China, Bitcoin, and the Escalating Trade War

The United States and China have had an interesting relationship over the last few decades. There have been times of prosperity, times of conflict, times of cooperation, and most recently, times of confusion.

While most Americans are getting their information about the ongoing trade war between the two global superpowers from President Trump’s Twitter account, China’s State Council Information Office released an 18 page white paper on Sunday outlining their view of the current situation.

The document’s preface does a great job of highlighting the main argument that is explained in detail throughout the paper.

The China-US commercial relationship serves as both the ballast and the propeller of the overall bilateral relationship. At stake are the fundamental interests of the two peoples, and the prosperity and stability of the world. Since the establishment of diplomatic relations between China and the US, bilateral trade and economic relations have come a long way, with expanding fields of cooperation at higher levels. A mutually beneficial and win-win relationship with strong complementarity and interlinked interests has been forged, benefiting not only the two countries but also the entire world.

Given the differences in stage of development and economic system, it is inevitable that the two countries will experience differences and friction in their commercial cooperation. The history of China-US trade and economic relations has seen twists and turns and difficult situations. By adopting a rational and cooperative attitude, the two countries have managed to resolve previous conflicts, bridge differences, and render the bilateral commercial relationship more mature through dialogue and consultation. 

Since it took office in 2017, the new US administration has threatened additional tariffs and other measures and provoked frequent economic and trade friction with its major trading partners. In response to the economic and trade friction unilaterally initiated by the US since March 2018, China has had to take forceful measures to defend the interests of the nation and its people. At the same time, committed to resolving disputes through dialogue and consultation, China has engaged in multiple rounds of economic and trade consultations with the US in an effort to stabilize the bilateral commercial relationship. China’s position has been consistent and clear – that cooperation serves the interests of the two countries, that conflict can only hurt both, and that cooperation is the only correct choice for both sides. Concerning their differences and frictions on the economic and trade front, China is willing to work together with the US to find solutions, and to reach a mutually beneficial and win-win agreement. However, cooperation has to be based on principles. There are bottom lines in consultations. China will not compromise on major issues of principle. China does not want a trade war, but it is not afraid of one and it will fight one if necessary. China’s position on this has never changed. 

To provide a comprehensive picture of the China-US economic and trade consultations, and present China’s policy position on these consultations, the Chinese government hereby issues this White Paper.

There is a lot to unpack throughout the paper, but here are my main takeaways:

  1. China recognizes the importance of a commercial relationship with the United States. They believe this relationship is not only important for themselves, but also for other countries around the world.

  2. China believes that the US and China have previously been able to work through differences because both parties engaged in diplomatic talks that were rooted in rational, cooperative approaches.

  3. China believes they are the victim of unilateral action by the US. They specifically say “the new US administration has threatened additional tariffs and other measures and provoked frequent economic and trade friction with its major trading partners.” They go on to say “trumpeting ‘America First,’ the current US administration has adopted a series of unilateral and protectionist measures, regularly wielded tariffs as a ‘big stick’ and coerced other countries into accepting its demands.

  4. China believes these unilateral actions by the United States are not only hurting China, but also hurting many other countries around the world.

  5. China believes their “technological innovation is based on self-reliance. Accusing China of intellectual property theft and forced technology transfer is utterly unfounded.

  6. Lastly, “China does not want a trade war, but it is not afraid of one and it will fight one if necessary. China’s position on this has never changed.

The position outlined in this white paper obviously does not mimic the story that we are hearing from the mainstream media in the United States. However, it shouldn’t be surprising that two countries engaged in a global trade war don’t see eye-to-eye.

If you can put the politics aside, our job as investors is to determine what is likely to occur in the future, while identifying those events’ impact on different financial assets. For example, when trade tensions escalated in early-to-mid May this year, many people claimed increasing inverse correlation between Bitcoin and the Chinese Yuan.

Bitcoin isn’t the only asset that has people’s attention though. The Institute for International Finance estimates that “investors pulled $14.6 billion out of emerging markets in May — the largest monthly EM outflow in six years.And “the Dow tumbled below 25,000 points to four-month lows on Friday. The Dow and S&P 500 declined nearly 7% apiece in May, their first losing months since December. The Nasdaq tumbled 8% on the month, its worst May since 2010,according to CNN Business.

US markets are not the only victim though — Chinese equities seem to be responding even more negatively than their US counterparts.

Given President Trump’s recent remarks about increasingly harsh trade wars with Mexico, India and other countries, I don’t anticipate the chaos to stop any time soon. More importantly, we must remember that the impact of these actions are not fully realized for 12-24 months in many cases.

The perfect storm of interest rate cuts, increased quantitative easing, Bitcoin’s halving, and a trade war with the United States’ largest trade partners, increases the likelihood that Bitcoin will continue to gain popularity as a safe haven asset. When the world is fighting and everyone is trying to manipulate each other’s economies, there may be no better asset to trust than one that has an algorithmic monetary structure and cannot be changed or manipulated.

Either way, strap in. If China is telling the truth when it says “China does not want a trade war, but it is not afraid of one and it will fight one if necessary,” we are in for a long, painful time of uncertainty.

This is incredibly bullish for Bitcoin.

-Pomp


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THE RUNDOWN:

Coinbase Says Chief Operating Officer Has Left Crypto Exchange: Coinbase Inc. is losing its president and chief operating officer, former TD Ameritrade Holdings Corp. executive Asiff Hirji, the latest in a series of departures by senior executives at the San Francisco-based cryptocurrency exchange. Hirji joined in December 2017, and played a large role in steering the startup through the roller coaster ride of cryptocurrency price swings that came late in 2017 and thereafter. Read more.

Coinbase Adds EOS to Its Crypto Education Rewards Program: The crypto curious can now get up to $10 in EOS tokens by watching videos on Coinbase Earn. “We think a large number of people will obtain crypto not by buying it or mining, but by earning it,” Balaji S. Srinivasan, the recently departed chief technology officer of Coinbase, said on behalf of his former employer at a Block.one event on Saturday night in Washington, D.C. Read more.

SEC’s Hinman Says Some ICOs May Be Eligible for ‘No-Action’ Relief: Startups that conducted initial coin offerings years ago may be eligible for relief from potential enforcement actions by the U.S. Securities and Exchange Commission, an agency official said Friday. SEC Director of Corporation Finance William Hinman said that cryptocurrencies are capable of shifting from being a potential security to very clearly not being one. “Digital assets may evolve into an instrument that no longer needs to be regulated as such,” he said. Read more.

Japan Hardens Rules for Cryptocurrency Storage and Trading: Japan has officially revised its laws to provide more clarity – and tighter controls – over cryptocurrency. The legislation amending the Payment Services Act and Financial Instruments and Exchange Act was formally enacted on May 31 and will take effect in April of next year. Among the notable changes, the act does away with the definition of “virtual currency” and replaces it with the broader term “cryptographic assets.” Read more.

Chainalysis: 64% of Ransomware Attackers Launder Proceeds via Crypto Exchanges: United States-based blockchain intelligence firm Chainalysis claims that 64% of ransomware attack cash-out strategies involve the laundering of funds via cryptocurrency exchanges. The data was revealed in a Chainalysis webinar. A ransomware attack involves the infection of a target with malware and the demand of a ransom payment — frequently denominated in cryptocurrencies. The payment is demanded in return for the ostensible delivery of a decryptor tool that can help victims recover access to their data. Read more.


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