US-China Trade War: Biden Makes Pre-Trump Move Against Tencent

US Tariffs – A Looming Question Mark?

Speculation over US tariffs on key export economies, including China, intensified on Monday, January 6, 2025. The Washington Post reported Trump’s aides targeting critical sectors with tariffs instead of sweeping import duties. Such a move would be a significant deviation from Trump’s presidential campaign pledges.

The report stated that tariffs would target sectors considered critical to national or economic security. While targeting certain sectors may be a softer stance, the incoming administration’s plans to enforce universal tariffs seek to prevent China from bypassing duties by rerouting exports through third countries.

However, Trump reportedly denied the Washington Post report, saying,

“The story in the Washington Post, quoting so-called anonymous sources, which don’t exist, incorrectly states that my tariff policy will be pared back. That is wrong. The Washington Post knows it’s wrong. It’s just another example of Fake News.”

Markets reacted to the news, with the US dollar Index tumbling 0.59% on January 6. Yet, Trump’s reaction left markets in limbo, with uncertainty over tariffs continuing to cast a shadow on global trade prospects.

Expert Views on US Tariffs and China’s Currency Weakness

Natixis Asian Pacific Chief Economist Garcia Herrero commented on China’s currency weakness before the overnight tariff story, saying:

“2025 has started with weakening Asian currencies in the light of a mighty USD but the most concerning is the Renminbi (RMB). To keep a decent fixing (below 7.3 to the USD), the PBoC needs to continue intervening directly and indirectly while warning mutual funds against selling stocks. This week we will get December data, which could weaken the RMB further if not good. Meanwhile, President Xi in his end-of-year speech has already confirmed that China will reach its growth target…”

Garcia Herrero noted that the overnight US dollar slump had a limited impact on the RMB, stating,

“The sudden weakening of the US dollar overnight given news that the incoming US administration may pare back on import tariffs does not really change the below story (in fact the largest appreciation came from the euro and not so much the RMB). China’s currency is under pressure for domestic reasons and not only because of Trump’s policies.”

China’s Domestic Struggles: PMI Data and Labor Market Concerns

December’s Caixin private sector PMI data raised concerns about the effectiveness of Beijing’s stimulus measures targeting consumption and domestic demand.

The Caixin Manufacturing PMI fell from 51.5 in November to 50.5 in December. Significantly, staffing levels declined for the fourth consecutive month as overseas demand weakened. The Caixin Services PMI painted a similar picture, with service providers cutting staffing levels for the first time since August. Concerns about international trade and competition weighed on sentiment, leading to job cuts.

China’s Labor Market and Consumer Sentiment Crucial for Consumption

Declining employment levels and muted consumer confidence add to Beijing’s uphill battle to stimulate the economy. Stable labor market conditions and falling youth unemployment could be crucial for Beijing’s stimulus measures to boost consumption and domestic demand. The youth unemployment rate stood at 16.1% in November 2024, well above the 5% national unemployment rate.

Labor market conditions and geo-political tensions also impact consumer sentiment. Consumer confidence dropped near to historical lows in Q3 2024. Weaker consumer confidence may curb private consumption and demand. Economists believe Beijing must boost confidence through the labor market and implement policy measures targeting household income.

US-China Relations and Economic Implications

US-China relations could be crucial to China’s economic recovery. Improving relations may ease trade tensions, boosting private sector sentiment. Improving sentiment may drive job creation, supporting consumer confidence, spending, and demand.

However, the Biden administration continued making waves on January 6, targeting Chinese companies in its final days. The US Defense Department announced the inclusion of Chinese tech giants on a list of companies that work with China’s military, known as the Section 1260H List.

The Section 1260H List now includes prominent global names, including Tencent Holdings Limited, COSCO Shipping Holdings, and China National Offshore Oil Corporation’s CNOOC China Ltd.

Companies on the list could face US sanctions and the cold shoulder from US firms to avoid government scrutiny. During Trump’s first term, Huawei faced global challenges following the US stating that the tech firm acted on behalf of the Chinese government.

The incoming administration’s first moves could give insights into Trump’s plans for China. In December, Trump appointed ex-US Senator David Perdue as the Ambassador to China. Perdue previously lived in Hong Kong and worked in China, well-positioned to improve US-China relations.

Trump also softened his tariff threat from 60% to 10%. These pre-inauguration moves could suggest the Trump administration plans to improve US-China relations.

However, China’s involvement in BRICS remains a hurdle. In September, Trump warned nations against dropping the US dollar, threatening 100% tariffs on goods from BRICS nations. China is a vocal advocate of BRICS’s plans to shift away from the greenback.

Hang Seng and Mainland China Markets Under Pressure

The prospect of a US-China trade war has rattled markets in Hong Kong and mainland China. Year-to-date, the Hang Seng Index is down 3.74%, while the CSI 300 and Shanghai Composite have declined by 4.30% and 4.62%, respectively.

The losses came despite Beijing’s efforts to bolster the economy, underscoring sentiment toward the potential impact of a US-China trade war on China’s economy.