Trade War or Chinese Politics?

The stock market may begin recovering from Friday's sell-off as favorable earnings reports take precedence for now over Trump's pending imposition of 100% tariffs on Chinese imports.  The mystery in this latest confrontation between the US and China is not Trump's tariffs but China's new restrictions on rare earth exports that triggered Trump's action.  On the surface, China's imposition of new restrictions didn't make sense, given that a trade agreement was being worked on and a meeting between the two countries' leaders was being discussed.  My conjecture is that Chinese politics was behind the new restrictions and that the whole issue could be resolved after the Fourth Plenum of the 20th Chinese Communist Party on October 20-23. 

According to podcasts by Chinese political observers, several groups among the Chinese leadership have been maneuvering to end Xi Jinping's rule as president.  Some of these groups want to improve China's ties with the West.  The observers cite circumstantial evidence.  For example, high-level people who were aligned with Xi Jinping have been removed from their government positions, while others who had been removed by him are back in power.  These observers say Xi Jinping could resign, citing health reasons, or could stay president as a figurehead with the opposition holding the real power.   Whatever the outcome, it could be resolved at this Plenum.

Like a le Carre spy novel, it's not clear which side -- the anti- or pro-Xi side -- is behind the new restrictions on rare earth exports.  The anti-Xi side could have wanted to demonstrate that taking an aggressive stand against the West would trigger large negative retaliations, counting on Trump's impulsiveness to implement them.  They would use this evidence to discredit Xi Jinping's anti-West stance.  The pro-Xi side could have wanted to create a situation, with the country under attack or stress, requiring continuation of the current leadership -- typical of government leaders who find themselves in personal difficulty.  

In any case, the motivation of the Chinese leadership to allow the 100% tariff to hurt their economy should end once the power struggle is decided at the Plenum.  So, if, indeed, the latest flare-up in the US/China trade war results from Chinese internal politics, there could be movement to resolve the problem after the meeting.  The rare earth restrictions and the 100% tariffs could be rescinded.  Movement in that direction could be seen in the last week of October -- before the 100% tariffs go into effect.