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How China chose to weaponize a setback

By: K. Abdullah

Many nowadays appear to have lost their ways into the chaotic dynamics of the US-China relationship. Those focusing on the tariffs and the conflict points that are making up most of the stories today find themselves in a difficult situation in making sense of it all. They see only the chaos, the uncertainty and the ever growing tensions.

There are still those awaiting a trade deal to be struck between the two countries and they seem to be on a wrong course. China, however, still defines the conflict “trade dispute” as opposed to the common term used “trade war”, and it so appears that the Chinese might be right.

It is not about the trade, nor would the resolution of trade disputes relieve any of the two giants. It is a war at a larger scale where the trade dispute is merely an accessory used by the US. The US may not have found China any weaker and more vulnerable than it has at this very moment. It, therefore, makes sense for US to capitalize on the opportunity.

Many, unaware of the Chinese economic realities, would object to this assessment. China is going through a transition, the transition that its nation longed, for over half a century. And now as the Chinese dream is the closest it has ever got to be realized is when it could slip away from its grip and lost forever.

In 2013 when Xi came to power the roadmap for a fundamental economic reform has been laid out. China, already very late at this point, needed a change that would shake the system while still requiring to maintain the order. China could no longer continue to function as the factory of the world, to name a few basic reasons: its “One Child Policy” would have eventually led to a persistent decline in its factories’ workforce; the improving healthcare led to prolonged life for the retirees; and the new generation was raised to work at the office desk and not on the factory floor.

All this meant lowering production and increasing spending. Then China, as it is always monetizing every trend, has started to monetize the losses to come. It launched a reform that would transition the country from industries and exports dependence to the services and consumption dependency. Aiming to turn up as a winner in a game it was losing. Nevertheless, this process is more delicate particularly in the case of China.

Soon after, lowering GDP growth figures and records of appreciating Chinese Yuan have emerged. The very signs of a healthy transition that some confused with a weakening Chinese economy. Chinese also required automation to replace cheaper labor. They needed technological advancement and innovation to become the new Chinese specialty, whereas their capital markets would have had to allow for the Chinese manufacturing to move to other developing countries without giving up on the profits.

The US, still threatened by the Chinese agenda, couldn’t have let the opportunity go in waste. Therefore, they had to disrupt the process. And contain China in a transitioning phase for so long that the Chinese would have depleted their resources on a cause that they would eventually abandon.

The Chinese have wrapped up their ambitious plans for globalizing the Chinese Yuan in 2016. After its economy and its ambitious reforms have endured the worst during late 2015 and early 2016. It was a clash of the West and East which left both wounded at the end. China, however, seemed to have given up, to the very least, on the globalization of Chinese Yuan.

Now that the US has gone aggressive yet again, the Chinese seem to have given up on the reform altogether and readied for the battles ahead. The Yuan has weakened and the imports are slowing as the exports are gaining momentum. Meanwhile, the prices are increasing in China and the producers are holding back. If the existing trends persist it would have to be at the cost of the reform itself.

However, even as China might have let go of the Chinese dream, at least for now, it is biting back the US. The US is expecting a recession and this time it won’t just be a recession, it might as well grow into an economic depression which means a long-term devastating downturn in the US economy. The Chinese policies are seeming to be helping make certain the downturn comes and to come soon.

A depression is being mumbled about at a period where the risks seem to be accumulated with the State and at the Corporations. If the depression comes about, the US might default on the $22 Trillion debt. The Corporate bubble would burst. The Capital Markets would experience historic meltdown. And then everyone will have to gather around the table to set new terms for the global rule.

On the other hand, if the US managed to avoid cyclical economic downturn for this period and the pressure on China kept rising, the Chinese might have to commit to severe austerity or opt for coming to the table to make compromises. In both cases the Chinese system will become too exposed to foreign influences.

So, will the Chinese then allow for the foreign vote in its internal matters? China seems to be determined not to. But China would’ve entered mid-income trap by then which seems to be the objective US is pursuing, knowing a mid-income trap for China would mean total devastation, hence, the Chinese submission.

Nevertheless, it will certainly be a brutal spectacle, and we will get to witness it all.

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