From “uncomfortable to scary”

August 3, 2019, 2:18 PM UTC
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Greetings from Hong Kong, where we’re girding for another week of typhoons and tear gas.

As a long-time resident of this city I’m accustomed to the former—but not yet the latter. I returned Thursday after nearly a month on the road to a Hong Kong that feels far more somber and subdued than the one I left. It’s not just the weather. There are fewer tourists. The luxury boutiques are empty. Even the stock market is in a funk.

And little wonder: demonstrations have become a part of daily life here lately. Today, two rallies rage even as I write: one on the Hong Kong island side of Victoria Harbor supporting police, the other in the Mong Kok shopping district on the opposite shore denouncing police brutality. Tomorrow, two marches are planned. On Monday, activists are calling for a multi-front “general strike.” Just getting around town has become an adventure.

* * *

Unrest in Hong Kong is among the many topics leaders of China’s ruling Communist Party will debate as they gather this month for their annual summer retreat in the northern resort town of Beidaihe. Also on the agenda: China’s slumping economy, Beijing’s deteriorating relations with Taiwan, and a spreading epidemic of African swine flu that is driving pork prices to record highs.

* * *

But the big issue looming over this year’s confab is the ongoing clash between the U.S. and China over trade and technology—a confrontation that shifted to a completely new risk level Thursday following Donald Trump’s surprise threat to slap 10% duties on $300 billion worth of Chinese imports beginning September 1.

The tariffs will heap new weight on China’s economy, already suffering from its slowest growth in 27 years. The Economist reports that the proportion of new college graduates in China who have found full-time jobs within six months of graduation has fallen from 78% in 2014 to 75% in 2018, while their average monthly salary has fallen from $690 in 2015 to $576 in 2017. China has vowed to retaliate tit-for-tat against Trump’s tariffs—although, as the Wall Street Journal notes, it has limited options for doing so without damaging its own economy.

In announcing his new tariffs on Chinese imports, Trump struck a bellicose tone, vowing to “tax the hell out of” China and declaring that, “if [China] doesn’t want to trade with us anymore, that would be fine with me.”

But the U.S. president should be careful what he wishes for. Economists argue, almost unanimously, that tariffs on China mainly tax U.S. importers, who do everything they can to pass that cost on to American consumers in the form of higher prices. According to an estimate by Oxford Economics, Trump’s tariffs on China will cost the average American household at least $700 a year.

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And as the Wall Street Journal points out, Trump’s tariffs result in an indirect tax on American exports. Data released Friday show that, in the first half of 2019, U.S. imports from China dropped by 12%, enough to oust China from its position as America’s leading source of imports. But U.S. exports to China fell 19%, as retaliatory tariffs and other barriers imposed by both nations took their toll. Because the U.S. economy remains relatively robust, total imports to the U.S. rose 1.5% in the first half from a year earlier, to $1.6 trillion. Meanwhile, America’s overall trade gap widened by 7.9% over the same period a year ago.

Trump’s threat to slap new tariffs on China sent a chill through U.S. stock markets, which fell Friday to their lowest levels in a month. The trade standoff also has cast a pall on cross-border investment between the two economies. The value of foreign direct investment and venture-capital deals between the U.S. and China sank to $13 billion during the first half of 2019, a decline of 18% compared with the previous six-month period, according to data released Thursday by the Rhodium Group.

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All of which led Bloomberg‘s Brendan Murray to conclude that this was the week that the U.S.-China trade war went from uncomfortable to scary. I couldn’t agree more.

Clay Chandler
– @ClayChandler

Economy and Trade

Blindsided. Chief negotiators from Washington and Beijing met in Shanghai this week – their first face-to-face since President Trump abruptly raised tariffs on Chinese imports in May. But any bonhomie was promptly dashed the following day when President Trump tweeted the White House would impose a 10% tax on the remaining $300 billion of Chinese imports, starting September 1. Some analysts suspect the timing of Trump’s tweet was a bid to put pressure on the Fed to introduce further easing measures. BBC

Avoiding metal bars. A federal grand jury has indicted billionaire Liu Zhongtian, founder of aluminium giant China Zhongwan Holdings, on charges of evading close to $2 billion in tariffs since 2008. The suit was filed in May but unsealed only this week. A warrant has been issued for Liu’s arrest but it is not clear where in the world he is. If Liu is in China, it’s unlikely he’ll face a court in the U.S. as the two countries have no extradition treaty. Wall Street Journal

Factory for sale. Apple manufacturer Foxconn is reportedly seeking a buyer for its $8.8 billion LCD screen factory in Guangzhou as demand for the product wanes. The factory, which Foxconn began building in 2016 and was heralded as the single largest investment in the city ever, isn’t even finished yet. The panel maker announced plans to open a plant in Vietnam to hedge against U.S. tariffs on China. Reuters

Innovation and Tech

Little red card. Xiaohongshu, a popular ecommerce app that combines shopping with social media, was stripped from Chinese android app stores this week. No explanation was given for the app’s removal but analysts suspect Beijing is reprimanding the app for failing to crackdown on counterfeits and “brushing” – the act of hyping products with fake reviews. Xiaohongshu, otherwise known as Little Red Book, said it has “launched a comprehensive investigation, rectification, and in-depth self-examination of the contents of the site, and will actively cooperate with relevant authorities to promote the improvement of the internet environment.” Reuters

Coming out. Beijing Kunlun, the owner of gay dating app Grindr, announced it is reconsidering an IPO after the Committee on Foreign Investment in the U.S. (CFIUS) dropped its investigation into the Chinese company. Kunlun didn’t apply for CFIUS approval when it purchased Grindr in 2016 and the security panel issued a probe into the company’s data practices this year. Financial Times

Calling it in. Bytedance, the world’s most valuable start-up and owner of video-sharing app TikTok, wants to launch a smartphone by the end of the year. It’s a strange idea that echoes of Twitter’s ill-conceived venture into hardware with TwitterPeek in 2009, but there’s no suggestion Bytedance’s phone will only serve TikTok videos. Bytedance is partnering with boutique phone maker Smartisan, which has a small but loyal following, to create the phone. Caixin Global

In Case You Missed It

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Echo Trump’s Tough Talk, or Lift Tariffs? Democrats Clash Over Trade NYT

How Sanctions Are Starting To Squeeze Huawei Fortune

Politics and Policy

Hong Kong. Police in Hong Kong charged 44 people with rioting this week as clashes between officers and protestors escalated. On Monday the Hong Kong and Macau Affairs Office in Beijing held its first press conference since 1997 to condemn the “riotous behaviour”. State officials are pushing the narrative that unrest in Hong Kong is being stirred up by “foreign forces” and pro-Beijing camps have begun circulating photos of foreigners at protests, claiming they are CIA operatives. On Wednesday the PLA garrison in Hong Kong released a promotional video that showed military personnel repelling protestors. South China Morning Post

Taiwan travel. Beijing has banned Chinese tourists from travelling solo to Taiwan, only eight years after permitting it in the first place. In a statement, China’s Taiwan Affairs Office made it clear the ban was intended as a punishment for Taiwan’s ruling, pro-independence party, the DPP. CNN

Is this halal? Authorities in China’s capital have been instructing Halal shops and restaurants to remove Arabic lettering and Islamic symbols from their stores. One shop manager told Reuters an officer said, “This is foreign culture and you should use more Chinese culture.” There are numerous Muslim ethnicities in China but Beijing has escalated its campaign of homogenizing the Chinese populace this past year, most notably through its crackdown on Uighur culture in Xinjiang. Reuters

This edition of CEO Daily was edited by Eamon Barrett. Find previous editions here, and sign up for other Fortune newsletters here.

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