Saturday, July 21News That Matters

It is soon going to be China vs rest of the world: Michael Every


If China tries to dump the US treasury bonds, who will buy them? China does not have the half the ammunition people think it does, says Michael Every, Head of Financial Markets research, Asia-Pacidic, Rabobank, talking to ET Now.

Edited excerpts:

Has a genuine trade war started now?

How can a trade war not start when Trump has put tariff on China? Do you think he is joking and he is going to pull out a fake gun or a fake pistol from underneath his desk and pull the trigger and it will go bang on the little flag.

So, what is coming next?

At some point, you are going to see retaliation. China has moved forward with $3 billion in tariffs today which is really very small but Trump said when he signed the order in the White House, that there are more to come.

If you listen to the tone in Washington, there probably are more to come at which point then the issue becomes what happens next? Either nothing happens at which point US has put tariffs on China and China takes it does nothing about it or China tries to push back one way or another.

The broader issue which is far more relevant is what happens when Trump says to every other country around the world that I want to put steel tariff on you unless you put tariff on China. This is clearly the direction that he is moving in or at least you confront him in the WTO, and then it becomes everybody against China.

For the longest time, we have not seen fear of a trade war. All we have seen in the last two decades is that global economies have opened up, more globalisation and international tariff rates have been brought down. Is that cycle likely to reverse and in that case, could there be serious long-term and big repercussions on global growth?

Well, the answer is definitely yes. The US is making abundantly clear that they are not opposed to globalisation and they are not opposed to free trade but China is. The message that is coming from the White House is that they are not prepared to continue to serve energy and effort into building an international trading and economic and financial architecture that basically allows China to continue to grow using mercantilism which is what it has been doing for decade after decade.

It is a brilliant growth story by the way. It has been incredibly effective for China just as it was for Korea and Japan and indeed for the US itself in the past. But the US is not allowing or not going to allow it to continue. So, if the rest of the world is not going to confront China, the US is going to walk away or walk away from the WTO, it will walk away from everything that we understand and it will start trading with a likely group of countries on terms it prefers.

Having said that, if everyone is prepared to confront China, then we can move back to something a little bit more the way things used to be, but that would involve China adapting and changing itself or ringfencing itself, basically saying we will now leave out these countries and buy from these countries. So, potentially we are moving very rapidly in that direction. The world we are tracking together as a giant open system, is going to change into a very different dynamic.

What is that we are eventually staring at right now? Do you think Beijing is likely to sell treasury bonds and that could have a big ramification for equity markets too? In that case, besides the knee-jerk reaction that we are bound to see today, tomorrow and I do not know for how many more days?

I am describing a world in which in the minimum, we go towards something like a Cold War and at the maximum, we have something similar to the Russians which led to World War I. That is the kind of spectrum of potential scenarios you are looking at.

Of course, there are others that are more favourable scenarios but we certainly have seen similar situations in the past. It is called the global system breaking down, nothing new. Take out a history book. Indian people are incredibly well read and so I would imagine many of the audience already have, but if not take one out, read it and you will see that the global system falls apart as often as we put it together.

Will the Chinese sell the treasury bonds, well who to? I mean, who is going to buy $1.1 trillion of treasury bonds? No other major western central bank is going to want to take part in that. It is seen as an anti US action. Emerging markets have not got the dollars to do it. Even if they did do that and try to push up interest rates, well fine, that will just mean that US interest rates are higher than China’s.

It would put capital flight pressure on the Chinese currency. Temporarily, of course, it will make the Chinese currency stronger which means that their exports will be then less competitive.

You might say maybe they will sell the treasuries and buy some other reserve assets from some other country instead. Again, who are they going to sell them to and are they going to buy Japanese bonds? I do not think so. European bonds? Are any available? So China is absolutely stuck. I simply do not see what it can do which is one of the reasons why Trump feels confident and have to actually push ahead because China does not have the half the ammunition people think it does.

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