Rabobank: Are Commentators Still Under The Illusion China Has A Market-Based Financial System

Submitted by Michael Every of Rabobank

As we move into the final stretch of the second round of US-China trade talks markets are reaching fever-pitch. If they weren’t already nervous at the prospect of things going wrong the slew of weak data yesterday from the US and re: global manufacturing were a stark reminder that things are already less than rosy. US durable goods were 1.2% when 1.7% was expected; the US Markit Manufacturing PMI was 53.7 vs. 54.8; existing home sales were -1.2% not +0.2%; the Philly Fed was -4.1 not +14.0, with new orders tumbling the most since October 2008; in Europe, manufacturing is contracting with the Markit PMI at 49.2; and in Japan at 48.5. South Korea’s February 20-day exports were also –11.7% y/y and imports -17.3%. True, the services sector is still doing better than expected globally. But traditionally which sector leads and which one lags?

So understandably there is much head-scratching about just what is going on with the US and China. On one hand we have reports that SIX Memoranda of Misunderstandings are being drafted by the negotiators; and, yes, one of them is USD30bn of extra Chinese purchases of US soybeans, etc. Another is a commitment not to devalue the currency, which we shot down already this week as equally unworkable. And any commitment to structural reforms is not on the table.

Naturally, bulls have tried to seize on Trump tweets as a sign that détente looms: “I want 5G, and even 6G, technology in the United States as soon as possible. It is far more powerful, faster, and smarter than the current standard. American companies must step up their efforts, or get left behind. There is no reason that we should be lagging behind on…something that is so obviously the future. I want the United States to win through competition, not by blocking out currently more advanced technologies. We must always be the leader in everything we do, especially when it comes to the very exciting world of technology!”

6G?! Is that what the US will use in Spaaaaaaaace Foooooorce (which I will politely remind readers is still obligatory to pronounce through one’s cupped hands to get the required echo effect). With rumours of Trump meeting China’s trade chief today, does this all mean the US is not going to lock out Chinese telcos from its market and might even be about to hold hands with Huawei in a new grand deal, as some have interpreted it? And is the Huawei CFO about to be released from arrest in Canada soon, as a “Communist insider” also alleged yesterday?

Let me take a guess on the former at least: No.

As Trump was tweeting, Secretary of State Pompeo was showing the US is forcing a binary choice on its allies: use Huawei, lose the US. Pompeo stated: “If a country adopts [Huawei] and puts it in some of their critical information systems, we won’t be able to share information with them, we won’t be able to work alongside them.” For Canada, the UK, and Germany the choice is clear as the US is in NATO and China isn’t (or perhaps NATO isn’t wanted?) All Trump was doing in his tweet was kicking the US industrial complex up the backside to out-innovate Huawei; and not “blocking out currently more advanced technologies” means Huawei won’t be banned due to Chinese tech being better than the US, but for national security reasons. And Europe will eventually get off the fence on the US side for one other simple reason: it has two large firms well placed to push ahead with 5G themselves, if anyone can link national security and economics.

Meanwhile, China has been showing the world exactly what a reliable free-trading partner it is by banning Australian coal indefinitely, which knocked AUD almost as much as two RBA rate cuts in 2019 being predicted by a local guru (no, not me: I got there first but don’t move markets Down Under). However, it’s the usual game of accentuate the positive from the Antipodean Wonder Boys today as Australia is dragged over suddenly not-so-hot coals. Treasurer Frydenberg cautioned against “jumping to conclusions” that the ban had anything to do with Huawei (or stripping residency from a certain influential pro-Beijing individual?) and reassured that Australian exports to China “will continue to be strong”. The RBA Governor’s semi-annual testimony saw him argue China’s coal ban might be for environmental reasons(!) but admit there would be “very difficult” economic consequences if the coal ban is a sign of a “souring” Australia-China relationship. Yes, there certainly would; and as things are playing out, yes there certainly will. However, the furthest Lowe would go is to say it was “unlikely” that rates would rise this year.

In China itself, the PBOC is also arguing that it doesn’t need to cut rates. That’s partly because when local coal producers start to suffer, for example, you can just shut down Aussie competition even if you have a Free Trade Agreement signed between the two states. (What price those six new US-China MoUs?) But specifically, who cares? The PBOC needs to keep short-term rates at a reasonable level to prevent currency collapse but are still talking about “targeted” stimulus; and they just forced 5% of GDP into the economy in one month; and borrowing costs have been declining for firms anyway. If the same trends hold up in the next few months it’s clear what is actually happening. Are foreign commentators still under the illusion China has a market-based financial system based on the cost of credit (i.e., rates) rather than the quantity (i.e., quotas/volume)?

Having said that, I can think of another central bank riddled with monetary-policy acronyms for quotas that keep its financial system afloat. Let’s just say it’s watching Brexit closely, where a 3-month Article 50 extension now appears to be more on the cards than before. Markets will love that. Yet will it solve anything? Not unless the brave new Independent Group swells from 11 to well into the triple figures by then: and if you believe that then I have a Chinese-built bridge to sell you.

via ZeroHedge News https://ift.tt/2U1fnsJ Tyler Durden

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