China Will Lose the Trade War, Only a Matter of American Will and Time

One of the falsehoods peddled by China bulls /American bears is that one day China will stop selling junk to the American consumer. The Chinese will consume their own output and the American standard of living will collapse. There is more than a grain of truth in that story, but it ignores a crucial point I've made more than once: Chinese have not built factories for domestic consumption. Chinese output is aimed at foreign markets. The closure of America's market is a loss for companies that focus almost entirely on the U.S. market. To exaggerate, much of China's economy is an American colony, it exists to serve U.S. consumers. If they lose access to those consumers, they are not prepared to sell into other markets, let alone China.

Moreover, the Chinese economy is not as efficient as it seems. It grew into a global power because it leveraged its access to the capitalist, free market industrialized world. Unlike Japan, South Korea and Taiwan, China has not reformed its economy away from reliance on foreign export markets because that requires loosening domestic political control. Instead of reform, it piled on ever increasing amounts of leverage to keep the old economic model running. There would always come a day when the U.S. would reach its limit for running trade deficits, either a political limit or a natural economic limit that would result in currency collapse. There would always be a limit to how much debt China could force into its economy, and how much steel, autos and ghost cities it could build to pump up GDP. And now all of these limits are being reached simultaneously.

NYTimes: China Needs New Places to Sell Its Mountain of Stuff

Faced with severe factory overcapacity at home and tariffs on exports to the U.S., Beijing wants to finish a much-delayed Asian free-trade pact.

No country can absorb the sheer volume of what China sells to American customers. China’s regional neighbors compete against it in a number of industries. And China continues to maintain high tariffs and other barriers to protect its own industries — barriers that would have to drop if other countries were to sign on.

The economic clash between the United States and China has thrown the world trade system out of balance. China runs an annual surplus in manufactured goods trade of almost $1 trillion, meaning that is how much more it sells to the world than it buys each year. Nearly half of that surplus comes from trade with the United States.

Already, the country is plagued with excess capacity for making cars, steel and other staples of global trade. More factory slowdowns and shutdown could lead to job losses and further drag down economic growth.

It's the NYTimes, hence there won't be any sentence about "President Trump was 100 percent correct in saying the U.S. already lost the trade war and that China has more to lose." Yet that is the reality on the ground. Their economy as currently structured cannot win the trade war. It was true in 2008 and it is more true today: China is more similar to the United States in 1929 that anyone wants to believe. The events of the 1930s were not caused by tariffs and other nonsense peddled by globalists seeking to subvert sovereignty of individual nations, but by a massive credit bubble enabled by poorly structured global finances. The British overvalued the pound, this led to incredible amounts of capital flowing into the United States, who in turn financed much of global trade while blowing twin real estate and stock market bubbles. In the 2000s and 2010s, China undervalued the yuan, blew a massive real estate bubble three times over, plus two stock market bubbles, ran up credit faster than any nation in history, and is far less efficient that the capitalist America of the 1920s.

Carl Walter with Jim Grant

Sounding Line: Carl Walter: China Will Never Open Its Capital Markets

“(Baoshang) is scaring everybody because they’re not the only one. They’re the one that couldn’t hold it together in the end, but… I’ve been trying… to figure out how many banks there are in China and supposedly there are 134 of these city commercial banks. 134 of which (Baoshang) is one, and all of these guys use wealth management products or borrowed in the inter-bank market to fund local things. Or, they borrowed in the inter-bank market or borrowed in wealth management products to support local asset management companies to hide other banks’ bad loans. I don’t think (Baoshang) is unique and I think the reason the markets are scared is because everybody knows that the emperor has no clothes. There is a lot more than just the one.”

“…The main point is that the People’s Bank had gotten their way and opened on all these things. They liberalized the interest rates, so you got wealth management products… You saw what happened when the capital account opened up and they closed it again. There is no way in the world things like that are going to happen (again) in China in your lifetime, my lifetime, or anybody’s lifetime as long as the Party’s in control. No way…”

No Trade Deal in Near Term

Axios: "He wants them to suffer more": Inside Trump's China bet

What we're hearing: "He wants them to suffer more" from tariffs on $200 billion of Chinese goods, said a source with direct knowledge of Trump's thinking, and the president believes the longer his tariffs last, the more leverage he'll have.

Why this matters: Trump's trade war with China is at the "beginning of the beginning," according to a source familiar with Trump's conversations. And his team doesn't expect much from the tentatively planned meeting between Trump and Chinese President Xi Jinping on the sidelines of the G20 summit in Buenos Aires next month.

The Trump economic team has done no substantive planning so far for the bilateral meeting's agenda, largely because the purpose of the meeting is for Trump and Xi to reconnect, eyeball each other, and feel each other out amid their escalating trade war.
"It's a heads of state meeting, not a trade meeting," a source with direct knowledge told Axios.

Trump is again right for the wrong reasons:

Behind the scenes: Trump has privately boasted that his China tariffs have driven down the country’s stock market. Experts say the trade war has hurt market sentiment, but the stock market has never been a reliable barometer of Chinese economic strength.

A-shares are not a good measure of Chinese economic sentiment, it's housing. In order to crack the housing market, however, Trump would need to inflict more pain for longer, to the point where China can't contain the fallout and home prices start sinking 1 or 2 percent per month.

Trump is pursuing the right strategy for his intentions, even if he isn't watching the right signals. Or maybe the stock market comments are for public (and China's) consumption.

Will the U.S. Allow China To Cut Its Losses

SCMP: China should cut its losses in the trade war by conceding defeat to Donald Trump

This setback has caused heated discussions domestically. People in academia, think tanks and the finance industry are concerned about China’s policy directions, not only in its recent dealings with the US about trade but also the overall trend over the past few years. There are increasing voices that China’s gain from the reform and opening-up policies of the past 40 years were because China has become integrated into a global economic system run by the US and its allies.

It is inappropriate, or at least premature, to send signals, intentionally or not, that China is about to build a new system to replace the existing one. China is still far from prepared for an economic confrontation with the US because China is much more dependent on US demand than the other way round, and it would only hurt itself if it were to take a hardline stance. Instead, China should be more focused on its own development and reforming the domestic economy.

It is possible that there were miscalculations several months ago when Beijing came up with the strategy of tit-for-tat retaliation, either because it underestimated Trump’s determination on trade policies, or because it underestimated the Washington establishment’s rising anti-China sentiments. By now, everybody in Beijing should have figured out how tough the situation is. Thus, Beijing has started to change its strategy.

The first mistake China made was not reforming its economy. It delayed opening up for 10 to 20 years depending on how you date it (whether you think Zhu Rongji was ahead of his time or not). China played a double game of accepting access to foreign markets through the WTO, but did not fully reciprocate.

China failed to reform the domestic economy. After the stimulus effects ran out in 2011, China realized endless real estate and infrastructure investment funded by rampant credit growth was a model it needed to break away from, yet nothing was done. It is 2018 and the government is still struggling with this issue.

China should have allowed the renminbi to weaken in 2008. Perhaps it was noble to coordinate with other nations to avert a deeper recession/depression, but taking the lumps in 2008 would have cleared the deck for growth. The renminbi weakened again in 2011/2 and 2015/6, and each time China intervened. Capital controls keep tightening because China's currency is becoming weaker.

Finally, China failed to understand the U.S. political system and cultural dynamism. Granted, even many "experts" in the U.S. missed rising populism right into the evening of the Brexit vote and the U.S. presidential election, but there should have been a sense that the good times wouldn't last. Americans wouldn't allow the "looting" of their country forever. In some sense the U.S. is also to blame for China's mess because it allowed it go on for so long. Had the U.S. confronted China earlier, perhaps this all would have been averted.

Today, China is in a weak position. Its currency is stable because of strict capital controls, but it also hasn't been tested by fire yet. If the U.S. Dollar Index is heading through 100 and on to 120 or higher over the next 12 to 18 months, the renminbi could weaken to USDCNY 8 before considering any outflow pressure. The country says it will embark on an inflationary stimulus, but we don't know if capital will pour into infrastructure and real estate again.

On the other side, if the U.S. dollar cycles keep going, a U.S. dollar peak in the next 12 to 18 months won't be challenged until sometime in the late 2030s. By then its likely the global monetary system will have reformed or collapsed. We may never see a stronger U.S. dollar in the future.

Once the U.S. dollar peaks and starts moving lower, the global economy will enter a new expansion phase. If China can make it through the next couple of years, financial pressure will alleviate. If the U.S wants substantial reform and opening in China, now is the time to press for it.

Everyone who wants a confrontation with China, be it Trump supporters, economists, defense officials or international trade experts, worries that Trump will fold early in pursuit of an expedient, short-term political victory. His behavior until now, plus recent comments by Steve Bannon, point to a larger goal. If Trump accepts a Chinese-favorable deal in September or October with an eye on the midterm elections, China can cut its losses and breathe a sigh of relief.

Assuming Trump extracts some major concessions as part of a quick deal, a victory for China would be a politically managed reduction in the trade deficit. China will make political import decisions. The trade deficit won't be allowed to exceed some figure such as $150 billion and China will target American markets, as it has done with soybean farmers, such that a future president won't even dare to risk a trade war. It might make concessions on IP that involve sending billions to the U.S. (which would offset the trade deficit), but it might also continue violating IP rights. The current trade relationship will largely be intact, but China won't profit as much. It will gain 10 to 20 years of breathing room.

If instead Trump wants a significant change in the relationship between China and the United States, one where China either opens up or the Logic of Strategy becomes U.S. policy, then China will suffer much greater "losses" before this trade spat ends.

Did Everyone Forget the J-Curve

Not only has the trade war not kicked off in earnest, but it seems nobody has ever heard of the J-curve as it relates to growth and exchange rates. Nations don't change their economic structures overnight and orders are placed months in advance. Increased growth in the United States increases the trade deficit, it boosts imports from China. Additionally, the trade war has its own J-curve effect as importers and exporters rush orders ahead of potential tariffs.

Bloomberg: China Imports Jump, Exports Robust as Trade War Yet to Take Toll

Exports rose 12.2 percent in July in dollar terms from a year earlier, the customs administration said Wednesday, faster than the forecast 10 percent. Imports climbed 27.3 percent, leaving a trade surplus of $28 billion.

Disharmony in China: Stimulus Is A Failed Strategy

The article below was at the top of the finance section today, a special section on the government's new stimulus effort and the recent Politburo meeting. It starts by examining the most logical outcome of increased liquidity: rising home prices. As discussed in Speculators Take Over Chinese Housing Market, the government has thus far failed to control prices and market distortions are multiplying as more heavy handed policies are introduced. Even if the government has finally strangled the market and prices are set to fall, it must prevent credit from flowing into real estate, otherwise it will reignite the market.

The article goes on to ask what else could absorb new credit? The next likely destination is A-shares. With Chinext at a new 3-year low, this seems unlikely for now. The author goes on to say he hopes for commodity inflation, since rising prices would at least help manufacturing. As for consumers, they'll be left in a similar position. Instead of being crushed by housing payments, they'll be crushed by consumer price inflation.

The track record with stimulus isn't encouraging. Prior rounds went into real estate and fixed asset investment. Ordinary Chinese were left worse off with more expensive housing. The economy also did not fully recover. Each stimulus round, in 2008, 2011 and 2014, was weaker than the last. This round may be even weaker then the trend would argue for because the United States has changed its trade policies.

Finally, the piece discusses how reform always leaves the government better off and the people worse off, and calls for real reform that redistributes resources and rights.

My comment: This article is a sign of negative social mood. It shows the latest stimulus effort hasn't boosted confidence. The slide in the A-share market reflects this fundamental reality. In addition to the main content, one surprising word in this article is hyperinflation. It is used as an aside, but it is notable that it appears at all. There is real concern about currency depreciation beneath the surface.

iFeng: 放水不能解决的问题：既然房价不能涨，那谁会涨？

"Resolutely curb housing prices."

But while giving you hope, while letting you doubt life - this meeting will give a "loose" tone, and in the second half of the year to ensure a reasonable liquidity, the market does not have to cry every day.

Although we have never fear that Chinese economics can contend with Western economics, we still can't help but feel lost about the country's direction and personal wealth:

It is necessary to release water and the house price does not soar. How do you play such a difficult action?

If water does not flow to the property market, where can it go, is it the big A-shares?

There is no price increase in the room. Is there always something in our daily life that will be pulled out to absorb this super currency emission?

With the fate of the nation at hand, are you ready?

A-shares is the most logical destination. Shares are down, the market is a confidence indicator for the economy and the government has engineered a market rise before (back in 2014/5).

Yesterday, the meeting was not over yet. Shenzhen upgraded the property market regulation for the first time, and bought a house for the company to press the timeout button. The house was sold for 3 years, and the divorce was strictly controlled to buy a house. In a word, the speculative seedlings are tightly held.

As the city's regulation of the wind direction, Beijing has clearly stated that it wants to control the land heat. In the next five years, the residential land supply structure will maintain the common commercial housing, shared property housing, resettlement housing, and rental housing 4:2:2:2 structure.

At present, the way of regulation is to artificially lengthen the trading cycle, making it difficult for you to enter and difficult, so that speculators can not benefit.

This time, directly speaking, the suppression of the rise is a fundamental shift in decision-making thinking. House prices can only be stabilized in the future, at least in the official statistics, and the front line of the population size may even fall.

Since the house price can't rise, who will rise? To be honest, we are more eager to see commodity price increases than house prices.

Rising commodity prices would be positive for China because it would ignite the emerging market growth cycle. But if the U.S. dollar is rising, how does China achieve rising commodity prices? With a lot of yuan and rising USDCNY.

The price has risen and the house price has not risen. At least it proves that money is not idling in the virtual economy, creating bubbles, and squeezing the living space of the entity. Instead, some water actually reaches the real economy, and the industry expands its scale, which in turn is transmitted to the rent, interest and people. On the payroll.

As long as there is no hyperinflation, the price increase is a blunt knife to cut the meat and warm water to cook the frog. The numb person will not feel pain. If you can't afford the house, then the wallet will be slowly smashed to the consumer goods. There is also an input inflation caused by oil prices. Oil prices are currently on the rise, and the cost of many industrial products is also rising. The price has risen a bit and the domestic demand has been expanded.

The above is purely an earnest hope.

Judging from historical experience, the two words "release water" is really a lingering worry, and it is the direct driving force for housing prices in the past decade.

During the end of 2008 and during the 12 years of flooding, the prices of first-tier cities have doubled. The 15-year policy shift has made the nation’s property market experience the feeling of panic and carnival. Divorce, lottery, and house-shaking are amazing. The housing dream finally fell heavy on the shoulders of every ordinary person, and even the third or fourth-tier cities you could not load on your body.

Three rounds of water release in history have directly stimulated soaring housing prices.

The logic of a surge in water prices is not difficult to understand, because for so many years, China has only dug up a real estate such a reservoir.

So far, no asset has a yield that can outperform real estate. Beijing has seen house prices rise at least 435% in the past decade, and Shanghai has at least 224%. Money is smart money, hot money with temperature, and of course know where to run. Everyone is turning afloat in financial real estate. Only when I go against the current, I am not cute.

Today, the total market value of Chinese real estate exceeds 400 trillion, while the total market value of the stock market is less than 60 trillion. After being cut one after another in the capital market, the people are even more convinced that the house that can be seen is true love. A toxic stock market can't be a water-absorbing sponge, and it's hard for entities to benefit from water.

Yesterday, Zhigu Trend was in the "Reading the Politburo meeting today: the most important one is landing, the policy shift is confirmed" article, "The problem that money can solve is not a problem", some readers are confused.

Quite simply, if printing money can save manufacturing, China's real economy will not be as it is today.

Even if the central bank has the heart to unblock the money transmission mechanism, it is difficult to stop the impulse of water from spreading to real estate.

Rescue the entity, it is impossible to release water.

There are still many problems that money cannot solve.

Stimulating infrastructure investment also won't help China because it needs to rebalance away from reliance on this method of growth, to say nothing of the falling investment returns as marginal utility declines, or the fact that local governments have a history of wasting money on projects.

Stimulation, infrastructure, and policy support... Each of these words sounds full of familiarity and dependence, but it is also worrying.

The historical experience has long proved that the marginal stimulation of large-scale water release is obviously weakening, and the investment income of infrastructure is getting smaller and smaller.

Guan Qingyou pointed out in the research report that the economic rebound effect brought by the loosening has become weaker and weaker, and the response has become slower and slower:

In the first round of 2008, it was loose, and it was effective in 2 quarters, rebounding 5.8% for 4 quarters.

The second round of easing in 2011, 5 quarters effective, rebounded 0.6%, lasting 2 quarters.

The last round of easing in 2014 was only effective in 8 quarters, rebounding 0.2% for two quarters.

Jiang Chao believes that the large release of water has not changed the downward trend of China's economic growth:

The first round: China's economic growth rate fell from 9.7% in 2008 to 9.5% in 11 years;

The second round: China's economic growth rate fell from 9.5% in 11 years to 7.3% in 14 years;

The third round: China's economic growth rate fell from 7.3% in 14 years to 6.9% in 17 years.

To achieve steady economic growth, it is not a matter of arranging money to stimulate it.

Although our idea is to fine-tune, pre-adjust and regulate the camera, Shanxi Securities issued a reminder that the index may be bottomed out again in the third quarter. When the policy is not up to the expected index, the easing policy may be more radical, or Structural easing has turned to full easing. A full, infinite loop of taste.

A new twist is the global economy. It is not favorable for China's stimulus.

The problem of the external environment is no different.

The contradiction between China and the United States is no longer a simple huge trade deficit. Conflicts continue to spread from the trade field to the fields of science and technology, currency, and ideology. Today, the proportion of tariffs is raised, and how many companies will be blocked by technology tomorrow. The day after tomorrow, I regret that I wanted you to enter the WTO... There is a cold war situation.

Last weekend, the Wall Street Journal published a long article "When the World Opened the Gates of China", mentioning that when Clinton first supported China's accession to the WTO, he hoped to include China in the Western economic system while reducing the control of conservative forces:

"China's accession to the WTO is not simply to let them agree to import Western products, but also to agree to a value cherished by the import of democracy - economic freedom. When individuals have more than just dreams and the power to realize their dreams, they will resort to more Big voice."

As the fate of the nation has come to this stage, China can no longer shut America up by spending huge sums to buy soybeans and airplanes.

The conclusion:

Today's China has a "change" in stability, and both internal and external weaknesses can not solve these problems.

The advantage of a controlling government has contributed to China's economic miracle, but its subsequent disadvantages have also constrained the upgrading of the economy.

Recently saw two paragraphs:

The word "reform" is now harder and harder to cheer. Like a tax cut, it becomes a word game. Every time it is drizzling, government taxes are rising year by year, and the physical tax burden is heavy. Local financial difficulties, but can not move the determination to abolish redundant staff and streamline institutions, and they are still counting on them when the stimulus policy comes.

If a great reform has become a situation of "the nation advances and the people retreat", it is really distressing.

What is really needed now is not to release water, but to complete a revolution in the face of difficulties, the transformation of the way resources are allocated, and the redistribution of rights; what is really needed is to activate the vitality of the people, not to make them confused, depressed, confused, The panic sentiment spread.

Professor Sun Liping once said that at present, the most realistic and urgent need for reform in Chinese society to solve problems is threefold:

The sense of direction of the country, the sense of security of the elite and the upper class, the sense of hope of the people.

China Enters the Trade Trap

Perhaps nobody know what President Trump will do next, including President Trump, but right now it looks like he has successfully maneuvered China into a trade trap. The goal is to slow China's economy such that military modernization slows and its economy cannot catch up with the United States. Meanwhile, implementation of this strategy is called "Beijing's playbook" and the whole time President Trump speaks positively about Xi Jinping and China's help in other areas.

Bloomberg: Xi to Counter Trump Blow for Blow in Unwanted Trade War

“The Chinese view this as an exercise in self-flagellation, meaning that the country that wins a trade war is the country that can endure most pain,” said Andrew Polk, co-founder of research firm Trivium China in Beijing. China “thinks it can outlast the U.S. They don’t have to worry about an election in November, let alone two years from now.”

This is the mistake autocrats always make about Western governments and the United States. They view the messy and inefficient political system (intentionally designed that way to protect liberty) as a weakness. They think politicians care more about elections than anything else. They see the difficulty in reaching consensus as a weakness. However, they miss the fact that democratic governments enjoy greater legitimacy. If the U.S. reaches a majority in favor of confronting China on trade, then President Trump has the far stronger political hand.

Confronting China on trade raises President Trump's popularity. His base and independent voters favor this policy. Democrats oppose him because he is Trump, but they would lose votes if the only issue in November was "Confront China on trade, yes or no?"

If President Trump makes it through November losing only a few House seats (as is typical of nearly all mid-term elections) and sticks to his China trade policy, he will come out the other side incredibly strengthened on trade heading into 2020. If the public begins to view the trade war more as war than trade, they will want to win the war of attrition.

China's "ace" remains yuan devaluation. When I wrote The Logic of Strategy: Yuan Devaluation and the Road to Trade War, I expected economics to lead the way as the yuan devalued. Although the yuan weakened in 2015 and 2016, it was not the substantial depreciation needed to reset the financial system. Still, China created the conditions for a major currency depreciation and U.S. trade policy will soon lean heavily on this pressure point.

Finally, remember that geopolitics is right beneath the surface of the trade war. The U.S. is confronting China in the South China Sea. Pacific nations are turning against China.

ABC: China warns citizens in Vietnam after protests fuel anti-Chinese sentiment

China has warned its citizens in Vietnam after protesters clashed with police over a government plan to create new economic zones for foreign investment that has fuelled anti-Chinese sentiment in the country.

SCMP: China tells Australia to remove its ‘coloured glasses’ to get relations back on track

Relations between the two countries have cooled since late last year when Prime Minister Malcolm Turnbull’s government proposed a bill to limit foreign influence in Australia, including political donations. Beijing saw the move as “anti-China”.

Critics say President Trump's trade policy is poorly designed and antagonizes allies, but the Logic of Strategy says nations will come around to Trump's position in the coming months and years.

Govt Trade Wars Already Underway Against Multiple Targets

While President Trump's critics continue to attack his trade negotiation tactics, one development is a growing consensus that China should be confronted on trade. In essence, what confrontation did was highlight the reality of an ongoing trade war that the United States wasn't fighting. Similar to how Trump's discussion of immigration won him the Republican nomination and then helped him win the Presidency, his position on trade has revealed a deep well of support that was left untapped by a bifactional establishment that did not allow deviation from free trade orthodoxy.

Meanwhile, critics of monopoly power in Silicon Valley are pleased with the European Union's protection of privacy and fines for big technology companies. Now another attack on technology companies is taking shape, this time memory chip manufacturers. This fuses animosity towards big tech with China's industrial policy goals. A couple of week ago I posted an article from China discussing the development of a domestic memory chip supplier. Chinese Govt Spends Big to Develop Memory Chip Companies. The Chinese government has been spending heavily for more than a decade and it still faces an uphill battle against established producers such as Samsung, Hynix and Micron.

Now two weeks later, China is launching anti-trust investigations against these companies on the heels of an anti-trust lawsuit filed in California.

Nikkei: China launches antitrust probe against US and Korean chipmakers

China has launched antitrust investigations into three American and South Korean chipmakers in what some analysts suspect may be an effort by Beijing to further its high-tech ambitions and gain leverage in its trade row with Washington.

Regulators are looking into Micron Technology of the U.S. and South Korea's Samsung Electronics and SK Hynix, the top manufacturers of DRAM memory chips. These three companies -- which together control more than 90% of the global DRAM market -- are accused of abusing their dominance to drive up chip prices, among other unfair practices, according to a source familiar with the situation.

China, a major production hub for smartphones and other devices, is the world's largest semiconductor market. DRAM prices have climbed steadily since 2016, apparently prompting formal complaints from big Chinese chip buyers. The chipmakers could face heavy fines if regulators find that they violated antitrust law.

...Similarly, the investigations into Samsung and SK Hynix may be an effort to deal with companies that Beijing has found to be less than cooperative on the tech front. Manufacturers including Samsung have been accused of using older technology at Chinese plants than in South Korea, and are leery of cross-licensing patents with Chinese partners, insiders say.

South Korean companies aren't stupid.

A Chinese article on the story cites a California lawsuit that claims these manufacturers agreed to raise DRAM prices.
21st Century: 反垄断审查三巨头 中国存储需警惕“逆周期”扩张

In the Q1-2018 Q1 price increase interval in 2016, Samsung’s storage chip business revenue increased from 79.4 trillion won to 173.3 trillion won, an increase of 118%; Hynix revenue increased from 3.65 trillion won to 8.72 trillion won, an increase. 139%; while Micron’s revenue increased from US$2.93 billion to US$7.35 billion, an increase of 151%.

During the same period, Samsung’s stock price has increased from 25,000 won in early 2016 to 50,000 won today, Hynix has increased from 30,000 won to 90,000 won, and Micron’s share price has soared from US$14 to US$58, an increase of 314%.

It is worth mentioning that during the crazy price increase of memory chips, a US law firm began to investigate this phenomenon. During the interview and investigation of the Big Three by China's antitrust authorities, the US law firm Hagens Berman launched an anti-monopoly class action lawsuit against Micron, Samsung, and Hynix at the Northern California Regional Court on April 27, 2018.

The law said that the investigation showed that DRAM manufacturers agreed to increase DRAM prices by limiting the supply of DRAM. In 2017, the price per bit of DRAM rose by 47%, which was the largest increase in 30 years, of which the price of 4GB DRAM products rose by 130%. As early as 2006, Hagens Berman had acted like a DRAM antitrust litigation and won a $300 million settlement fee for his agent.

One unexpected outcome of the trade wars could be increased scrutiny of corporations and multinationals, and in the United States, a revival of anti-trust law. Government is stepping up its regulation of the economy.

Trump Fights to Protect Chinese Jobs

21st Century: 转机！中兴通讯销售禁令有望取消！或成下周中美重要议题，8万员工31万股东可稍松口气
CNBC: UPDATE 3-U.S., China nearing deal to remove U.S. sales ban against ZTE -sources

Washington and Beijing are nearing a deal that would remove an existing U.S. order banning American companies from supplying Chinese telecommunications equipment maker ZTE Corp , two people briefed on the talks told Reuters.

The people, who declined to be identified because negotiations are confidential, said the deal could include China removing tariffs on imported U.S. agricultural products, as well as buying more American farm goods.

Flawless Chinese victory.

White House advisors have said previously the ban against ZTE is being reexamined, and that the firm would still face "harsh" punishment, including enforced changes of management and at board level.

There will be no change to the real upper management of the Chinese state-owned enterprise.

The Chinese trade issue isn't going away. Trump could revive the trade issue at any moment and he probably will. If he doesn't, someone else will. Negative social mood will guarantee it.

Chinese Govt Spends Big to Develop Memory Chip Companies

An article discusses Wuhan Xinxin Semiconductor Manufacturing Corp and the Chinese government's plan to spend billions on chip technology. Wuhan Xinxin is still unprofitable after 11 years.

21st Century: 中国芯”艰难突围路：武汉新芯十一年终扭亏

Following the investment in the first phase of the IC Fund, which amounted to RMB138.7 billion, the second phase of the Chinese government's large capital investment has once again focused on the market. Relevant media reports indicate that the second phase of the brewing fund is expected to be no less than 150 billion to 200 billion yuan in size.

How will the national team support the chip industry? On the morning of April 26th, when General Secretary Xi Jinping came to Wuhan Xinxin Research under the Yangtze River Storage Store of the Ziguang Group, he mentioned that the core technology with independent intellectual property rights is where the company’s “Gate of Life” lies. The chip of equipment manufacturing industry is equivalent to the heart of people. The heart is not strong, and the body size is not too strong. It is necessary to speed up major breakthroughs in chip technology and bravely climb the peak of semiconductor storage technology in the world.

The 21st Century Business Herald reporter recently interviewed relevant stakeholders of Wuhan Xinxin, taking samples of issues such as Wuhan's efforts to develop IC industry and Wuhan Xinxin's development over the past decade and beyond, to restore the difficult breakthroughs of the central government and enterprises in the chip field.

From 2006 to the present, the central government has continued to invest heavily in Wuhan Xinxin. The integrated circuit industry has a intensive and long-term investment cycle. This company, which continued to lose money before 2017, is also struggling to break through the controversy.

Wuhan Xinxin was launched more than a decade ago as part of an effort to develop domestic chip suppliers:

The chip is called "industrial food". China still has gaps in chip design, manufacturing capabilities, and talent teams. China is the world's largest chip consumer, with 90% relying on imports and imports exceeding $250 billion a year.

The representative company of the Wuhan Xinxin Central Government who made efforts to develop the chip industry was incorporated in April 2006. It is invested by Hubei Province, Wuhan City and Donghu High-tech Zone. The investment scale for the first phase reached 10.7 billion yuan, which is the first time in the Central Region in these years. A 12-inch integrated circuit production line project.

As of now, Wuhan Xinxin is the only memory-based IC manufacturing company in China. Wuhan Xinxin is facing an urgent task of catching up with technology. Behind it is the continued investment of the Central Government. On August 5, 2015, the Hubei integrated circuit industry investment fund with a total size of not less than 30 billion yuan was established, of which Wuhan Xinxin is the investment focus. The first phase of the national integrated circuit fund of 138.7 billion investment, one of its investment priorities is the memory.

Experts who participated in the new core project told the reporter of the 21st Century Business Herald that Xinxin did achieve losses in 2017. On the one hand, the international market conditions were relatively good. In the past 20 years, the global semiconductor factory was much more involved. In addition, with mobile communications and the Internet of Things, With the development of the chip, the demand for chips has greatly increased and it is good for Xinxin. Of course there is another reason. From the financial report, the depreciation of the equipment is over.

The loss of data in the financial report does not mean that the real dawn has come. According to the data provided by Tanshui, at present, the global memory market is highly monopolized and the market and key technologies are in the hands of several oligopolistic companies such as Samsung, Toshiba and Hynix. Samsung, Hynix and Micron monopolized 95% of the DRAM memory market. Samsung, Toshiba, Micron and Hynix monopolized 99% of the NAND memory market. The top six manufacturers monopolized 90% of the NOR memory market. Wuhan Xinxin still has a long way to go.

"Although it is a state-owned enterprise, unlike many monopolized state-owned enterprises, Wuhan Xinxin is faced with global market competition. This industry is a globally transparent market, and there is no designated unit procurement for the product. State-owned enterprises are not good at doing it." A practitioner from Wuhan Xinxin told a 21st Century Business Herald reporter.

Related:

A good in-depth view at Semiconductor Engineering that sees high hurdles for China: Will China Succeed In Memory?

IP issues are just one of the challenges. China’s memory makers also face stiff competition in a tough market. “I look at this at maybe almost like what China did in the foundry industry. They have 10% market share. Maybe China will get 10% of the memory market,” IC Insights’ McClean said. “I don’t think it would be zero. But I don’t see big chunks of market share coming out of Samsung, Micron and Hynix anytime soon.”

Asia Times: China has too few chips to play in high stakes tech game
China.org: Xi calls for maintaining new development philosophy, winning 'three tough battles'

"Businesses must unceasingly make breakthroughs in core technology, mastering more key technologies with self-owned intellectual property rights and building up the ability to dominate industrial development. The country needs you to pick up the pace," Xi said.

Xi then visited Wuhan Xinxin Semiconductor Manufacturing Corp. to inspect a national memory production base and assembly lines of integrated circuits.

In workshops, he listened to reports about smart manufacturing of chips and accelerating chip localization progress.

Referring to chips as like the human heart, Xi said, "No matter how big a person is, he or she can never be strong without a sound and strong heart," he said, urging businesses to make major breakthroughs in chip technology and challenge the new heights in global semiconductor industry.

Free Traders Lose the Narrative

The narrative on free trade as changed from the extreme "it's always good; trade partners only cheat themselves by using protectionism measures." Where it ends is anyone's guess, but a "fair trade" (reciprocity) consensus is building.

Barron's: The People’s Republic of Protectionism

By 2025, China aims to produce 80% of its “new energy vehicles,” 70% of its medical devices, 70% of its industrial robots, 60% of its advanced tractors and harvesters, and 10% of its commercial aircraft. The targeted sectors represent the bulk of U.S. manufacturing exports to China. While these targets are directly opposed to the spirit of an open international order, the Chinese government should have little trouble achieving its goals within the confines of World Trade Organization rules. China has plenty of experience with import substitution.

The first step is to “digest”—the Chinese government’s term—advanced foreign technology. Sometimes the know-how is explicitly traded for market access, sometimes it is acquired through mergers and acquisitions, and sometimes it is stolen.

Trade War: No Deal

The Guardian: US-China talks end in increased tension and demand for $200bn trade deficit cut

Tensions between the US and China increased on Friday as it emerged US officials had handed Beijing a list of demands including a $200bn cut in its trade deficit and an end to state subsidies on strategic industries.

The two days of talks in Beijing between Steven Mnuchin, the US treasury secretary, and Liu He, the vice-premier, ended on Friday after weeks of escalating rhetoric between the two nations.

A statement released by the official Xinhua news agency described the talks as “frank, efficient and constructive” but added that there remained “significant disagreements over certain issues”.

A document handed to Chinese officials described the trade relationship between the two countries as “significantly imbalanced”. The US’s trade and services deficit with China was $337bn last year, according to US data, and the Trump administration is pushing for a $200bn cut in that deficit by 2020.

Hot take:

1. Trump openly talks about how he negotiates. The $200 billion target or the 2020 deadline, or both, are flexible. There will be no movement in the U.S. direction unless China thinks this time is for real. The news out of trade talks will get worse whether there is a deal or no deal down the road. It's possible there won't be a deal (real, not window dressing) until Trump walks away.

2. Assuming U.S. real GDP grows 2 percent in 2018 and 2019, it will grow ~$800 billion heading into 2020. If Trump got everything he wanted and it was fully onshored by the U.S. (Chinese exports don't shift to other nations), a trade deal would boost GDP growth by ~0.5 percent in the next two years. Who knows what China's GDP really is, but assuming it is ~12 trillion, a $200 billion swing in the trade balance would slow GDP growth by ~0.8 percent in the next two years. This is a big number, even for the huge U.S. economy, in a world where GDP growth has struggled to sustain 2 percent after 2008.

Winter is Coming to China, Tax Cuts and Infrastructure or Bust

iFeng: 预警！美元寒冬逼近，中国楼市悬了

China can't ease monetary policy.

According to the analysis of the previous two sections, if the Chinese currency chooses to relax at the moment, the Chinese government bond yield curve will shift downwards, and then the spreads between China and the United States will be further squeezed, which means that the renminbi will be subjected to tremendous devaluation pressure.

China can't devalued the renminbi though, since it will exacerbate trade tensions:

On the one hand, Trump will not allow China to resolve the dilemma of declining external demand through the devaluation of the renminbi, which is inconsistent with the United States’ stance of launching a trade war.

On the other hand, China’s efforts to enhance product competitiveness by devaluing its own currency will also hurt its trading partners outside the United States. Under the current environment of confrontation between China and the United States, it is obviously unfavorable to China.

China also can't tighten monetary policy as the trade surplus declines.

How to expand domestic demand? The total output of a country, divided according to demand, can be divided into three parts:

Investment + consumption + net exports, the first two parts are domestic demand, and the last one is foreign demand. Now that external demand is not working, it is logical to either expand consumption or expand investment, there is no other way.

Is it easy to expand consumption? Very difficult.

Taking into account the arduous efforts made by the Chinese resident sector in the past two years to “de-stock,” mortgage loans for decades have completely overdrawn most of the residents’ spending power and willingness to consume.

Therefore, only investment is left. Investment can be divided into manufacturing, infrastructure and real estate.

Manufacturing? Unlikely.

Is manufacturing investment easy to start? The same is very difficult!

Why? Because manufacturing ROE (return on investment) has been significantly squeezed out of finance and real estate, it is almost zero, or even negative. The ROE that reshapes the manufacturing industry is a relatively long process. It may be that the entire process of supply-side reform and de-leveraging is completed and that the market is only possible once it is cleared.

Real estate? Also unlikely.

The key point is that the level of residents' debts is increasing very quickly. It's scary! Resident debt ratios ranged from 20% to 50%, the United States spent 40 years, and China only spent 10 years. At this rate, within the next three to four years, the United States could reach the top of the bubble in the last round of housing bubbles by 73%.

It is also the madness of residents that increases leverage and restricts the contribution of consumption to economic growth. The growth of real estate investment is based on the overdraft of residents' consumption in the coming decades.

If the currency depreciates, the real estate market will suffer:

Especially with the United States in the cycle of rising yields, if China's currency cannot tighten to maintain spreads (in fact, it cannot), then the renminbi has a greater depreciation pressure to start real estate and may cause house locks. Without the liquidity, there is a systematic risk that the capital flight will lead to the passive rupture of the real estate bubble. This result is very damaging! This is also the fundamental reason why the exchange rate cannot be depreciated significantly.

What is left? Centrally planned infrastructure!

However, I believe that, based on the above analysis, the top management is likely to abandon this short-term goal and instead tolerate the short-term increase in the level of local government debt, in order to achieve the goal of “expanding domestic demand”. In connection with the latest Politburo meeting's description of the “Rural Revitalization” strategy and the “Out of Poverty Alleviation” program, I think it is possible and feasible to promote domestic demand through the expansion of rural infrastructure.

This kind of deduction is also in full accord with the statement made by the Politburo meeting on "adhering to a proactive fiscal policy." The implementation of a proactive fiscal policy, which is implemented in concrete terms, is most likely a result of the foundation of the infrastructure (economy) (domestic demand).

Therefore, fiscal policy points out that tax cuts and infrastructure will continue to be “positive”.

Tax cuts and infrastructure.

China will face a dilemma in the selection of any kind of policy tools. However, taking into account the circumstances that lead to the smallest possible systemic risk, only an active fiscal policy is the current way out. Specifically, it is a tax reduction and maintaining a relatively positive infrastructure.

Monetary policies may remain neutral, and they cannot be significantly loosened, nor can they be tightened. There will be a small depreciation of the exchange rate, but there is no long-term depreciation condition.

As regards tolerance of local government for increasing leverage, local government debt and bank's possible bad debts can be regarded as the opposite of the government. It is possible to temporarily relax the restrictions.

Politically, China can no longer allow the renminbi to depreciation. Yet depreciation is where the market wants to go. China boxed itself into a corner. It is now at the mercy of the markets. Positive economic shocks can bail it out. Strong growth overseas could bail out a China. A resumption of global growth to pre-2008 levels, with massive U.S. dollar credit growth and depreciating USD, can bail them out. Otherwise, the are walking a tightrope and any mistake leads to currency depreciation.

The author of this piece finishes with some investment advice based on the above:

Based on the above analysis logic, the trading strategy is self-evident.

The stock market will not have major systemic opportunities.

The reason is that the currency will not relax and the risk-free yield will not decline. Corporate earnings are also difficult to exceed expectations in the face of demand pressure. The turbulence in the box and the concept of fried items are the main theme of this year (for example, Hainan, semiconductors, etc.).

The bond market will move slowly down the high.

The reason for not making a sharp turnaround is because there is no inflation expectation in China and there is no possibility that growth will exceed expectations. However, taking into account the traction of the U.S. debt, it is possible that the Chinese government bond yields will slowly increase.

Goods are the only major assets that may have opportunities.

Logic is a foundation. From the previous year to the present, commodities represented by black lines have plunged in pessimism. I think this pessimistic expectation may be remedied with the introduction of more measures to “expand domestic demand”. In addition, inflation in the United Stat es may raise the price of bulk commodities globally.

Finally, talk about real estate alone.

Regardless of how the cannon was said, or the six purses and the seven purses, I always believed in my own logic, that is, real estate could not be restarted at present, for reasons that have been detailed before. If I was beaten later, I would accept it willingly.

In this world, there are too many things that are beyond our knowledge. We cannot calculate their probabilities. But what we can do is to limit the possibilities of infinite with limited knowledge.

If not, what is the difference between each of our actions and gambling?

PS: People shouting that the government should restart real estate, do you forget that in the midst of ZTE's battle, we feel the helplessness and incompetence? Real estate not only fails to save the country, but also buries the future of the entire nation.

Hope is the strategy now. Hope that U.S. growth and inflation picks up, boosts commodities, and more Chinese infrastructure can boost the economy there.

America's Top Export is Fiat; Software Eats the Trade Deficit Too

If you believe the argument that says automation and robotics will dominate production, if you believe that universal basic income is something to consider because there's a risk of widespread mass unemployment, then you also expect production will eventually be concentrated in fewer and fewer hands (and even no hands if the machines take over). This is usually discussed in domestic terms, but it will also happen internationally. We should expect some nations will see their exports soar and other nations become chronic trade deficit nations or simply become relatively poorer as their economies fall behind. Domestically, the fear is that high-skill white collar labor is next, with lawyers, accountants, financial analysts, writers and such in line to see their jobs automated. Internationally, developing nations that lack highly-advanced sectors will also fall behind as their economies cannot keep pace.

The U.S. has a massive trade deficit because it prints the reserve currency. It's really the #1 export of the United States. Pieces of paper with no value except that other people accept them because the United States is the pre-eminent military, political and economic power in the world. Path dependency could secure that status through many years of decline, but eventually the U.S. will lose this status. The U.S. could collapse the trade deficit at any moment by extracting itself from this role. A long-term global agreement to increase the use of foreign currencies, allowing the dollar to slowly fade away as a share of global finance. Of course, this would weaken the U.S. dollar and make exports more competitive and imports more expensive. It will have a similar impact to passing tariffs. Using tariffs is a way of keeping reserve status (for a time, and only if it doesn't blow up global trade) and mitigating the costs to the long-term health of the economy.

The U.S. can also help itself by dominating in advanced manufacturing, artificial intelligence and software. It needs large domestic industries for applied research though. The software to run an automated steel mill needs a steel mill to automate.

As an advanced manufacturing economy, the U.S. would become like Germany, Japan and China (if there's no major wars or serious national decline, these four nations might produce an unbelievable sum of global GDP in 2100). Instead of buying stuff as a consequence of reserve currency demand, it will offer credit to its buyers (as it did in the 1920s).

The current system is unsustainable. Tariffs aren't a long-term solution, but they are a step in the direction of the future. (They're also close to inevitable in a democracy where unemployed workers can vote. Either that or UBI.) The U.S. must produce more, either because the dollar will lose reserve currency status or because it simply does produce more through advanced manufacturing. Otherwise it goes into terminal decline. I view tariffs as a step towards the death of the dollar as reserve currency. Washington and Wall Street refuse to give that up willingly, so the only way to push things forward is to put the U.S. in a better position when the dollar crisis hits. Or break the global trading system and negotiate the end of reserve currency status as part of a major renegotiation of the global financial and trading systems.

Markets Do Not Believe Trade War Coming

Here's a look at China, South Korea, Japan and Germany, four export powerhouses. China is of course most likely to suffer in a trade dispute with the United States, but if China deals with the U.S. and imports more U.S. cars (one possibility) it will likely import less from somewhere else. Global trade isn't growing rapidly, rebalacing trade at this moment means redistributing trade.

Whatever one's opinion on the matter, there is no sign of investor concern in any of these charts. That could change at any time and markets are notoriously wrong at key turning points, but there is bearish signal from these charts with the exception of DXJ, but that's mainly due to the strengthening yen. A stronger yen is a bearish signal, but not because of trade.

The lack of concern might be because many of the people screaming loudest about tariffs also screamed loudly about Brexit and Trump's election, and were shown to be wrong. It may be that investment managers support tariffs, but don't want to go on record publicly because they either dislike Trump or don't want to get into a debate with economists. It may be that people complaining about tariffs don't really believe their rhetoric or lack investment capital (no skin in the game). It may be that the sudden thaw in North Korea relations (assuming North Korea isn't simply buying time, a good assumption given their track record) finally taught investors to watch Trump's actions more than his rhetoric, that negotiations with China are the most likely outcome. It may be investors think Trump is all bluster and will back down when the global push back hits. Whatever the reason, if you expect a negative market reaction, the market is priced right for going short.

I don't think a tariff dispute will be a single event like Brexit and the U.S. presidential election. Instead, it will likely drag on as the North Korea situation did. If China fires back with fiery rhetoric or a strong retaliation, even if it is also a set up to negotiations, I suspect markets will react poorly. It will be remarkable if they don't. Several charts including China, Germany and Japan Hedged (DXJ) aren't far from support. South Korea (EWY) would need to fall 20 percent to hit support. China (FXI) needs to slid a little more than 7 percent to fall below support.

Trump Wants $100 B Reduction in China Trade Deficit

This article is a few days old, but the number is now confirmed.

FT: US asks China for $100bn plan to cut trade deficit

The Trump administration wants China to import more cars, aircraft, soybeans and natural gas to meet Washington’s aim of cutting the US bilateral trade deficit by $100bn, according to people familiar with talks between the two countries.

Reducing the trade deficit through higher US exports could ease demands for curbs on Chinese exports to the US — and so help spare goods made by American companies in China from new US import tariffs.

If a deal is reached, the secondary impact will be reduced Chinese imports from other countries because this is a low growth environment.

World's Largest Aluminum Producer Appeals to Patriotism Amid Fraud Accusations

The phrase "patriotism is the last refuge of a scoundrel" is often misapplied, but it is a perfect description of the world's largest alumnimum producer's response to fraud charges. Hongqiao Aluminum created the "Hongqiao model" whereby aluminum producers generate their own electricity. Given lax regulation in China and officials willingness to look the other way when GDP growth and financial stability are in question, it doesn't require a stretch of the imagination to think producers might be cheaply operating coal-fired power plants. It has enough plausibility to fool investors who might not dig too deeply into the numbers. However, some analysts did dig into the numbers. Instead of developing a low cost method of energy production, short-sellers argue the firm used its electricity generation to cook its books, vastly understating its electricity costs.

With shares halted on the Hong Kong exchange, Hongqiao isn't addressing the specific charges. Instead, it is lashing out at a "U.S.-led Western attack" on China's aluminum industry. It's not the worst strategy in a world with rising nationalist sentiment and at least a rhetorical barrage of protectionist sentiment from President Trump. Still, the evidence suggests this is a last ditch effort. Well, second to last. If the appeal to patriotism fails, Hongqiao has one more argument: the industrial cluster built around its companies in Binzhou, Shandong Province are responsible for more than 50 percent of 500 billion yuan in GDP, and more than half of the 200 billion yuan in local debt.

iFeng: 山东魏桥求援：沽空如处理不当将危及2000多亿贷款

China's largest electrolytic aluminum enterprises, Shandong Binzhou Zouping County private enterprises Weiqiao Group on March 1 encounter foreign institutions short, the group's listed company China Hongqiao (01378.HK) accused of financial fraud, said it significantly higher than the industry The profits are actually false. Over the past month, China's Hongqiao has not yet made a strong refutation of the short selling report itself. China Hongqiao and Weiqiao Group, another listed company Weiqiao Textile (02698.HK) have issued a delay in the release of performance reports, and both shares have been suspended.

For background see this story at Aluminum Insider: Metal Fatigue – Has China Hongqiao’s Weiqiao Model Run Its Course?

In addition to discrepancies involving power generation, Emerson revealed interesting numbers surrounding Hongqiao’s purchase of alumina. Comparing alumina production costs reported by Hongqiao against those of similar companies operating in the same province, Emerson reported the cost per ton differed by generally RMB300 between prices claimed by Hongqiao and those reported by the other companies in the area. This difference of roughly 20% between the reported price and the apparently actual price means that, according to Emerson, Hongqiao could be hiding up to RMB2 billion in production costs. In addition to apparently under-reporting alumina production costs, Emerson also points out discrepancies with the purchase of alumina from companies that are allegedly third parties. Gaoxin A&P, from whom Hongqiao buys the vast majority of outside alumina, sold Hongqiao the aluminium precursor for an average loss of CNY273 per ton from 2011 to 2015, racking up an estimated CNY6.62 billion. Though allegations by others have been made claiming that Gaoxin is an undisclosed related party, Emerson simply asks Hongqiao why an unrelated company would sell at a loss for so long that debts from the practice would significantly outweigh the firm’s assets.

The full Emerson Analytics report is here (PDF): China Hongqiao – Electrifying Margins to Absurd Levels

China Hongqiao raised Rmb5.2bn in its 2011 IPO to set itself off on the path to becoming the world's largest aluminum producer. Our investigations show it began cooking its books at the IPO stage by underreporting
production costs and purchasing electricity and alumina from connected parties at exceedingly low prices.

China Hongqiao's net margins were similar to those of its peers from 2007 to 2009. In 2010, it claimed a sharp improvement to a staggering 27.7% when its peers continued to struggle with single-digit margins. In subsequent years, China Hongqiao persisted with its accounting irregularities and reported margins far higher than those of its peers.

The company's success is not built on the use of self-supplied electricity as its peers also have captive power plants. We have used three independent methods (working through China Hongqiao's numbers in great details, talking to its ex-staff, and relying on data from an industry consultancy) to show that the true cost of its electricity generation is 40% higher than its claim. In 1-3Q2010, when coal price went up 23%, China Hongqiao dared fabricate a 33% drop in the unit cost of its self-supplied electricity.

Back to iFeng:

Two recent documents show that in the critical juncture, Weiqiao Group has to China Nonferrous Metals Industry Association for help, will be attributed to their own short selling hit Alcoa and Rio Tinto's commercial interests. The two documents are the "Report on Emergency Response to US Agency Short Events" submitted by the Weiqiao Group to the Nonferrous Metals Association, and the Non-Ferrous Metals Association submitted to the Ministry of Industry, "to prevent and respond to the US-led Western countries to contain China's aluminum industry Letter of advice".

There is a grain of truth to their complaint.

FT: Call to tackle China’s soaring aluminium output

An international coalition of aluminium trade associations has called for a global forum to be created ahead of the G20 meeting in Hamburg this summer to tackle China’s soaring output.

Russian companies, hit particularly hard by Chinese production, are also backing the initiative by trade groups from the US, Europe and Canada, which represent companies including Rio Tinto and Alcoa.

“This situation not only significantly distorts international trade flows affecting all of our countries but also undermines global stability,” the three trade associations said in a letter to G20 leaders.

Hongqiao takes it much further though. The phrase "patriotism is the last refuge of the scoundrel" is appropriate here. Honqiao doesn't address any of Emerson's direct charges about electricity costs, instead shifting attention to raw materials. Hongqiao thinks a new source of bauxite led Alcoa and Rio to strike back.

For the reasons for the short selling, Weiqiao Group speculated that the direct incentive began in 2015. At that time, by the Weiqiao Group-led Guinea's bauxite mine project completed and put into production. Weiqiao Group analysis, the project put into operation led to Alcoa, Rio Tinto and other giants lost the global market price of raw materials pricing, directly hit its fundamental business interests.

Weiqiao Group believes that before and after the release of short reports and a series of actions, the biggest consequence is to force the Weiqiao Group auditors in the 2016 annual audit, to take "extreme conservative and cautious attitude." If the two listed companies can not complete the annual audit work, will eventually be caught by the Hong Kong Securities and Futures Commission, the Stock Exchange for investigation, long suspension and can not carry out the normal production and operation of financing risk.

...It is noteworthy that the association will Weiqiao Group repeatedly suffered short selling to "the United States led the Western countries to contain China's aluminum industry." Association since 2001, China has more than the United States, Germany has become the world's largest producer of electrolytic aluminum, the world's largest consumer of electrolytic aluminum, the world's largest export of aluminum exports. These Western countries, led by the United States, have never stopped suppressing and accusing China's aluminum industry.

...The past two years, the situation is even worse. Association pointed out that from the past two years, the United States on China's aluminum industry to carry out containment action, showing from the economic level to the political level, from bilateral contradictions to multilateral contradictions, from trade sanctions extended to the entity, from the attack industry At the same time on the individual enterprises to break the situation.

If appeals to patriotism don't work, Hongqiao also warns of social unrest:

"The two major industrial clusters involved 300,000 people in direct employment, once the risk spread, is bound to lead to severe social unrest"

...Weiqiao Group in the report details, Weiqiao Group is one of the world's top 500 enterprises, the top three Chinese private enterprises, 2016 group sales revenue reached 375 billion yuan. Weiqiao Group's textile, aluminum two business segments, are the world's largest and most profitable. In addition, Weiqiao Group is the core of Binzhou City, formed a textile, aluminum two major industrial clusters, more than 2,000 enterprises, the integrated annual output value of more than 500 billion yuan, total employment of nearly 300,000 people (of which Weiqiao Group employees 16 people, more than 10,000 employees upstream and downstream), Binzhou City, a direct contribution to more than half of the GDP, accounting for more than half of the local financial institutions, the total size of credit, up to 200 billion yuan.

When the tide goes out, you can see who is swimming naked. In this case, the tide is liquidity. Only a year ago, Hongqiao was ramping up capacity amid a burst of monetary emissions.

FT: China Hongqiao undeterred by aluminium glut

China Hongqiao, the world’s largest aluminium producer by capacity, on Monday said it planned to increase capacity to 6m tonnes by the end of 2016 from 5.19m tonnes at the end of last year, depending on market conditions.

Zhang Bo, chief executive, said: “If demand is good, we will stick with the plan. If not, we can slow down new capacity expansion or even suspend it.”

The group added it would spend up to Rmb15bn ($2.3bn) in expanding capacity and retrofitting coal-fired power plants to meet China’s stricter emissions requirements.

Even without the fraud charges, Hongqiao is a microcosm of a Chinese industrial economy riddled with debt-financed excess capacity (and for the more skeptical, the book cooking is part of the microcosm too). This is merely one part of a wider debt-blowup in Shandong province covered yesterday (Shandong Bad Debt Daisy Chains Exploding, Loanshark City Falls on Hard Times). More stories will follow as long as credit growth is restrained and China cracks down on real estate. Beijing's harsh attack on the real estate sector is being held up as a model for the country, thus a new wave of national tightening is expected. (Beijing Bans House Flipping, Punishes 55 Agencies) Tianjin is the latest city to tighten.

Last year, new credit growth was driven by real estate activity. In July, 102 percent of new bank loans were mortgages. Conservatively, one-third of new lending in 2016 went into real estate. There are reports saying in the second half of 2016, mortgages accounted for as much as 80 percent of new credit in some cities.

Mises said: There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved. China's response to every nascent crisis has been further credit expansion. Evidence suggests another "bust" is underway. With real estate still tightening, credit should slow more than expected if other sectors do not offset it with increased borrowing. If another round of credit expansion is the solution, raise your long-term USDCNY target.

China Targets Japanese Food on Consumer Rights Day

Nikkei: China consumer rights show exposes cracks in Fukushima food ban

A state-owned television broadcaster here revealed Wednesday that products are being sold in China against local restrictions on food imports from Japan since the Fukushima Daiichi nuclear disaster.

The Chinese government prohibited such imports from Fukushima Prefecture and surrounding areas as far away as Tokyo after the meltdowns at the nuclear power plant in 2011. Japan has asked Beijing to review the ban.

A popular and influential consumer affairs program on China Central Television aired a segment Wednesday night that showed online retailers in China offering baby formula, rice and health food from areas covered by the ban, including Tochigi and Niigata prefectures.

Environmental regulations are a great way to back door protectionism. This is part of China's consumer rights day, however. Not an explicit attack on Japanese exports, rather the Chinese businesses that aren't following the law.

This story and others are covered at iFeng's site for consumer rights day. 日本核辐射区食品被曝流入国内 含无印良品

Hebei Limits Alternative Energy Subsidies to Local Firms

Protectionism isn't only between national governments, but local as well. The main complaint against Baoding doesn't seem to be the buy local requirement though, rather it hasn't issued its policy yet. Baoding is a major producer of solar panels and the home of Yingli (YGE).

aoding, Hebei Province of eight companies still waiting Baoding Finance Bureau for a final version of the statement. According to the latter to the Economic Observer reported that although these users because of the "outside the province to buy" failed to enter the list of the first subsidies, but the Baoding Financial Bureau is actively self-financing, for batches, Home companies to subsidize the new energy bus.

On the 949 bus, a total of 3.9 billion in subsidies, when exactly, how to implement the eight companies in the view, the Finance Bureau still failed to come up with specific programs, Hebei Province, the relevant practices, Was unable to get subsidies as scheduled on the user labeled "local protectionism" label.

EO: 新能源补贴资金告急！外地车被挤出首批补贴名单

Trump-China Negotiations Continue

FT: Beijing fires trade warning after Trump appoints China hawk

“Chinese officials had hoped that, as a businessman, Trump would be open to negotiating deals,” said Zhu Ning, a finance professor at Tsinghua University in Beijing. “But they have been surprised by his decision to appoint such a hawk to a key post.”

China does not yet realize negotiations started when Trump took a call from Taiwan's president, and they haven't stopped.

CNN: Trump team floats a 10% tariff on imports

A senior Trump transition official said Thursday the team is mulling up to a 10% tariff aimed at spurring US manufacturing, which could be implemented via executive action or as part of a sweeping tax reform package they would push through Congress.

Incoming White House Chief of Staff Reince Priebus floated a 5% tariff on imports in meetings with key Washington players last week, according to two sources who represent business interests in Washington. But the senior transition official who spoke to CNN Thursday on the condition of anonymity said the higher figure is now in play.

Such a move would deliver on Trump's "America First" campaign theme, but risks drawing the US into a trade war with other countries and driving up the cost of consumer goods in the US. And it's causing alarm among business interests and the pro-trade Republican establishment.

There will be much wailing and gnashing of teeth by free traders, but U.S. policy is pro-import and anti-export compared to most of the world. Adding a 10 percent tariff is not the best way forward for global trade, but other nations could abolish export subsidies and VAT rebates, and encourage more domestic consumption. Given current social mood, however, it's more likely nations will oppose the U.S. action and the result will be grudging acceptance of U.S. policies. The alternative could be the end of the WTO because protectionism is one rise all over the world.

AFP: China tycoon moves jobs to US, citing high taxes at home

The 70-year-old tycoon's decision to open a glass factory in the eastern American state of Ohio in October -- a rare case of jobs being exported from China to the US -- triggered an outpouring of criticism on social media.

The phrase "Cao Dewang has escaped" became a hot topic, generating nearly 10 million views on the Twitter-like Weibo microblog and many comments urging China to "not let Cao Dewang run away".