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China: a bad time to tussle over tariffs

Investors may be overestimating China's vulnerability to a trade war, but a slowing economy and an overheated property market, it's not a good time.

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Markets may be overestimating China's vulnerability to a trade war. As David Dollar points out on The Hill, the world's second-largest economy is far less dependent on exports than it was even ten years ago. What's more, one of the paradoxes of Trump's trade measures is that by creating global uncertainty they actually strengthen the value of the dollar, because it is the global reserve currency that investors tend to flee to in a crisis. That makes exporters in China and Germany even more competitive, at least in the short term.

Still, this trade war "comes at a bad moment", says Ambrose Evans-Pritchard in The Daily Telegraph. The yuan has plunged by 5% since mid-June, prompting a rush for the exits by foreign investors. The Shanghai Composite index, having slipped by 20% from a recent peak, is now officially in a bear market. That evokes memories of the currency crisis three years ago, which saw capital flight spike to $100bn (£75bn) a month and triggered fears of a Chinese and global recession.

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The market falls this year have yet to reach 2015 levels, says Gabriel Wildau in the FT. That year the Shanghai Composite index plunged more than 45% between June and August. The trouble is that today worries about a trade war come on top of pessimism about a slowing economy, highlighted by data showing slowing growth in manufacturing last month.

And then there is the property market, which many worry is in "an even more severe bubble than in 2015". The authorities have been squeezing credit to deflate the debt bubble gently, but even a relatively small correction in this inflated sector could "ripple through China's economy, where property underpins manufacturing demand, debt collateral and local government budgets".

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