s best protection is to refuse to stay isolated on the matter and work on bilateral trade with other countries to show its outward international value.

The region’s current government came into power on the back of a wave of concerns over sharp reliance on China. Currently, 40% of Taiwan’s exports go to China, accounting for half of Taiwan’s GDP. The election manifesto called to “bid farewell to our past over-reliance on a single market.”

Taiwanese President Tsai Ing-wen introduced the New Southbound Policy, a document that sets out intentions to get new investment from other South Asian nations. India is at the top of the list.

The Taiwan External Trade Development Council will be working to achieve this, and Chairperson James Huang has called India “the jewel in our external economic strategy.” India’s mass labor market, low wages and skill in electronics are well suited to the Taiwanese tech sector.

With India’s aim to grow its GDP by 8%-10% and its population set to overtake China’s, there could well be a developing battle between the two nations to establish themselves as dominant powers in the burgeoning tech market. China is beginning to feel the effects of a trade war between itself and the US.

Taiwan is likely to struggle with growth if it cannot establish bases in other countries due to its shortages in land and energy capacity. Forming agreements with nations such as India could, therefore, help Taiwan to flourish, reduce its reliance on China, and gain support from elsewhere.

(BBG) Market Swoon Raises Stakes for U.S.-China Trade Talks Next Week

(BBG)

  •  Market confidence ‘hanging by a thread’: China cabinet adviser
  •  Mid-level negotiations set to begin in Beijing on Monday

Falling markets and increased warning signs in the world’s biggest economies are adding pressure on U.S. and Chinese negotiators to make progress on a trade deal during two days of talks in Beijing next week.

Deputy U.S. Trade Representative Jeffrey Gerrish will lead a delegation to meet Chinese counterparts starting Monday, China’s commerce ministry said in a statement. It will be the first time the two sides have met formally since Donald Trump and Xi Jinping agreed to a 90-day truce in Argentina last month.

News of the meeting helped boost Chinese stocks on Friday, as investors bet on easing tensions following a slew of bad news. After the market closed, China’s central bank acted to release money into the economy to support growth, cutting the amount of cash reserves lenders must hold by 1 percentage point.

With the trade war now starting to hit global stock prices and the pace of world economic expansion, both Trump and Xi have an incentive to strike a deal.

The S&P 500 Index dropped 2.5 percent on Thursday, while Apple Inc. shares plunged the most since 2013 after reporting it would miss a quarterly sales forecast because of slowing iPhone sales, especially in China. Chinese data this week also showed a worsening picture, with a manufacturing gauge signaling contraction for the first time since mid-2017. The Shanghai Composite Index hit a four-year low earlier this week.

“Market confidence and growth in 2019 is hanging by a thread and the trade negotiators are shouldering big hopes for a truce,” said Wang Huiyao, an adviser to China’s State Council and also founder for the Center for China and Globalization, a Beijing-based think tank. “Companies, the stock market and the real economy from the two countries are desperate for any signs of confidence.”

The talks next week will involve mid-level officials and be more technical in nature, dealing with non-tariff measures, intellectual property, agriculture and industrial purchases, two people familiar with the matter said. USTR Robert Lighthizer is expected to meet with Chinese Vice Premier Liu He, President Xi’s top economic adviser, later this month, one of the people said.

Robert Lighthizer, left, and Liu He.Photographers: Andrew Harrer/Bloomberg, Qilai Shen/Bloomberg

“Given the market sensitivities, both sides will likely want to convey a sense of progress coming out of this round,” said Michael Hirson, Asia director at Eurasia Group and a former U.S. Treasury Department official. “An important indicator of real progress will be whether they announce a substantive round of negotiations soon at a more senior level.”

The Trump administration has sought to portray recent market declines as a positive. White House economic adviser Kevin Hassett told reporters that lower sales for U.S. companies in China indicates economic pain that will give Trump leverage, saying it “puts a lot of pressure on China to make a deal.”

But other U.S. administration officials quietly concede that falling stock prices may have weakened their hand, even as they grow frustrated that Trump’s trade policy is being blamed for the slump. One person familiar with the White House internal discussions said the market moves were being used by advocates of a deal with China to press their case with the president.

Read More: Trump Trade War Advantage Slips as Apple Cites Slowing China

Where Trump will eventually come down remains unclear, the person added. But hawks in the administration continue to make the case that the long-term threat posed by China to the U.S. economy makes the fight worth having and that any meaningful deal could take years to negotiate.

After meeting Xi on Dec. 1, Trump agreed to put on hold a scheduled increase in tariffs on $200 billion in annual imports from China for 90 days while the negotiations take place. In response, China temporarily lowered tariffs on U.S. car imports for the same period.

Trump reported “big progress” in trade negotiations after a phone call with Xi last week. Beijing also announced a third round of tariff cuts, lowering import taxes on more than 700 goods from Jan. 1 as part of its efforts to open up the economy and lower costs for domestic consumers.

Still, the gap between the two sides remains large. While China has expressed an openness to a deal that involves increased purchases of American goods, Xi’s government has resisted U.S. demands for it to take real action on technology transfer and curtail state support for strategic industries like robotics, electric cars, computer chips and artificial intelligence.

Read More: China Heads Into Trade Talks Bracing for More U.S. Demands

For a truce to last China will have to implement extensive structural reforms, Citigroup Inc.’s London-based strategist Mark Schofield said in a note last month. Even if initially successful, uncertainty will remain and additional U.S. trade and investment restrictions are likely, he said.

“Rather than reflecting purely economic issues, Sino-U.S. trade tensions reflect strategic conflicts,” he said. “This renders such hostilities difficult to resolve and sets this conflict apart from other recent U.S. trade disagreements.”

People familiar with the talks next week said the U.S. delegation in Beijing would include officials such as Gregg Doud, USTR’s chief agricultural negotiator; David Malpass, the Treasury Department’s under secretary for international affairs; and Merry Lin, director for global and Asia economics at the National Security Council.

A realistic deal would include big Chinese purchases of U.S. agricultural and energy products, greater market access in areas like autos and financial services, and Chinese action on intellectual property, according to David Dollar, a former U.S. Treasury attache in Beijing and now a senior fellow at the Brookings Institution in Washington.

“Recent developments like the U.S. stock market correction and Apple’s declining sales hammer home the message that a trade war will be damaging to the U.S. economy,” he said. “And that it is in the administration’s interest to reach a practical compromise.”

(BBG) China Lands Probe on Far Side of the Moon in a World First

(BBG)

  •  Beijing wants to be one of top aerospace powers by 2030
  •  NASA administrator, Elon Musk congratulate China in tweets

China landed a lunar probe on the far side of the moon, the first ever spacecraft to reach the surface that always faces away from Earth and giving a boost to the country’s ambitious space program.

The Chang’e-4 lunar probe, named after the mythical Moon Goddess, landed at 10:26 a.m. Beijing time Thursday and relayed a picture, the People’s Daily newspaper reported.

The feat caps a series of lunar missions China has launched over the past few years as part of its plan to become one of the world’s top three aerospace powers by 2030. The nation’s space budget is about $8 billion a year, second only to the U.S. The moon landing comes at a time when tensions between the two powers are at a long-time high, with their economic, technological and military rivalry deepening amid China’s quest for dominance.

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China Xinhua News@XHNews

What does the far side of the moon look like?
China’s Chang’e-4 probe gives you the answer.
It landed on the never-visible side of the moon Jan. 3 http://xhne.ws/zPoty 1,4155:14 AM – Jan 3, 2019934 people are talking about thisTwitter Ads info and privacy

Aerospace is among sectors President Xi Jinping has identified as key to modernizing China’s economy. That means developing its own technology for planes, rockets, satellites and other spacecraft. In 2017, a state-owned company successfully test flew the nation’s first home-built single-aisle passenger plane. The country has also rolled out an alternative to American-owned GPS, while local startups are racing to launch rockets and microsatellites.

Space Billionaires Now Have a Rival With Even Deeper Pockets

Jim Bridenstine, the administrator at the U.S. National Aeronautics & Space Administration, congratulated China on the accomplishment in a Twitter post, as did billionaire Elon Musk.View image on Twitter

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Jim Bridenstine@JimBridenstine

Congratulations to China’s Chang’e-4 team for what appears to be a successful landing on the far side of the Moon. This is a first for humanity and an impressive accomplishment!3,7394:14 AM – Jan 3, 20191,407 people are talking about thisTwitter Ads info and privacy

Landing on the unexplored region will enable Chang’e-4’s rover to better study the moon because of the lack of electromagnetic interference from Earth. The rover is equipped with a low-frequency radio spectrometer to help scientists understand “how the earliest stars were ignited and how our cosmos emerged from darkness after the Big Bang,” according to China’s official Xinhua News Agency. Scientists will test whether plants can grow while on the moon, it said.

China’s Rival to GPS Technology Is Looking to Go Global

Chang’e-3, launched in 2013, and its rover Yutu — or Jade Rabbit — surveyed the moon’s geology and natural resources after a soft landing.

In May, China launched a relay satellite called Queqiao that’s now orbiting about 450,000 kilometers (280,000 miles) from Earth, where a gravitational equilibrium can be maintained so it stays on course to relay messages from the rover back to Earth.

A Long March-4C rocket carrying the Queqiao satellite lifts off in Xichang on May 21.Photographer: AFP via Getty Images

China also plans to launch its first Mars probe by the end of this decade, according to a white paper on the country’s space activities issued in 2016. It also aims to build its own space station in 2022, Xinhua reported.

NASA is pursuing a dual path of building a lunar orbital platform and returning astronauts to the moon in the mid-2020s, with the eventual aim to send humans to Mars. The Mars InSight craft landed on the planet on Nov. 26 to study its interior to help answer questions about the early days of the solar system.

(Reuters) Exclusive: White House considers new year executive order to bar Huawei, ZTE purchases

(Reuters) WASHINGTON (Reuters) – President Donald Trump is considering an executive order in the new year to declare a national emergency that would bar U.S. companies from using telecommunications equipment made by China’s Huawei and ZTE, three sources familiar with the situation told Reuters.

It would be the latest step by the Trump administration to cut Huawei Technologies Cos Ltd [HWT.UL] and ZTE Corp, two of China’s biggest network equipment companies, out of the U.S. market. The United States alleges that the two companies work at the behest of the Chinese government and that their equipment could be used to spy on Americans.

The executive order, which has been under consideration for more than eight months, could be issued as early as January and would direct the Commerce Department to block U.S. companies from buying equipment from foreign telecommunications makers that pose significant national security risks, sources from the telecoms industry and the administration said.

While the order is unlikely to name Huawei or ZTE, a source said it is expected that Commerce officials would interpret it as authorization to limit the spread of equipment made by the two companies. The sources said the text for the order has not been finalized.

The executive order would invoke the International Emergency Economic Powers Act, a law that gives the president the authority to regulate commerce in response to a national emergency that threatens the United States.

The issue has new urgency as U.S. wireless carriers look for partners as they prepare to adopt next generation 5G wireless networks.

The order follows the passage of a defense policy bill in August that barred the U.S. government itself from using Huawei and ZTE equipment.

China’s Foreign Ministry Spokeswoman Hua Chunying said that she did not want to comment on the order as it had not been officially confirmed.FILE PHOTO: A man walks past a sign board of Huawei at CES (Consumer Electronics Show) Asia 2018 in Shanghai, China June 14, 2018. REUTERS/Aly Song

“It’s best to let facts speak for themselves when it comes to security problems,” Hua said.

“Some countries have, without any evidence, and making use of national security, tacitly assumed crimes to politicize, and even obstruct and restrict, normal technology exchange activities,” she added.

“This in reality is undoubtedly shutting oneself off, rather than being the door to openness, progress and fairness.”

Huawei and ZTE did not return requests for comment. Both in the past have denied allegations their products are used to spy. The White House also did not return a request for comment.

The Wall Street Journal first reported in early May that the order was under consideration, but it was never issued.

HIT TO RURAL NETWORKS

Rural operators in the United States are among the biggest customers of Huawei and ZTE, and fear the executive order would also require them to rip out existing Chinese-made equipment without compensation. Industry officials are divided on whether the administration could legally compel operators to do that.

While the big U.S. wireless companies have cut ties with Huawei in particular, small rural carriers have relied on Huawei and ZTE switches and other equipment because they tend to be less expensive.

The company is so central to small carriers that William Levy, vice president for sales of Huawei Tech USA, is on the board of directors of the Rural Wireless Association.

The RWA represents carriers with fewer than 100,000 subscribers. It estimates that 25 percent of its members had Huawei or ZTE equipment in their networks, it said in a filing to the Federal Communications Commission earlier this month.FILE PHOTO – The logo of China’s ZTE Corp is seen on the building of ZTE Beijing research and development center in Beijing, China June 13, 2018. REUTERS/Jason Lee

The RWA is concerned that an executive order could force its members to remove ZTE and Huawei equipment and also bar future purchases, said Caressa Bennet, RWA general counsel.

It would cost $800 million to $1 billion for all RWA members to replace their Huawei and ZTE equipment, Bennet said.

Separately, the FCC in April granted initial approval to a regulation that bars giving federal funding to help pay for telecommunication infrastructure to companies that purchase equipment from firms deemed as a threat to U.S. national security, which analysts have said is aimed at Huawei and ZTE.

The FCC is also considering whether to require carriers to remove and replace equipment from firms deemed a national security risk.

In March, FCC Chairman Ajit Pai said “hidden ‘back doors’ to our networks in routers, switches — and virtually any other type of telecommunications equipment – can provide an avenue for hostile governments to inject viruses, launch denial-of-service attacks, steal data, and more.”

In the December filing, Pine Belt Communications in Alabama estimated it would cost $7 million to $13 million to replace its Chinese-made equipment, while Sagebrush in Montana said replacement would cost $57 million and take two years.

Sagebrush has noted that Huawei products are significantly cheaper. When looking for bids in 2010 for its network, it found the cost of Ericsson equipment to be nearly four times the cost of Huawei.

(SCMP) Thucydides Trap author Graham Allison says China and US must work together and not end up on path that leads to war

(SCMP)

  • Harvard scholar Graham Allison says China’s rising influence sets it at odds with the US’ notion of itself as a superpower and both need to take a step back

The scholar who warned that China and the US could be heading for war said the two powers needed to redefine their relationship with a “new strategic concept”.CHINA AT A GLANCEGet updates direct to your inboxE-mail *By registering you agree to our T&Cs & Privacy Policy

Graham Allison, who said Beijing and Washington could fall into what he called the Thucydides Trap – where a rising power threatens to eclipse a rival and conflict may result – told the South China Morning Post that the two were “in a dangerous period”.

“We need a new strategic concept for the relationship between US and China, because the old idea from an American perspective is that the strategic partnership has collapsed,” said Allison, who was recently in Beijing to attend a forum that fostered exchanges between Chinese and Western academics and policymakers.

“Unless we can find a new strategic concept that is good enough for each, we will continue rifting in this Thucydides dynamic which will be a very dangerous period,” said Allison, a professor at the John F. Kennedy School of Government at Harvard University. “And I think it is a dangerous period now … and it’s likely to get more dangerous if we don’t become more imaginative.”

Still destined for war? What Xi-Trump trade talks didn’t change

Relations between the two powers have been under increasing strain on trade, political and military fronts. While they agreed to a 90-day trade war truce this month, the risk of conflicts remains.

US Deputy Attorney General Rod Rosenstein will announce a China-related national security law enforcement action on Thursday. It is expected to involve criminal charges against hackers linked to the Chinese government.

US Vice-President Mike Pence has accused China of interfering in US domestic politics and warned Beijing that aggression would not be tolerated in the Indo-Pacific region. Military vessels from both nations have had an increasing number of close calls in the disputed South China Sea.

And Beijing is learning to cope with a growing bipartisan consensus in Washington for a tougher China policy.

“The US no longer sees China as strategic partner, but a strategic adversary,” Allison said. “It’s challenging for China. So people are asking themselves, ‘OK, what to do?’ I think the community is actively thinking, but it has not yet come up with anything specific [to do].”

Since Allison popularised the concept of the Thucydides Trap in an essay in 2015, it has sparked debate among political elites in Beijing and Washington.

Now, scholars and officials across the Pacific are looking for a way towards finding a balance between the competing powers.

Book review: Destined for War should scare you

“It needs to be done jointly,” Allison said. “And actually, interestingly, that is what [Chinese President] Xi Jinping hopes. He does not say, ‘I have a blueprint.’ He says, ‘I have a few pointers.’ You can have a new form of new power relations between rivals.”

In 2015, during a visit to the US for meetings with then president Barack Obama, Xi floated the proposal of building a “new model of major-country relations” that was based on principles of “non-conflict, non-confrontation, mutual respect and win-win cooperation”.

But Xi’s proposal was never embraced by the US leader. After Donald Trump took office in 2016, the relations took a further dip and Washington has officially identified China as a rival in both its national security and defence.

Speaking at the PLA’s National Defence University in Beijing last week, Xu Hui, dean of its defence studies college, expressed a similar viewpoint to Allison’s.

“We have been trying hard to define this relationship. But regrettably, we have not been able to reach a conclusion that is accepted by both the Chinese and American sides,” Xu said.This article appeared in the South China Morning Post print edition as: xi, trump w arned of dangerous days ahead

(Nikkei) China’s bleak economic data exposes trade war scars

(Nikkei) As consumer sentiment darkens, pace of expansion at 15-year low

China’s retail sales growth slowed in November, as consumers tightened their belts amid worries over the trade war with the U.S.   © AP

BEIJING/HONG KONG — The Chinese economy is showing clear signs of slowing down. November retail sales announced on Friday marked the lowest growth rate in more than a decade and a half, and growth in industrial output also fell to the weakest in years.

With consumers and business owners increasingly concerned about the fallout from the Sino-American trade war, the Chinese leadership is expected to tap such growth-friendly measures as tax cuts when setting its 2019 economic policy in the coming weeks.

Total retail sales — including sales at department stores, supermarkets and e-commerce sites — rose 8.1% in November from a year earlier, according to figures from China’s National Bureau of Statistics. That fell short of market forecasts and was down from 8.6% growth in October. November’s growth was the slowest since May 2003.

Car sales declined, as did sales of smartphones and other communication devices. A November slowdown is especially noteworthy because that month includes the Nov. 11 discount bonanza of Singles Day, the largest online shopping event in the world.

The National Bureau of Statistics had blamed October’s slower growth on consumers holding back ahead of Singles Day.

Li Xiang, a businesswoman from northern China’s Hebei Province, said sales were slow in her hometown.

A few years ago, she said, “Jewelry shops here were always jam-packed at the year-end because people were buying gifts for each other. But this year, whenever I passed by, I saw few customers inside. In fact, one jewelry shop near my home just went out of business,” Li said. She stopped buying jewelry herself awhile ago.

Other statistics released Friday added to concerns about the economy.

In manufacturing, auto production fell 17% in November as sales dropped 13%. Production of industrial machinery, robots and ethylene, all subject to U.S. additional tariffs, fell lower on the year.

Overall industrial production missed forecasts by rising 5.4% on the year in November, slowing from the 5.9% increase of October. The comparison versus last year looked especially bleak, given the many factories that were shut down last winter to reduce pollution.

Fixed-asset investment, a measure of private and public spending, including factory and condominium construction, rose 5.9% on the year in the January to November period, up from 5.7% for January to October. Real estate investment was firm, while manufacturers increased their spending on plant and equipment.

“Looking ahead, investment growth may still face downward pressure, while uncertainty will likely remain on retail sales growth,” Citibank said in a research note.

Economists expect a slowdown in China’s economic growth in 2019, with many forecasting gross domestic product to expand 6.2%, versus an expected 6.5% to 6.6% this year.

Goldman Sachs is among those that have pegged GDP growth at 6.2% for next year. In a recent report, the U.S. investment bank said it expects the Chinese government to lower its growth target modestly to 6% to 6.5%. Goldman said that while Chinese policymakers are likely to accept a “mild deceleration” in economic growth for 2019, it does not expect Beijing to tolerate a growth rate of 6% or lower.

Ting Lu, chief China economist at Nomura in Hong Kong, is slightly more cautious than Goldman and many other economists, forecasting GDP growth of 6.1% next year. “We believe that growth will continue slowing this quarter and in the first half of next year, and most likely it will reach the bottom in the second or third quarter of next year” before moderating, he said at a media briefing on Monday.

Lu said he expects the government to introduce a more aggressive fiscal policy and deregulation of the property market around midyear to help stimulate the economy.

Ben May, director of global macro research at Oxford Economics, in a report published Monday, said: “In China, weakening survey indicators have raised concerns in some camps of a repeat of the 2015-16 soft patch or perhaps worse,” adding that Oxford Economics’ prediction of 6.1% growth next year is at the low end of consensus forecasts.

“However, it is worth emphasizing that our forecast still implies a modest recovery in growth versus [the fourth quarter of] 2018, as the effects of the recent and prospective stimulus measures come through.”

The government is expected to try to maintain moderate economic growth next year. On Thursday, the Politburo, the Communist Party’s top decision-making body, said: “We will promote steady growth, promote reform, adjust [the] structure, benefit people’s livelihood, prevent risks in a coordinated way, and keep economic operation in a reasonable range,” according to a report by state-owned news agency Xinhua.

(ZH) Second Canadian Citizen Disappears In China

(ZH) For a trade war that was supposed to be between the US and China, Canada has found itself increasingly in the middle of the crossfire. And so after the arrest of a former Canadian diplomat in Beijing in retaliation for the detention of the Huawei CFO in Vancouver, Canada said a second person has been questioned by Chinese authorities, further heightening tensions between the two countries.

The second person reached out to the Canadian government after being questioned by Chinese officials, Foreign Minister Chrystia Freeland said, at which point Canada lost contact with him. His whereabouts are currently unknown and Global Affairs Canada said they are in contact with his family.

“We haven’t been able to make contact with him since he let us know about this,” Freeland told reporters Wednesday in Ottawa. “We are working very hard to ascertain his whereabouts and we have also raised this case with Chinese authorities.”

According to the he Globe and Mail, the man was identified as Michael Spavor, a Canadian whose company Peaktu Cultural Exchange brings tourists and hockey players into North Korea. He gained fame for helping arrange a visit to Pyongyang by former NBA player Dennis Rodman, and he met North Korean leader Kim Jong Un on that trip, the newspaper reported. Attempts to reach Spavor on his contact number either in China, or North Korean went straight to voicemail.

Spavor’s personal Facebook page contains several images of him with North Korean leader Kim Jong-un including one of him with both Jong-un and former Dennis Rodman at an undisclosed location.

Michael P. Spavor, right, pictured here with North Korean leader Kim Jong-un, second from right, and Dennis Rodman.

Another image shows the two sharing a drink on a boat.

The unexplained disappearance takes place after China’s spy agency detained former Canadian diplomat Michael Kovrig in Beijing on Monday, who was on leave from the foreign service. The arrest came nine days after Canada arrested Huawei Chief Financial Officer Meng Wanzhou at the request of U.S. DOJ. While Canada has asked to see the former envoy after it was informed by fax of his arrest, Canada is unaware of Kovrig current whereabouts or the charges he faces.

“Michael did not engage in illegal activities nor did he do anything that endangered Chinese national security,” Rob Malley, chief executive officer of the ICG, said in a written statement. “He was doing what all Crisis Group analysts do: undertaking objective and impartial research.”

One possibility is that Kovrig may have been caught up in recent rule changes in China that affect non-governmental organizations, according to Bloomberg. The ICG wasn’t authorized to do work in China, Foreign Ministry Spokesperson Lu Kang said during a regular press briefing in Beijing Wednesday.

“We welcome foreign travelers. But if they engage in activities that clearly violate Chinese laws and regulations, then it is totally another story,” he said, adding he had no information on Kovrig specifically.

As Bloomberg further notes, foreign non-governmental organizations are now required to register with the Chinese authorities under a 2017 law that subjects them to stringent reporting requirements. Under the law, organizations without a representative office in China must have a government sponsor and a local cooperative partner before conducting activities. ICG said this is the first time they’ve heard such an accusation from the Chinese authorities in a decade of working with the country. The company closed its Beijing operations in December 2016 because of the new Chinese law, according to a statement. Kovrig was working out of the Hong Kong office.

Meanwhile, realizing that it is increasingly bearing the brunt of China’s retaliatory anger, Trudeau’s government distanced itself from Meng’s case, saying it can’t interfere with the courts, but is closely involved in advocating on Kovrig’s behalf.

So far Canada has declined to speculate on whether there was a connection between the Kovrig and Meng cases, with neither Freeland nor Canadian Trade Minister Jim Carr saying Wednesday that there is any indication the cases are related. Then again, it is rather obvious they are. Indeed, Guy Saint-Jacques, who served as ambassador to China from 2012 to 2016 and worked with Kovrig, says the link is clear. “There’s no coincidence with China.”

“In this case, they couldn’t grab a Canadian diplomat because this would have created a major diplomatic incident,” he said. “Going after him I think was their way to send a message to the Canadian government and to put pressure.”

Even though Meng was granted bail late Tuesday, that did not placate China, whose foreign ministry spokesman said that “The Canadian side should correct its mistakes and release Ms. Meng Wanzhou immediately.”

The tension, according to Bloomberg,  may force Canadian companies to reconsider travel to China, and executives traveling to the Asian country will need to exercise extra caution, said Andy Chan, managing partner at Miller Thomson LLP in Vaughan, Ontario.

“Canadian business needs to look at and balance the reasons for the travel’’ between the business case and the “current political environment,’’ Chan said by email. Chinese officials subject business travelers to extra screening and in some case reject them from entering, he said.

Earlier in the day, SCMP reported that Chinese high-tech researchers were told “not to travel to the US unless it’s essential.”

And so, with Meng unlikely to be released from Canada any time soon, expect even more “Chinese (non) coincidences”, until eventually China does detain someone that the US does care about.

(ZH) This is What The “Trade” War With China Is Really All About

(ZH) Forget soybeans, auto imports, iPhones, crude oil, and cheap Chinese gadgets. Also forget tariffs, duties, and subsidies. Even forget weapons.

The real reason behind the US-China “trade” war has little to do with actual trade, and everything to do with what China’s president, Xi Jinping, said when he visited a memory chip plant in the city of Wuhan earlier this year. In a white lab coat, he made an unexpectedly sentimental remark, comparing a computer chip to a human heart: “No matter how big a person is, he or she can never be strong without a sound and strong heart”.

What is really at the basis of the ongoing civilizational conflict between the US and China, a feud which many say has gradually devolved into a new cold war if few top politicians are willing to call it for what it is, are China’s ambitions to be a leader in next-generation technology, such as artificial intelligence, which rest on whether or not it can design and manufacture cutting-edge chips, and is why Xi has pledged at least $150 billion to build up the sector.

But, as the FT notes, China’s plan has alarmed the US, and chips, or semiconductorshave become the central battlefield in the trade war between the two countries. And it is a battle in which China has a very visible Achilles heel.

Even with the so-called truce between the two sides signed last weekend, and which promptly unraveled after the Huawei CFO’s arrest was unveiled last week, Washington plans to ramp up export controls next year on so-called foundational technologies — those that can enable development in a broad range of sectors — and the equipment for manufacturing chips is one of the key target areas under discussion.

This is a concern for China as the $412 billion global semiconductor industry rests on the shoulders of just six equipment companies, with three of them based in the US. Together, these companies make nearly all of the crucial hardware and software tools needed to manufacture chips, meaning an American export ban would choke off China’s access to the basic tools needed to make their latest chip designs.

“You cannot build a semiconductor facility without using the big major equipment companies, none of which are Chinese,” said Brett Simpson, the founder of Arete Research, an equity research group. “If you fight a war with no guns you’re going to lose. And they don’t have the guns.”

To observe China’s reliance on foreign products, look no further than the over $300 billion in semiconductor equipment China has imported over just the past 12 months.

Chart: @brad_setser

To be sure, under Beijing’s auspices, Chinese chip companies have made enormous gains in semiconductor design as well as chip testing and packaging, in an attempt to catch up to the US. Several private and state-owned Chinese companies — Intel-backed Tsinghua Unigroup, Cambricon Technologies and Huawei’s HiSilicon among them — have already begun to venture into designing the leading edge chips capable of AI applications.

But, as the FT, notes, the real difficulty is not in designing the chips, but in making them: “From a design perspective, Chinese companies are at least on par with anyone else in the world,” said Risto Puhakka, president of VSLI Research. “Where they have a challenge is if they decide to make a very cutting-edge chip.”

The country’s recent scramble, amid the push for China 2025 strategic plan, to become technologically self-sufficient in chip production is clearly visible in the next chart, showing the big spike in recent imports of equipment for semiconductor manufacturing.

Chart: @brad_setser

Still, as Chinese semiconductor plants try to catch up, they have few choices when outfitting or upgrading their chip foundries. The reason: only a few equipment suppliers remain after a decade of consolidation.

Foremost among them is the Netherland’s ASML, which makes the photolithography machines that print and etch designs on to silicon wafers. It is the only supplier of the extreme ultra violet (EUV) lithography machines needed to make a 7-nanometre processor, the industry’s current gold standard.

Over in the US, Lam Research and Applied Materials as well as Japanese company Tokyo Electron dominate the market for equipment that can deposit billions of transistors and other active components on to a single chip. Another US company, KLA Tencor, sells much of the technology used in testing and monitoring the quality of chip production.

It is China’s reliance on these companies, more than any down swing in the stock market, that has made it vulnerable.

“Firms like Applied Materials, Lam Research and KLA-Tencor made 10 to 20 per cent of their revenues in China in 2017, a share which is expected to rise in 2018,” said Dan Wang, an analyst at Beijing research group Gavekal Dragonomics. “China is a large and growing market for them, and these companies don’t want export controls that are too restrictive.”

What would happen if the trade war escalates to prevent China from catching up with the US technologically?

Under current laws, an export ban on semiconductor equipment would mean both foreign companies, such as Samsung and Intel with foundries located in China, as well as wholly owned Chinese foundries would be unable to buy American equipment, though foreign companies are likely to be able to apply for waivers.

“One of the ideas of export controls is to prevent the release of the tech to certain foreign nationals from China: as an example, that could mean to a Chinese national wherever they are located, or to anyone within the physical geographic region of China,” said Anthony Capobianco, a partner at Hogan Lovells in Washington DC.

A US ban would also impact non-American chip equipment suppliers, because of the integration of what is a highly specialised supply chain: “ASML cannot do without Applied Materials and the other way around. If you take even one out of the value chain, that may hamper Chinese fabs,” said a former ASML executive.

Puhakka of VSLI Research said: “[These equipment suppliers] have the research and development, the trade secrets in metallurgy, the recipes: all of that knowledge base is 40 years old.” said VSLI Research’s Mr Puhakka.

“This is not about money. This about the knowledge base . . . and that knowledge base is not moving” he added, delineating China’s core dilemma.

* * *

Still, slowly China is catching up and some mainland companies are starting to produce their own chip-making equipment. At the head of the pack are Shanghai-based AMEC, which makes both wafer fabrication and packaging equipment for 28nm chips, Shanghai Micro Electronics Equipment, which is creating chip-etching lithography machines, and CETC, the state defence company, which announced a 28nm ion implanting device this August.

But what matters in the global technological arms race is that no Chinese company is close to being able to offer equipment that can produce the current target size of 7nm chips. SMEE’s machines can only match what ASML was able to do about 15 years ago. Today’s most basic smartphones require chips that are between 14nm and 16nm in size, but the smallest chips offered by China’s biggest manufacturer, SMIC, is 28nm.

And if the US cuts them off from purchasing foreign equipment, Chinese plants will also miss out on accumulating operational experience. “Basically, it’s a double whammy,” said Mr Simpson from Arete Research.

“You’ve got two big bottlenecks. You need to get the equipment into your fabs [plants] and secondly, you’ve got to know how it runs and the intellectual property process to make use of that equipment,” he explained.

Of course, being behind doesn’t mean China would give up, and if faced with US export controls, Chinese-owned plants could simply continue producing lower-end semiconductors, such as analogue chips, used in everything from industrial robots to electric vehicles.

However, out of reach in the medium term would be making the most advanced chips able to support AI functions or 5G telecommunication networks. Leading edge chips are also where sales and margins are highest. TSMC expects revenue from sales of advanced chips 28nm and smaller to rise to as much as 70% by this year, up from 42% only four years ago.

The risk is that an overly aggressive posture would backfire, and force China to become entirely self sufficient, because in the long term, analysts said, a US export ban would likely cement Beijing’s resolve to cultivate a wholly home grown semiconductor industry along every step, from design to fabrication to packaging.

“In the short term, US export controls can seriously set back Chinese progress on semiconductors. In the longer term, it’s hard to say if China will be permanently set back,” said Gavekal’s Wang, noting that fear of US export controls helped marshal the resources that shaped Japan’s most dominant semiconductor equipment players.

“The more tightly the US controls these goods, the more important it becomes for China to make these goods itself.”

At the end of the day, however, it is a simple question of money, because if China is willing to throw enough money at the problem, the solution will come. And as we showed back in May, China has every intention of not only matching, but surpassing total US military spending – springing the biggest Thucydides Trap ever witnessed in civilization – and in light of the importance of an autonomous, self-reliant semiconductor industry, one can argue that much of this spending will go toward beating the US where it truly matters…

… in the technological arms race.

Because remember what Bank of America’s Michael Hartnett said half a year ago: for all the talk of the escalating confrontation between the US and China, the “trade war” of 2018 should be recognized for what it really is: “the first stage of a new arms race between the US & China to reach national superiority in technology over the longer-term via Quantum Computing, Artificial  Intelligence, Hypersonic Warplanes, Electronic Vehicles, Robotics, and Cyber-Security.”

Which is why, at this point delaying Beijing may be the best option for the US which is slowly but surely losing its one insurmountable technological advantage. But while that may win the short-term battle, will it merely lead to an even faster victory for China in the war, first trade and eventually, real.

(ZH) Futures Tumble After China Summons US Ambassador, Threatens “Further Action” Over Huawei Arrest

(ZH) Update: Amid escalating tensions and stern words from both sides (China warning both Canada and the US over Huawei CFO’s arrest, warning of “retaliation” and “further action”, with the US countering with “hard deadlines” and concerns of “predatory behavior”), US futures have tumbled at the open, back below Thursday’s pre-panic-bid lows.

Of course, it’s not just China-US tensions, as Bloomberg notes: Here’s a non-exhaustive list of potential risk-off drivers hanging over Monday’s open (as succinctly summarized by Bloomberg’s Garfield Reynolds):

  • China summons U.S. Ambassador over the Huawei case
  • Trump Chief of Staff Kelly to leave, amid a welter of fresh Mueller developments
  • China reports weaker trade and inflation data
  • May pushes ahead on Brexit vote despite Cabinet, DUP opposition
  • Soggy U.S. payrolls, though not soggy enough to stop a December Fed hike
  • France protests intensify, raising concern of economic damage

Given all that list Dow -200 is not too bad:

The S&P and Nasdaq are also falling.

As Bloomberg’s Mark Cranfield further notes, ES futures only need to drop another 0.6% and it will goodbye to the October low and could trigger an acceleration of the down move.

The next area of support is likely to be between 2,550 and 2,562, which were the low points in February and April. However bad it gets for E-Minis in Asia, it wouldn’t be surprising for Wall Street to reverse some of the damage when it opens later on Monday. But if there is no climbdown from the U.S. on the Huawei arrest, the bears are still set to be the winners.

Meanwhile, gold and Crude are modestly higher.

easury futures are bid, implying 10Y Yields down around 2bps.

* * *

Earlier:

The trade truce between the US and China was fun while it lasted for about 24 hours.

Following the Dec 1 arrest of Huawei Technologies CFO Meng Wangzhou (which took place right around the time Trump and Xi were having dinner in Buenos Aires, and which the entire top echelon of the Trump administration claims to have been unaware of heading into the dinner), on Saturday China made its growing displeasure and rising anger clear when Chinese Vice Foreign Minister Le Yucheng summoned Canadian ambassador to China John McCallum to urge the immediate release of Meng, threatening Canada with grave consequences and calling her arrest as she changed planes in Canada “unreasonable, unconscionable and vile in nature.”

Artist’s sketch of Meng Wanzhou in a Canadian courtroom

Le told McCallum that the arrest was a severe violation of a Chinese citizens’ legitimate rights and interests. The move ignored the law, and Canada should be held accountable if Meng was not immediately released, Le said in the statement.

Meng’s arrest, based on allegations that she committed fraud to sidestep sanctions against Iran with the help of the one bank which over the past decade was directly and indirectly implicated in virtually every instance of money laundering, HSBC, has become a flash-point in trade tensions between the U.S. and China, roiling markets and judging by the latest news, when futures reopen for trading in a few hours we may see another flash crash, because moments ago China’s Vice Foreign Minister doubled down when Le Yucheng also summoned the U.S. Ambassador to China, Terry Branstad, in a protest over the arrest of the Huawei Chief Financial Officer.

CGTN

@CGTNOfficial

China’s Ministry of Foreign Affairs summons U.S. Ambassador to China Terry Branstad to protest the arrest of CFO Meng Wanzhou by Canadian authorities, which took place at the request of the United States

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The minister said U.S. actions have violated the “legitimate rights and interests of Chinese citizens and are extremely bad in nature,” according to a posting on the ministry website. “China will take further action based on the U.S. actions.”

Curiously, attempts to access the Chinese foreign ministry website from abroad have proven unsuccessful.

Like with Canada, the ministry urged the US to withdraw the Huawei CFO arrest warrant, crushing any speculation that Beijing was allowing the US to arrest her as a sign of “goodwill” in ongoing negotiations.

As a reminder, on Friday, the U.S. began a case against the Chinese telecoms giant in a Vancouver courtroom, alleging that Meng had hidden ties between Huawei and a company called Skycom that did business in Iran, said a lawyer representing Canada during the court hearing.

Meng, 46, daughter of Huawei’s founder, is spending the weekend in jail after a decision on whether to grant bail was not reached amid concerns any bail amount would prove too low and she would promptly flee back to China. The case will continue on Monday.

The second official warning in 24 hours marks a sharp escalation in Beijing’s rhetoric as investors – still weary from Wednesday’s S&P futures flash crash after news of her arrest first hit – worry that the arrest could crush the unstable trade detente between the US and China, resulting in even more aggressive tariffs. As a reminder, a federal US judge had issued a warrant for Meng’s arrest back in August. Though after she was made aware of the warrant, Meng avoided travel to the US. She was arrested in Vancouver last Saturday while traveling to Mexico.

Aside from breaking off trade talks, some are worried that Beijing could seek to retaliate in kind by arresting one or more notable US executives, which in turn prompted Cisco to “erroneously” advise its employees against non-essential travel to China. And while the threats of Chinese bureaucrats might not amount to much in the eyes of US prosecutors, threatening a US executive with long-term detention in a Chinese “reeducation camp” just might.

(ECO) Visita de Xi: E se Portugal tiver de escolher entre americanos e chineses em Sines? – Paulo Portas

(ECO) Na prática, Portugal e sobretudo Sines podem interessar às duas potências do mundo do futuro. Mas convém ter a noção de que não são interesses conciliáveis e que podemos ter de fazer escolhas.

Em geral a visita de Xi Jinping correu bastante bem. É muito positivo que se estabeleça uma rotina de visitas de Estado importantes entre Portugal e a República Popular da China. O Presidente Xi Jinping escolheu Portugal como um dos dois países europeus para este périplo — já tinha estado nos Açores há uns anos durante umas horas — e o Presidente Marcelo irá à China em abril do próximo ano. Suponho que a seguir haverá visitas a nível de primeiro-ministro com reciprocidade. Portugal tem, pela historia, uma ligação especial com a China, que nem todos os países têm — antes pelo contrário — e que gostariam de ter. Portugal foi dos países que levou o Ocidente para o Oriente e a transição de Macau — sobretudo em comparação com Hong Kong — é lembrada por Beijing como exemplar. Quem tem essas vantagens comparativas não as desperdiça.

Tenho muitas dúvidas, certamente, mas também tenho uma certeza sobre o que deve ser a estratégia nacional depois de Portugal ter deixado de ser um Império. Devemos ser ser aliados dos nossos aliados, mas também temos de multiplicar as parcerias porque aconteceu a Portugal ser apenas continental e europeu, tivemos enormes problemas com a nossa independência. Dito de uma forma mais simples: sou a favor de diversificar as nossas dependências para garantirmos melhor a nossa independência.

Nesse sentido há coisas que correram bem. Por exemplo, no domínio agroalimentar, vamos ter um centro de serviços da maior empresa agroalimentar da China: não é coisa pouca. Na área aeroespacial e da ciência houve um acordo importante que é um princípio de entrada no sistema de produção de satélites da China. Nos últimos anos a China entrou a fundo neste mercado — não apenas como produtor mas também como prestador de serviços (lança satélites de países terceiros).

Ponto mais sensível é a participação de Portugal no OBOR (para simplificar é uma espécie de nova Rota da Seda). É um gigantesco projeto de diplomacia económica, que visa garantir a expansão geoeconómica (e, portanto, também geopolítica) da China, assegurando conexões com a Eurásia, com África e com a América Latina. Em princípio Portugal estaria longe, geograficamente, deste projeto.

Nesta nova Rota da Seda, o único país da Europa Ocidental que até agora tinha assinado um memorando no sentido de dizer ‘estou presente nesta projeto’ tinha sido a Grécia. Não é uma grande companhia. Chamo a atenção para o facto de Espanha se ter escusado diplomaticamente de participar, no início da visita de Xi Jinping. Devemos estar conscientes de que o projeto é de tal dimensão que não deixara de ser lido do ponto de vistas das relações atuais e futuras dos ocidentais com os chineses.

Portugal não tem de tomar a mesma posição que a Espanha tomou; e as nossas autoridades certamente conhecem as declarações da Administração dos EUA sobre o OBOR. O nosso interesse nacional é o nosso e é independente e tem primazia. Podemos tomar opções que às vezes não agradam excessivamente aos nossos amigos habituais. Não somos os únicos. Por exemplo, a Administração Obama ficou muito incomodada — to say the least — quando o UK decidiu (sem consultar Washington) ser acionista do novo Banco Asiático de Investimento em Infra Estruturas, outro projeto nuclear de afirmação global da China.

Mas há um ‘porém’ que Portugal deve ter em atenção. Aquilo que interessa aos chineses, Sines como hub, como placa giratória para melhor chegarem à África Ocidental e, sobretudo, para terem melhor acesso ao Canal do Panamá.

Panamá, país que Xi Jinping também visitou neste périplo — et pour cause. Sucede que Sines também está, pelo menos em tese, nos objetivos potenciais dos Estados Unidos. Porquê? Porque os americanos passaram a ser exportadores líquidos de energia e consideram relevante contribuir para a redução da dependência que a Europa tem do gás da Rússia. Acham por isso exportar o gás para a Europa e reexporta-lo — a partir da Península Ibérica — para o centro da Europa. Para isso é preciso armazenar e garantir as conexões para lá dos Pirenéus (boa parte dos ‘pipelines’ em Espanha e Portugal estão infra utilizados dada a resistência dos franceses).

Não sendo credível que Portugal esteja a sugerir a um aliado — os EUA — e a um parceiro especial — a China — o mesmo bem, a minha interpretação é que Portugal está a valorizar Sines, e nesse sentido está a aumentar o preço extraordinário que pode ter o segundo terminal de Sines.

Mas atenção: terá de haver um concurso público que obedece as regras europeias, para esse mesmo segundo terminal de Sines. Ora, a sugestão de que Sines esta na rota do OBOR pode parecer a sugestão de que a China lidera o interesse no segundo terminal. Se fosse isso era uma antecipação menos prudente. Talvez por isso o Memorando de Entendimento (que passou relativamente discreto) invoque as decisões que Portugal terá de tomar de acordo com as regras europeias e seja tão político que acaba por mencionar não ser juridicamente vinculativo…

Esta questão é a mais interessante da visita (e uma das menos abordadas). Na prática Portugal e sobretudo Sines podem interessar às duas potências do mundo do futuro. Mas convém ter a noção de que não são interesses conciliáveis e que podemos ter de fazer escolhas — o que deixa sempre rastro e lastro.

A propósito de portos, cuidado com o que está a acontecer com o Porto de Setúbal e afeta gravemente as exportações portuguesas. São cinco meses de greve que chegaram a um nível perigoso. Praticamente o porto de Setúbal esteve parado no mês de novembro.

Oiço dizer, e se isso for verdade é bastante grave, que estão cerca de 20 mil automóveis da Autoeuropa, à espera de ser embarcados, junto ou na base aérea do Montijo. Há vários setores que são prejudicados e a partir de um certo limite, os efeitos são em cascata. Há um limite para tudo — e passado esse limite não é uma greve, é uma agressão à economia nacional.

Nota: A opinião de Paulo Portas é publicada com base no comentário semanal no Jornal das Oito da TVI, ao domingo,