China’s escalation toolbox ultimately limited, China Beige Book’s Shehzad Qazi says

Key Concepts

• US-China trade relations
• Tariffs
• China's potential retaliatory measures
• Weaponizing US Treasury holdings
• Yuan devaluation
• Geopolitical risks in the region (Taiwan, Philippines)
• Accidental war

China's Potential Retaliatory Measures

• Tariffs: China can double down on tariffs on US goods.
• Investigations: China can announce more investigations into US companies operating in China.
• Boycotts: China can encourage its citizens to boycott American companies, similar to boycotts against Japanese companies in the past.
  • Example: Telling citizens "do not go and buy from China from American companies."

Limits to China's Retaliation

• The guest doesn't believe China will take drastic actions that would be considered acts of war.
  • Example: Weaponizing US Treasury holdings or interfering with critical supplies.
• US Treasury Holdings: China holds $760 billion in US Treasuries, making it the second-largest foreign holder of US debt.
  • The guest believes using this as a weapon would be a "very, very serious escalation."
• China's Goal: China wants a deal with the US and hopes to convey the right messages to the US administration to resolve the trade issues.

Yuan Devaluation

• The offshore yuan hit an all-time low against the dollar.
• This is significant because China is an export-driven country.

Geopolitical Risks

• Taiwan: There is concern about China's military drills and whether they could conceal a real invasion of Taiwan.
• Philippines: China has become very aggressive towards the Philippines.
• Accidental War: The increased military activity raises the risk of an accidental war between the US and China.
• Taiwan Priority: The guest believes that an invasion of Taiwan is not currently a high priority for China.

Conclusion

While China has various retaliatory measures it can take in response to US tariffs, it is unlikely to take actions that would be considered acts of war. The primary goal is to reach a deal with the US. However, there are significant geopolitical risks in the region, particularly concerning Taiwan and the Philippines, which could lead to accidental conflict.