Rabobank: US-China Relations Are About To Fall Off A Cliff

Submitted by Rabobank's Michael Every

The title of today’s Daily may go over the head of those who don’t speak French (even very poorly, like me). It nonetheless still coveys a message, I hope – albeit one that has yet again gone right over the head of Bloomberg. Our ‘go-to’ market news service had decided that its daybreak headlines for me were: a US virus reopening story; a record US budget deficit, and; President Trump tweeting about negative rates. All of them are newsworthy – but none of them are new.

The on/off reopening is already a meme we know well and are seeing everywhere. The record budget deficit is a surprise how? We all know the spending bills just passed and the collapse in tax revenue to be seen. Even negative rates, while not something the Fed wants, are lower than where Fed Funds is now – and higher than in Europe and Japan, while now New Zealand is flirting with negative rates while adding even more asset purchases (which saw NZ down sharply to the 0.6010 level). Why wouldn’t Trump push for the US to be lower-er than the lower-er-est rates out there when the US budget deficit is about to get as big as it is in Japan, and public debt is heading off on the same path?

What Bloomberg doesn’t mention as major news is that the US Senate is set for action as soon as this week on approval of a bill that would impose US sanctions on Chinese individuals seen as responsible for human rights abuses in Xinjiang. The Senate has already unanimously passed a first reading of a version of The Uyghur Human Rights Policy Act 2019, and the House passed a stronger form in September. We are hence edging closer to it taking a veto from Trump to avoid it becoming law. Which he did not do on legislation focused on Hong Kong, of course.

Furthermore, the AFP reports another group of Republican senators has proposed The COVID-19 Accountability Act, which if passed will give Trump 60 days to certify to Congress that China has provided a full accounting to an independent body, such as the UN, of what happened with this virus, has closed all its highest-risk wet markets, and has released all Hong Kong activists arrested recently. Failure to do so would authorize Trump to impose sanctions such as an asset freeze, travel bans, visa revocations, and to restrict Chinese businesses’ access to the US banking system and capital markets. (And we are once again back to the Eurodollar weapon given that would mean an inability for China to access USD if so.)  

Notably, there is very little popular sentiment in the US to avoid movement on either of these bills, and no likelihood at all of China moving on either of these issues to try to cap US anger. (Indeed, in Hong Kong, part of one of the bills’ focus, the government is pushing ahead urgently with legislation to criminalise booing the Chinese national anthem, and is flagging the removal of civics from the school curriculum.)

Either bill would severely impact already dented US-China relations – especially on the back of the US decision on de facto capital controls to China, and the Global Times’ claim of a “tsunami of anger” already leading some in China to consider walking away from the “Phase One Trade Deal” by declaring force majeure. Likewise, did nobody read the op-ed written by USTR Lighthizer which screamed ‘Made in America’? As a former Deputy USTR once told me, as lawyers USTRs had one missive: whether silicon chips or potato chips, more free trade was always better. Well not anymore.

Yes, the “market” that is USD/CNH is still unmoved - but so is snow before the avalanche. Just count slowly upwards and we will get there: and much faster with fewer exports to the US and no Chinese access to the USD system. Indeed, we just saw a rare stumble in equities and a drop in US 10-year yields back to 0.67% after a stellar auction. Of course, we will then be told that this is just noise: but as noted before Trump already has zero rates and the Fed buying trillions in assets, and he and EVERYONE knows they will do even more if markets fall. So why not push back against China to provide political cover?

Meanwhile the same 1, 2, 3, 4, sanctions issue is also playing out in Europe. A German constitutional court judge has spoken about its recent controversial ruling, stating the ECB isn’t ”Master of the Universe”. Does that sound like a judicial retreat to you? In response, the ECB’s Chief Economist has stated that its asset buying is “proportionate” and will end “as soon as the inflation aim is reached.” Which to anyone looking at the Bank of Japan will immediately set off alarm bells, as it implies it will never stop – and I would assume the German judges are quite capable of looking at Japan as an example. Risk on or off, would you say?