The trade war between the world’s two largest economies is entering its second round, and China is taking a beating. Bloomberg writes that China has recently ceded its position as the world’s second largest economy in terms of market capitalization to Japan, whose equities it eclipsed previously in 2014. Chinese equities dropped in value to $6.09 trillion USD slipping well below the Japanese equity market, which is currently valued at $6.17 trillion USD. Much of this shift can be attributed to the Trump administration’s announcement that it would be pursuing additional tariffs against China, citing that trade talks have stalled and that additional pressure must be brought to bear.
In comparison, the United States’ market capitalization is $31 trillion, three times that of China at its peak. Despite having a significantly less mature financial sector, China is attempting to duke it out, trying to match shot for shot with the United States in what could be the beginning of a full-out trade war. President Trump claims that China has subjected the United States and the rest of the world to unfair trade practices, ranging from currency manipulation to product dumping. Regardless of whether or not these claims are true, investors have signaled that they believe China is in for a pummeling. “The Shanghai composite index has lost 17% in 2018” and has been ranked as one of the “world’s worst performers”, reports Bloomberg. Tech and industrial stocks, once the brightest stars in a rapidly evolving Chinese economy, have taken the largest hits domestically sliding more than 20% this year.
However, while this change in ranking of market capitalization value damages China’s image abroad, China’s economy remains in acceptable health. This is more a reflection of China’s limited integration with the world financial markets than evidence of a seismic shift in the economic order.
Even though China is attempting to look more attractive to foreign investors by easing investment restrictions on domestic industries, the share of foreign ownership remains low; a problem marked by the fall in share of international transactions conducted in the Chinese yuan by nearly 4% between June and July of this year alone. Additionally, the yuan has lost more than 8% in the last 6 months against the dollar, again highlighting the repeated blows that the regime has taken in the current bout with the U.S.
Despite what one might believe about President Trump, what can be said for sure is that this administration does not pull punches. President Obama always lauded “negotiating from a position of strength,” and Trump is doing just that, hopefully foreshadowing a favorable outcome in the talks ahead.