US/China Trade War

Talks between a Chinese delegation and the US are being billed as low level talks. The Chinese delegates will be led by the Vice Minister of Commerce Wang Shouwen. They are meeting US treasury representatives headed up by the Under Secretary for International Affairs David Malpass. The moves leading up to the meeting have all been signalling what is likely to come. On Friday it was reported via the BBC that, 'China is preparing for strikes against the US'. This was based on a Pentagon's annual report to congress. There was a quote from the report that said:

"Over the last three years, the PLA [People's Liberation Army] has rapidly expanded its overwater bomber operating areas, gaining experience in critical maritime regions and likely training for strikes against US and allied targets," the report says

China has been building a number of islands in the South Pacific and if you look at the BBC report here you get a pretty interesting video clip of a US plane flying over international air space and being told to clear off by the Chinese air controller. China wants control of the the seas off their coast and thy want to try and repel the US as far away as possible. China is trying to develop a navy to control those waters. At the moment it has the second hand aircraft carrier the Liaoning bringing their tally up to two aircraft carriers. However, their crew are still inexperienced and it takes years and years to get a crew proficient enough to sail around the world, fight a war, and then come back. China wants to try and ensure it has it's roots to markets and a good navy can keep waters clear for you. So, China is in a constant state of agitation trying to influence it's coastal neighbours through threat or reward that they should side with Beijing. The US by contrast is trying to maintain it's interests in China recognising that nearly half the world's population are projected to be living in that region in the near future.

So China wants to expand it's geo-political influence. However, China has a problem and Trump knows it very well. Check out Adam's post here on 'three signs that Trump is headed to war with China'.

The problem is China is deeply locked into the global economy. If we don't buy it, then China don't make it. This potential lack of production would result in mass unemployment in China and then civil unrest. The unspoken deal between the communist Party Leaders is 'if we make you better off, we make the rules'. If there is large scale unemployment the deal will quickly be off. Compounding this problem is China's ability to feed their own population. According to their Ministry of Agriculture 40% of their arable land is either polluted or is experiencing problems associated with thinning topsoil. So, China is in a tight spot here with the US/China trade war and Trump knows it. He has hit them right where it hurts by focusing tariffs on all their half a trillion exports to the US. Ouch. China will hate it, but they will have to find a way to do a deal. China has made a deal with the world, 'we'll make it cheap, you buy it cheap'. They have to keep selling and doing it cheaply. So, Trump is going to put the squeeze on for sure. The question is not if, but when, the Chinese capitulate to Trump and make a deal. All the signs this week have been showing a China ready to play ball.

The Chinese will back down. For trading, it is just a question of getting the timing right. The AUD rally should be worth it when it does.