Submitted by Michael Every of Rabobank
First day back from a three-week holiday and fresh on my desk is copy of the Australian Farm Policy Journal Vol 16, No. 11, which has just re-published a Rabobank special report from much earlier this year titled “A Great Deal of Nonsense”. Flicking through and wondering why the paperstock is so superior to anything I usually get printed on, I can’t help but also notice that report concludes “Of course, if the trade talks break down then CNY, and markets, are also likely to come under pressure! And we have not even discussed the underlying political-economy dimension of these talks, as global headline after global headline underlines that these two economic superpowers are sliding towards Great Power politics/struggle that risks up-ending their economic relationship. (Look at the Huawei issue, for a key example!) In short, there is much talk of a Great Deal ahead. But logic, mathematics, and politics all suggest it is a great deal of nonsense.” Even with the usual ‘sing when winning’ caveats, not a bad call given today’s headlines.
After all, the US will today officially starting the clock ticking to the imposition of a further 25% tariff on USD325bn of Chinese imports within a month. That takes us to a real trade war, not a spat. And there is no sign of backing down. US President Trump up the ante when tweeting “We are right where we want to be with China. Remember, they broke the deal with us & tried to renegotiate. We will be taking in Tens of Billions of Dollars in Tariffs from China. Buyers of product can make it themselves in the USA (ideal), or buy it from non-Tariffed countries... ....We will then spend (match or better) the money that China may no longer be spending with our Great Patriot Farmers (Agriculture), which is a small percentage of total Tariffs received, and distribute the food to starving people in nations around the world! GREAT! #MAGA” That’s a major shift in US agricultural policy if so, with potentially huge market impact, and a surprising step away from America First towards a combination of FarmAid and LiveAid. This was then rapidly followed up with more aggressive Trump tweets: “China is DREAMING that Sleepy Joe Biden, or any of the others, gets elected in 2020. They LOVE ripping off America!”; and “Why do Democrats want China to screw over the United States? Thank GOD President Trump is willing to stand up for the America worker!”
In short, the international political dimension that shouted “a great deal of nonsense” while markets were blithely asking when the deal would be signed, and on what quality paper-stock, is now matched by a powerful domestic political dynamic: Trump is clearly staking out a 2020 election position as the candidate who is tough on China, something that early Democrat presidential-nomination favourite Biden is not going to be able to follow given his recent public comments to the contrary and his son’s deep financial involvement with Ukraine China. Let’s just say that with all the endless obsession on Russian interference in the 2016 elections, the Chinese interest in the 2020 outcome is already blatantly obvious. Meanwhile, as pointed out in recent ‘The Age of Rage’ report, more liberal Democratic candidates are going to find it hard to square pressure on China with a progressive stance on diversity and the environment.
Meanwhile, on the other side of our new divide the editor of the Global Times, China’s angry zeitgeist-y tabloid, has tweeted “Objectively, trade war has unprecedentedly mobilized hostility between Chinese and American societies toward each other. I am very worried the mutual hostility could spiral out of control, causing a big retrogression of the entire international relations”; then “China has made public 3 core concerns that must be addressed & it won't make concessions on. From perspective of China's politics, there is little room for compromises. They will insist. This political logic won't be changed no matter how much additional tariffs the US will impose”; and then “The sooner new tariffs on $300 b of Chinese goods come, the better. That means trade war comes to the 1st turning point, shifting from a comprehensive US offensive to a stalemate. The two sides will then compete on endurance. China’s political system will ensure we won’t lose”. This all argues that China has its own redlines...and basically these boil down to the US trying to achieve any real change on the trade front.
For a summary of what we now see coming, and its economic impact, please refer to this report published Friday; but one of them is a weaker Chinese currency. With CNH already at 6.87 today, 20 big figures above its high of 6.67 in mid-April, markets are perhaps just starting to wake up to what a great deal of nonsense a bullish case for CNY and CNH is – and hence the same is going to be true for a swathe of EM FX. Indeed, if you want to remain bullish on US-China trade at all one can only focus on two things.
- First, there is the “Will they really?” issue of 25% higher prices for US mobile phones and laptops, etc. – though that presumes we don’t see, for example, a 10% drop in the CNY, a 10% equivalent fiscal bailout from Beijing, and a 5% equivalent drop in profit margins. Or a shift to other suppliers who are less than 25% more expensive; indeed, the scramble for new supply chains is well underway and won’t be reversed at this stage. And also note that the tariffs to date have hardly generated US inflation in either CPI or PPI.
- Second, the hope that the end-June meeting between Trump and Xi at the Osaka G-20 will be a repeat of the making nice that we saw back in Argentina, which we feared would be Aaargh!-gentina but was actually Aah!-gentina as trade détente kicked in. Will Osaka be Oh!-saka or Oy vey-saka? We shall see. But recall the phrase ‘once bitten, twice shy’.
On which front, and on the theme of ‘a great deal of nonsense’, the looming Australian election has taken a surprise twist. No, it’s not one of the candidates finally addressing anything to do with China or the new Cold War, even though Australia is caught in the middle of it. Rather it is PM Morrison launching a new policy to try to bail out the imploding housing market by offering loans for first-time buyers who only have 5% to put down and who now need 20% according to suddenly-cautious banks. Of course, if the property market keeps going south that means the public will be on the hook for these new loans; then again, the public is likely going to be bailing out the banks anyway on current trends. Key issues then: will this policy work? No. Not on the very limited scale being offered; and frankly, why not just wait for prices to fall further rather than jumping in now? Indeed, home loans were -2.8% m-o-m in March vs. -0.5% consensus, with owner-occupier loans -3.4%, again vs. -0.5% expected. Moreover, will this help keep Morrison in his job? Well, the opposition Labour party immediately said they will match the policy, suggesting another ‘No’(?)…and that it’s property, not Cold War, that’s seen as truly existential by all Aussie politicians.
The same is also true for the RBA, of course. Yet the local press are now asking if the Cold War might give the Reserve Bank cover to admit how utterly wrong they have been on everything else and cut. I wouldn’t put it past them. And I wouldn’t be long AUD either.