Did China Just Run Up the White Flag in the Trade War?

After the worst month in history for China’s currency, the PBOC has had to declare it won’t use RMB as a trade weapon. Otherwise it would have risked capital flight like China experienced from 2014 to 2017, when it lost $1 trillion in reserves. This highlights, along with the bear market in Chinese equities and the record number of downgrades and defaults, that China is too fragile to take the pain of a sustained trade war, and won’t dare to employ regulatory interventions that could cost Chinese jobs at foreign-owned factories such as Foxconn. It explains weakness in the emerging market complex, of which China is the hub. Despite some tough talk, China is already negotiating against itself. Trump keeps raising the stakes and may not take yes for an answer until closer to the mid-terms. The risk here is not from a trade war itself, but the chance that China will fall into instability. When this ends, the biggest winner will be China – short-term with a major relief rally and long-term with a second wave of massive growth.