Submitted by Michael Every of Rabobank
Excuse the repeat pun today, but there was no need to publish in Australia to avoid the Official Secrets Act: just leak the contents to journalists and, hey presto, the Bloomberg headline (so far) is “Book of Bolton”. Which, it must be said, lands some heavy blows on this US president. The particular hits the media are flagging are that Trump allegedly pleaded with China’s Xi Jinping to help him get re-elected, and was fine with re-education/detention camps in Xinjiang.
On the re-election, was there anyone who did not think the US-China trade deal was anything but a re-election platform, either if it was adhered to (“So much winning!”) or if it were broken (“CHINA!”)? That is how (geo)politics works, warts and all. On Xinjiang the irony is that Trump just signed into law the Uighur Human Rights Act, which requires the imposition of US sanctions on Chinese officials. Beijing’s reply? “Strong indignation and firm opposition”; a call that the US must “immediately correct its mistakes” and stop using this law to “harm China’s interests and interfere in China’s internal affairs”; and “unless the US corrects itself, China will resolutely respond.”
Crucially, how do Democrats (and Republicans) who might have wanted to pivot back to China in a post-Trump era square the circle above? Whatever one’s take on the Book of Bolton, this marks another step deeper into US-China Cold War – unless the meeting in Honolulu between US Secretary of State Pompeo and China’s top diplomat Yang Jiechi went exceptionally well. Did they touch on the US sanctions that are also looming over Hong Kong, or legislation just proposed that would target the US green cards of Chinese CCP members?
Against a backdrop of geopolitical risk off, also consider this quote: “The explosive sound of justice that will continue to come out could go far beyond the imagination of those who make a noise about what could unfold." No, it’s not Antifa, but North Korea’s state press. How about this one? “Our military's patience has run out. The military's announcement that it is mulling a detailed military action plan should be taken seriously.” No, it’s not a Republican senator, it’s North Korea again. Yes, Pyongyang exports more rhetoric than any other product, and of the same low quality, but things are heating up – and neither Trump nor Denis Rodman are welcome as interlocutors.
After the serious heat on the India-China border this week, both sides are literally digging in: Indian press reports China has brought in hundreds of new soldiers and heavy construction equipment, while India is building its forces and an access road. The clash has already prompted serious economic fallout: India has banned China’s Huawei and ZTE from providing equipment to state-run telcos and may also prohibit private mobile firms from using them. They currently hold a 25% market share.
On the geopolitics/trade front the US will be moving to reset its WTO tariff schedule – meaning higher. That’s another step towards a scenario long discussed here: infinite USD liquidity at home via the Fed, but ring-fenced by politicians to Makes America Great Again. Expect others to follow that lead. USTR Lighthizer also stated a trade deal with the UK is closer than one with the EU, with agriculture a stumbling block. (Which implies it isn’t with the UK?) Further, the US has just walked away from discussions with the EU over a digital tax. The EU itself has announced plans to ring-fence its market from firms that are subsidised by states - which means China. (Or the UK if it tries to veer away from Europe’s idea of a level playing field?)
Meanwhile, the virus situation in the US and in Beijing provides little comfort. Neither do key data in New Zealand, where Q1 GDP was -1.6% q/q vs. -1.0% expected; and in Australia, where employment collapsed 228K vs and expected fall of 79K, taking the unemployment rate up to 7.1% from a revised 6.4%. With the Aussie border officially to stay closed until the end of the year, we can be assured that not a lot of tourism jobs are going to be back in a hurry.
With developed economies already at zero rates and doing mega-QE and/or yield curve control, there is still room for emerging markets to play catch-up. Brazil has just cut rates 75bp to 2.25% and is flagging that there is still room for more. So rates in Brazil are now where they were in the US a year ago. How the world changes.
Moreover the PBOC has flagged that Reserve Requirement Ratios are also going to be cut further, perhaps as soon as this weekend, further eroding under-capitalised banks’ margins of safety. Indeed, they are being asked to sacrifice CNY1.5 trillion in earnings ‘for the team’: remind me again why foreign banks are so excited about entering the Chinese market? Additionally, the PBOC is pledging broad credit will expand CNY30 trillion (USD4.2 trillion) in 2020, up 17% y/y, and equivalent to around 30% of GDP. New loans alone are expected to be up 19% y/y.
Given we can be assured that USD FX reserves will be flat at best --unless China is going to collapse import growth while trying to hold exports steady, which will lead to a rapid geopolitical trade push-back-- then the outlook for CNY is not good. Nor for the quality of investment that will be made (then again, they are hardly alone on that front).
Indeed, while the USD had been on the back foot for some time now due to the Fed’s I-never-met-an-asset-I-didn’t-like monetary policy, emerging markets are about to requiring the same kind of CTRL-P policy response. The FX see-saw will then swing the other way in many cases.
Then we will see who kvetches