Trump drops a nuclear bomb on China, but China is not blinking

China Translated - Briefing #46

Apr 08, 2025

Hi folks! I am quickly announcing two housekeeping items.

First, you might notice that this newsletter finally has an official logo. Hurray!

Second, I have switched the “weekly review” column to a “briefing” format. My original idea for the weekly review format was partly out of fear that I might feel exhausted and procrastinate if I hadn’t committed to a fixed schedule. It turns out, I seem to be inexhaustible at writing! So, instead of writing a long review every week, I will just write whenever I see things that are worth writing about, and I will try to write at least once a week.

Yesterday (Monday) was both epic and entertaining. During the day, China’s capital markets tanked heavily after China announced an earlier-than-expected, tic-for-tac retaliation against the US over the tomb-sweeping festival holiday.

The reaction exceeded many people's (including my own) expectations. The Hang Seng Index tanked more than 13%, a drop that was only seen during the depths of 1987, the 1997 Asian Financial Crisis, and the 2008 GFC. The post-DeepSeek surge was all but erased in one day.

Just when we thought the drama was over, we were greeted by even more entertainment when the US capital market opened to another crash, but quickly surged, only to crash again within minutes on fake news regarding a 90-day delay on all countries except China. Here in China, we were joking: did the US also learn from China’s tradition of trading on 小作文 too? (xiao zuo wen, a little note without source or attribution but can move the market bigly.)

And then, just before we were going to bed, Trump dropped a nuclear bomb-level tweet that he would add an extra 50% tariff on China if China didn’t withdraw the 34% tariff. For a moment, the market was quite stunned, trying to process this information. Soon afterwards, the China ADRs listed in the US tanked, while the broader US markets actually trimmed losses.

To me, it’s clear that Trump panicked. He is playing poker, but when he should have folded, he chooses to raise. He is the “Panican”, a name for “weak and stupid people” he himself just coined.

The crux of the matter is, at this stage, does the number even matter? Pre-50%, there is already an effective 70%+ tariff on China, which means direct trade between the US and China is close to being dead already. So adding another 50% won’t make much a difference other than hammering more nails into the coffin. He could well add another 500%, and it still won’t make much of a difference.

I think the Chinese leadership is already prepared for the worst-case scenario of ZERO (direct) trade between the US and China. So, there is no way for China to back down at this point. China may even announce a 50% reciprocal tariff should Trump’s 50% come into effect, which would be really embarrassing for the globally acclaimed Art of Deal author.

What Trump was doing was based on the fundamentally erroneous assumption that the US still had the upper hand in this trade war with China. He had the upper hand eight years ago, but not now. The trade war between China and the US has been going on for long enough, and China’s dependence on export to the US is low enough, for China not to care that much.

On the other hand, there seems to be a prevailing idea in the US that the Chinese economy is too weak for the Chinese leadership not to acquiesce, hence the belief that China’s counter-measures are “irrational”, and that they will eventually come to their senses when facing maximum pressure.

China’s economy is weak indeed, but it’s only weak under the backdrop of 3 decades of breakneck development speed. It is not too weak to bow down to a bully.

The cognitive error here is born out of the “China-collapse” echo chamber fed by one-sided stories from the likes of WSJ’s Wei Lingling (Why do I always make fun of Wei LingLing?), and further exacerbated by another error committed by the likes of Alex Wong that confronting the CCP when the economy is weak will weaken their rule. This entire package of cognitive errors will finally bump into the wall of reality soon.

Today (Tuesday), China’s capital markets surged, unfazed by Trump’s “50%” nuclear bomb, and encouraged by PBoC, China’s central bank’s strong messaging about supporting the market by buying into ETFs. (It’s also helpful that the excessive crash on Monday already priced in a lot of negativity.)

What’s unique about PBoC’s messaging this time is its characterization of buying ETFs as a “quasi-stabilization fund.” So, the stabilization fund that everyone has been clamoring for is actually already there and will be triggered into action whenever the market crashes too much.

This is the “PBoC Put.” And I am not sure if there is a Trump Put right now.

Accounting of predictions in the last briefing

Finally, I think it’s worthwhile to do an accounting of the 5 predictions that I made in the paywalled section of my last briefing on how would China respond to Trump’s 34% “reciprocal” tariff. My new comments are marked in [bold].

At this stage, China will refuse to negotiate and will only respond with more targeted tariffs. Again, it’s a “contest of pains”, and China has the upper hand. Also, judging from the disciplined and measured manner with which China responded to the previous 20% tariff, it’s clear that China has made detailed preparations for different levels of countermeasures for different scenarios. [Correct]
The unexpected part is that the US is unleashing high tariffs on many other countries at the same time. And it is a positive surprise. China will wait a while to see how smaller powers’ negotiations with the US conclude to make a decision on how to respond.
[Wrong. I underestimated the resolve Chinese leadership has regarding prediction 1 above.]
I won’t expect China to create substantial troubles for US businesses in China because now is the time to project an image of openness to contrast with Trump’s isolationism.
[Correct. Yesterday, the vice commerce minister immediately met with representatives of US companies in China to assure them that they will not be retaliated against.]
In the medium term, demand-boosting measures will have an added urgency to deliver, and there will likely be more unannounced measures in preparation for this scenario coming out.
[So far, so good. Xi vowed to ‘fully unleash’ consumption in the face of Trump's tariffs. I am waiting for more details]
In the medium- to long-term, China will seek trade deals and tighter integration with most of the non-US world. We need to notice that after this, and after the “Liberation Day”, and after Zelenskyy spat, the US global leadership in its so-called “rule-based order” should be officially dead by now. This is a great moment that China will not want to waste.
[This is not conclusive yet, but I still believe total decoupling from the US but tighter integration with the rest of the world is the right path to go. It’s also a highly complex matter, which I will expand on in future briefings. So stay tuned!]