China may feel backed into a corner. The Hong Kong protests are symptomatic of a broader shift in sentiment across SE Asia against Chinese ‘influence’. China’s bid for hegemony – symbolised and underpinned by 1B1R – may be running into some resistance. For the US, this presents an opportunity to ‘turn the screw’, to accelerate the exodus of manufacturing jobs out of China – in many cases, to SE Asian countries.
The Chinese Government could, of course, retaliate to the latest round of Trump tariffs. It may finally let the Renminbi sink below Rmb/$7.00. The current account surplus has stabilised this year, and capital outflows have continued to fall. A lower renminbi would accelerate the sell-off in equities, but it would be a clear warning to other SE Asian countries too, not to exploit the current impasse between the US and China. China will want a lower Renminbi against the Vietnamese Dong and the Thai Baht, among others, if the trade fight escalates.
This paints a dark picture for the Chinese economy. However, as always, there are two sides to consider, and the potential for Chinese companies to innovate and adapt should not be underestimated. Foreign suppliers may vacate China, but in the key battlegrounds – 5G, semiconductors, quantum computing, EVs, the Internet of Things – there is little sign of any real impact.
Huawei is a case in point. Two new, in-house chips show that Huawei is moving ahead of US and South Korean competition. With its vast R&D outlay, time may be running out for the Trump administration to stop China’s leading technology company. Management at Huawei are paying top salaries to attract postgraduates that will help drive the company’s research into chips, software and other technologies that are being moved in-house.
