It’s On: China Preparing “Punishment Measures Against Members Of Congress” In Response To Anti-China Litigation

Earlier today, we published the latest note from Rabobank’s Michael Every, who warned that “US-China Relations Are About To Fall Off A Cliff”, following the sharp escalation in diplomatic (and military) tensions between the US and China in recent days, which he laid out as follows:

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.)

As Every cautioned, echoing what we said yesterday, “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.”

And while the “market” that is USD/CNH is still largely unmoved…

… “so is snow before the avalanche“, and as we also said previously, “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?“

So while we wait to see whther Trump decides to go “all in” anti-China sentiment ahead of the election, moments ago Beijing – via its Twitter mouthpiece, Global Time editor in chief Hu Xijing, issued a preemptive warning, saying that “to counteract the abuse of anti-China litigation over COVID-19, Beijing is already preparing to take the necessary punishment measures against some members of the US Congress, the state of Missouri, and relevant individuals and entities.”

To counteract the abuse of anti-China litigation over COVID-19, Beijing is already preparing to take the necessary punishment measures against some members of the US Congress, the state of Missouri, and relevant individuals and entities, sources told Global Times

— Hu Xijin 胡锡进 (@HuXijin_GT) May 13, 2020

The bottom line is that as the Trump Administration makes China central to the re-election campaign, Beijing won’t just “stand there” and take it, which means that any incremental push by either said will be met – for the first time since the trade war which concluded with a tentative truce in January – with more than just jawboning, and once words turn to deeds, it will be very difficult to de-escalate before the November 3 election.