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Kudlow Says Trump Won’t Back Down: “China’s $60BN Response Is Weak”

Courtesy of ZeroHedge. View original post here.

It took little time for Trump's chief China trade war advisor Larry Kudlow to respond to China's publication of its "retaliation list" itemizing the $60 billion in US goods that will be subject to US tariffs. Saying that the $60 billion trade response by China might be weak, Kudlow warned that the US has more ammunition than China in a trade fight, envisioning that the US imports more products from China than vice versa. 

Predictably, Kudlow focused on China's currency devaluation response as the trade war recently shifted to currency war as Beijing hopes to offset the impact of tariffs using a weaker currency.

Speaking on Bloomberg TV, Kudlow correctly noted that the yuan has fallen in part because China has "stopped defending the yuan. They think it’s going to help offset the U.S. efforts to get rid of their unfair trading." This changed on Friday evening  (Chinese time) when the PBOC announced it would increase the reserve requirement on FX forward, precipitating a short squeeze and sending the Yuan sharply higher and the dollar sliding.

Some speculated that the PBOC move was a form of soft capital control, as the Yuan had fallen so much it had precipitated capital flight, easily the weakest link in China's economy. Kudlow touched on this, saying that "some of the currency fall though I think is just money leaving China because it’s a lousy investment, and if that continues that will really damage the Chinese economy."

"If money leaves China – and the currency could be a leading indicator – they’re going to be in a heap of trouble. And so I’m going to make the case that they are in a weak economic position. That’s not a good place for them to be vis-a-vis the trade negotiations," he told BBG TV's Jonathan Ferro.

It is not clear if this means that Kudlow – and thus Trump – finally understand that further tightening, and higher rates in the US, is a far worse for the Chinese economy, especially since China is about to post its first first half current account deficit on record which, without outside capital, it simply can't fund and the alternative would be economic contraction.

It does, however, explain why Wilbur Ross yesterday said that Trump plans to pour more pain on China's economy: after all if the Trump administration believes China is near a breaking point, it makes sense to keep cranking up the pressure.

Kudlow then made another accurate assessment of China's economic situation saying that "it looks to me like the China economy is declining in growth. It’s weakening almost across the board. And it looks like the People’s Bank of China is trying to pump it up by adding high-powered money and new credit."

And the punchline: "We’ve said many times: no tariffs, no tariff barriers, no subsidies. We want to see trade reforms. China is not delivering. Their economy’s weak, their currency is weak, people are leaving the country."

As a reminder, this is precisely the prescription suggested by One River CIO Eric Peters, who last weekend laid out what is the best way to win trade war with China:

“The best way to bring Beijing to its knees is by running a tight monetary policy in the US,” continued the same investor. “China has the world’s most overleveraged, fragile financial system.” In 2008, China’s total debt-to-GDP was 140%. It is now roughly 300%, while GDP is slowing. “The economy is held together by capital controls. If those fail, the whole system fails.” The capital flight in 2015/16 cost the government $1trln in reserves, and that was with ultra-dove Yellen in charge. Imagine what would have happened with Volcker at the helm. “The Chinese are dying to get their money out.”

“Engineering a decade of rolling Chinese financial crises would be the most effective foreign policy the US could run,” continued the same investor. Forget about the South China Sea, don’t bother with more aircraft carriers, just let Beijing try to cope with their financial system. “And we’re 80% of the way there – we instigated a trade war, implemented a massive fiscal stimulus, which created the room to raise interest rates,” he said. “The combined policy mix makes capital want to leave at the same time it makes the dollar more attractive and effectively shuts down new investment inflows to China.

Kudlow's conclusion: China "better not underestimate President Trump’s determination to follow through" on trade threats, and we are confident that it is only a matter of time before Trump tweets his angry response to China's latest retaliation to Trump's own Chinese tariffs, pushing the tit-for-tat escalation further beyond a point of no return.


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