Yuan, Futures Slide After Trump Orders Retirement Fund Investment In Chinese Stocks Blocked

Having threatened last week that “COVID reparation” would be paid one way or another – and following Peter Navarro’s comments echoing the same rhetoric this morning – FOX Business reports that President Trump is moving ahead with his plans to block a government retirement fund from investing in Chinese equities considered a national security risk.

As we detailed previously, Trump made his initial threats from the Rose Garden at the White House two weeks ago after he was pressed by a reporter over a German newspaper report suggesting that China should be issued a $160 billion invoice for the impact on Europe’s economy.

Since then plans have been strawman’d, escalating up to last Wednesday’s threat that the Trump admin is planning an executive order to block a 2017 decision that The Thrift Savings Plan, the federal government’s retirement savings fund, would transfer a massive $50 billion to an international fund which would mirror the MSCI All-Country World Index.

The issue being China’s addition to the index, and thus the fund being forced to allocate significant capital to the Chinese stock markets, at a time when the gloves between the two nations are clearly off.

In one letter written Monday, obtained exclusively by FOX Business,  national security adviser Robert O’Brien and National Economic Council Chair Larry Kudlow write to U.S. Labor Secretary Eugene Scalia stating that the White House does not want the Thrift Savings Plan, which is a federal employee retirement fund, to have money invested in Chinese equities.

Specifically, the letter directly links China’s handling of COVID-19 as one of several reasons why investment in Chinese companies should not occur.

It says the Federal Retirement Thrift Investment Board is “Departing from the Board’s established index for the International Stock Investment Fund (I Fund) to track one that maintains Chinese equities is risky and unjustified.”

In a second letter, FOX Business reports that Scalia writes to Michael Kennedy, the chairman of the Federal Retirement Thrift Investment Board, sharing the Kudlow/O’Brien letter noting the two have “grave concerns with the planned investment on grounds of both investment risk and national security.”

460987415 Sec Scalia to Cha… by Zerohedge on Scribd

The letter concludes by saying that moving the assets out of a certain fund is “at the direction of President Trump.”

Needless to say, the optics of the US halting capital from entering China would be staggering and could result in a reversion of China-bound capital flows across all Western countries until the current war of words between Trump and Xi rages.

The main reaction so far is a drop in US equity futures…

And some weakness in yuan…

The only problem is that this particular war of words could last a long time, since there is no longer any impetus to kiss and make up, and if anything, Trump will only escalate the anti-China sentiment into the election (and after), to keep pounding that the collapse resulting from the COVID-19 pandemic is not his fault, but rather Beijing’s, even as China pursues a mirror image approach, blaming the US for launching the pandemic (and perhaps as we saw tonight, taking its retaliation against US allies like Australia).

Additionally, Trump knows The Fed will defend his stock market (he does not need a ‘trade deal’ to levitate it) into the election, giving him leverage in any war of words (or deeds) against China.