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Authored by Lawrence Franklin via The Gatestone Institute,

China’s People’s Liberation Army (PLA) is currently staging a military exercise across from the Taiwan Strait that looks as if it plans to culminate in an amphibious assault on an island in the South China Sea. Taiwan’s military — evidently fearing, with good reason, that the exercise may be a cover for an actual Chinese plan to seize another island in the region, Pratas (Dongsha), claimed by both the People’s Republic of China (PRC) and Taiwan — has declared a state of emergency. The PLA exercise also looks as if it is preparing China’s air, naval and marine assets required for an invasion of Taiwan.

In 1996, China initiated a similar crisis in the Taiwan Strait by staging an amphibious assault military exercise. After President Bill Clinton deployed two powerful US aircraft carrier-led battle groups, China discontinued its aggressive posture toward Taiwan. Strategic analysts judged that the Chinese decision was the fruit of a realistic assessment that it could not overcome the US ability to defend Taiwan.

The Chinese Communist Party (CCP), under current Chairman Xi Jinping, appears to be threatening war in a renewed effort to bring Taiwan under Communist Chinese control. The CCP considers Taiwan to be a Chinese province, an integral part of the mainland that ultimately must rejoin it, and the only remaining part of China yet to be returned after the Communists defeated the Nationalists in 1949. For China, it is unfinished business from 70 years ago. China has isolated Taiwan by requiring that all countries who want to have normal diplomatic ties with China must have no state-to-state links with Taiwan. Although the US consents to this diplomatic requirement, it also continues to provide Taiwan with weapon systems, enabling the island to defend itself against any Chinese invasion. US President Donald J. Trump recently authorized the latest sale of US weapons — including advanced heavy torpedoes — to Taiwan. Trump, earlier in his tenure, also approved the sale of anti-aircraft Stinger missiles, Abrams tanks, and F-16 fighter jets.

Many foreign specialists on China seem to discount the possibility that the Chinese are willing to risk war with the West to subdue Taiwan. Serious consideration should nevertheless be given to the Chinese Communist Party’s (CCP) determination to incorporate the “secessionist” province despite the danger of a conflict, especially if China considers the US distracted by the fallout of the Wuhan coronavirus that China unleashed on the world, and American voter squeamishness before a presidential election in four months.

The CCP views Taiwan as an existential threat to continued Communist rule in China. Taiwan’s vibrant democracy is the alternate model to the CCP’s totalitarian rule. Despite China’s efforts to cut Taiwan off from the world, the country remains an economically successful and politically free society, less than 90 miles from the Chinese coast.

Millions of mainland Chinese have visited Taiwan, a practice which could stimulate pressure by Chinese citizens on the Communist regime for liberalizing political reforms. If China assesses that its growing military power could quickly reduce Taiwan’s ability to defend itself or that the West has lost the will to defend the island, CCP Chairman Xi might direct the PLA to launch an invasion.

China also doubtless took stock of the free world’s obliging passivity the past few weeks as Beijing seized Hong Kong. Not one country lifted a finger to stop them. The move was in explicit violation of China’s 1997 Joint Declaration with the United Kingdom to maintain “one country, two systems” until 2047.

Presently, China seems to be assessing the West’s resolve to defend Taiwan, while simultaneously attempting to instill fear in the administration of Taiwan’s President Tsai Ing-wen. China initiated this latest aggressive posture toward Taiwan shortly after President Tsai’s May 2016 election, possibly anticipating that Taiwan could declare formal independence from China. In recent months, the PLA’s deployment of air and naval assets near Taiwan have been violating the island’s airspace and territorial waters. China’s aggressive moves have included its deployment of Air Force H-6 bombers and SU-30 and J-11 fighter jets. China’s ongoing 79-day military exercise (May 14 – July 31) opposite Taiwan is being orchestrated by the PLA’s Southern Theater of Command, headquartered in Nanning, the capital city of China’s Guangxi Zhuang Autonomous Region in the south. The exercise features the dual deployment of the Chinese Navy’s two aircraft carriers, the Shandong and the Liaoning, just across the narrow Taiwan Strait in China’s Bohai Sea. The exercise is utilizing air-cushioned boats, amphibious assault vehicles, landing barges, and ground attack helicopters. Reportedly, the ongoing PLA military exercise will conclude with an amphibious assault by Chinese Marines upon Woody Island (Yongxing) in the Philippine Sea, south of Taiwan. Woody Island is occupied by Chinese troops is also claimed by Taiwan and Vietnam (which calls the island Phu Lam).

In response to China’s threatening exercise, Major General Lin Wen-Huang, Chief of Taiwan’s Joint Operations, asserted that Taiwan’s military had plans and preparations in place. General Lin, perhaps fearing that the actual target of the PLA amphibious assault is the Taiwan-occupied island of Pratas (Dongsha), 548 kilometers southwest of Taiwan, reinforced the island’s small Coast Guard contingent with hundreds of Taiwanese Marines from the 99th Brigade.

Taiwan’s armed forces maintain close communication with the US military. In a “cross-strait” confrontation between Taiwan and China, American air and naval assets would be granted complete access to Taiwanese airfields and ports. The Trump Administration, signaling China not to assume dominance in the South and East China Seas, has conducted seven such “Freedom of Navigation” missions through the Taiwan Strait in 2020, and the US Navy has already deployed three aircraft carrier battle groups in the South China Sea.

China’s Communist leaders should not miscalculate that the US is too immersed in domestic distractions to defend Taiwan militarily against any possible plans to threaten the island’s sovereignty.

Topping off a day of increasingly aggressive tit-for-tat escalations between the US and China, the NYT reported late on Wednesday that the Trump administration is considering an extensive travel ban to the United States by members of the Chinese Communist Party and their families, a move that would almost certainly prompt retaliation against Americans seeking to enter or remain in China and further exacerbate tensions between the two nations.

Such a ban would be “the most provocative action against China by the United States since the start of the trade war between the two countries in 2018″ and would further deteriorate U.S.-China relations, which after several years of open clashes over economics, technology and global influence have devolved into a de facto new Cold War.

Additionally, the draft proclamation could revoke the visas of party members and their families who are already in the country, leading to their expulsion. The NYT further adds that some of the proposed language is also aimed at limiting travel to the United States by members of the People’s Liberation Army and executives at state-owned enterprises (even though many of them are likely to also be party members).

The presidential order would cite the same statute in the Immigration and Nationality Act used in a 2017 travel ban on a number of predominantly Muslim countries that gives the president power to temporarily block travel to the U.S. by foreign nationals who are deemed “detrimental to the interests of the United States.” The 2017 ban was fought in the courts and expanded this year.

Then again, this being the NYT, the whole report may well be fake news based on a non-existent (or conflicted NSA) source seeking to spark even more conflict in the already strained US-Sino relations, and the paper of records tacitly hints as much saying that “details of the plan have not yet been finalized, and President Trump might ultimately reject it.”

Assuming Trump is indeed considering such a ban, it wasn’t clear just how such a ban would be implemented: the Chinese Communist Party has 92 million members, and the U.S. government has no knowledge of party status for a vast majority of them. So trying to immediately identify party members to either prevent their entry or expel those already in the United States would be difficult. Meanwhile, almost three million Chinese citizens visited the United States in 2018.

As the NYT further adds, officials at the White House, State Department and Department of Homeland Security have been involved in the discussion over the ban. Officials at those agencies also continue to debate a variety of formulations for banning Chinese travel to the United States short of barring all party members, such as targeting only the 25 members of the ruling Politburo and their families.

Ironically, the report follows just hours after another anti-Trump outlet, Bloomberg, reported that the president “doesn’t want to further escalate tensions with Beijing, and has ruled out additional sanctions on top officials for now, according to people familiar with the matter.”

So which is it: no sanctions or sanction 92 million Chinese communists? It’s safe to say that the truth is somewhere inbetween.

Submitted by Christopher Dembik, Head of Macro Analysis at Saxo Bank

Summary:  We are onside with consensus in expecting no change in monetary policy this week. Now the German court challenge has been defused, the ECB can focus on the future of its bond purchases. Technical discussions should concern the likely slowdown in the path of bond purchases this summer, further flexibility in the PSPP (Public Sector Purchase Programme) parameters, and early talks about the Strategy Review that is due next year, especially regarding climate change. The ECB is likely to remain on alert as the second economic wave of the COVID-19, characterized by business restructuring and permanent closures, is about to hit the Eurozone and fragilize the banking sector.

Timeline of the ECB’s response to the crisis:

• March 12: The ECB decides to expand its QE programme by €120bn until the end of 2020, with a special focus on private sector bonds, such as corporate bonds, and to offer more favorable terms for the already planned TLTRO III with a rate up to -0.75%.

• March 18: “Whatever it takes” moment. The ECB unveils its Pandemic Emergency Purchase Programme (PEPP) of €750bn until the end of 2020 with a high degree of flexibility: the 33% limit DOES NOT apply and the ECB can purchase debt across all the yield curve, including Greek debt under waiver. The QE program reach a total of €1050bn until the end of the year (including previous measures and the relaunch of QE by Draghi in 2019).

• April 7: The ECB decides a very significant easing of its collateral requirements, including an expansion of eligible credit claims (ACCs) to SME loans, Greek debt (waiver) and a 20% reduction in haircuts.

• April 22: The ECB accepts some junk-rated debt as collateral for loans to banks (Important caveats: the bonds must be rated as investment grade on April 7).

• June 4: The ECB increases the €750bn envelope for the PEPP by €600bn to a total of €1350bn. All asset categories eligible under the existing asset purchase programme (APP) are also eligible under the new programme.

• June 25: The ECB creates a Eurosystem repo facility to provide liquidity in EUR to central banks outside the euro area. This is a precautionary measure to alleviate potential euro funding difficulties due to the pandemic.

The timely response to the pandemic by the ECB successfully managed to close governments financing gap in the Eurozone. Despite the depth of the recession and the large negative shock to the level of public debt, Italy is able to finance COVID-19 expenses at very low cost, without requesting financial help from the ESM. The 10-year Italy-Germany government bond spread is basically back to pre-COVID levels, at 1.66% versus a crisis peak at 2.77% in mid-March. The ECB’s greatest success is that it has avoided a remake of the 2012 debt crisis, by absorbing almost all new public debt related to the pandemic, and by providing as much liquidity as necessary to the market, thus preventing the emergence of a liquidity crisis. Much bas been said about Christine Lagarde’s appointment as president of the ECB, but we need to recognize, myself included, that we were probably too critical and that she has brilliantly managed the crisis, almost making us forget about Draghi.

The ECB has managed to “fill the gap” in the Eurozone

Now the German Constitutional Court challenge has been defused, the ECB can focus on the future of its bond purchases. Technical discussions are likely to concern:

• The slowdown in the path of the bond purchases, which usually happens during the summer season (July and August), and might be the main point of interest for investors this week;

• Further flexibility in the PSPP parameters, especially regarding the 33% issuer limit. This issue needs to be addressed soon as there are many indications that the limits for German government bonds must be quite close.

• As part of the Strategy Review due in 2021, early talks about how the ECB could help fighting climate change – a topic that has been at the heart of Lagarde’s speeches lately.

Due to the ECB firepower and hopes for EU deal on the recovery plan “”Next Generation EU” this week at the physical EUCO meeting on July 17 and 18, sentiment of investors has significantly improved over the past weeks regarding European financial assets, and especially the euro. Speculators are betting on a higher euro as they take their long position close to their annual high point, currently at 180,387 contracts. This move also reflects aversion against the USD due to the health crisis in the United States and the impact on the greenback of the Federal Reserve flooding the markets with US dollars. At least in the short term, the euro should keep performing well.

The ECB’s timely action and hopes for EU deal on budget and recovery plan have driven positive sentiment of investors regarding the euro

However, there is no room for complacency. Downside risks remain elevated for the coming months. The ECB is likely to remain on alert as the second economic wave of the COVID-19, characterized by business restructuring and permanent closures, is about to hit the Eurozone and fragilize the banking sector. Though the ECB systemic stress indicator has receded from its annual peak reached in mid-March, it is still in risk-zone territory at 0.21, confirming that further support from the ECB might be needed to limit financial issues that could slow down the recovery. It will be of prime importance to monitor well risks on the banking sector related to payment deferrals, that has been granted to consumers and businesses in order to cope with the crisis. These risks will only become apparent over time and might cause a sharp increase in the ratio of non-performing loans in the most vulnerable countries.

Euro area systemic stress remains in risk-zone

Authored by Philip Marey, Senior US Strategist at Rabobank

Civil Unrest

Summary

• In contrast to most other developed countries, the first wave of COVID-19 has not been suppressed in the US. Both at the federal and state level institutions are failing.
• Protests against COVID-19 measures and against racism reflect a lack of trust in US institutions that predates the outbreak of the virus. In a polarized society trust in institutions is likely to be vulnerable.
• No matter who wins the elections, the turbulence in US politics and society is not likely to pass. In fact, what we are seeing now may be only the beginning.

First wave failure

In the last months we have seen the US taking a descent into chaos. In contrast to most other developed countries, the first wave of COVID-19 has not been suppressed. In fact, in June the daily amount of new confirmed cases surpassed the initial peak reached in April. At the same time, a coherent federal plan to turn this around seems lacking. At the state level, economies have been reopened before meeting the criteria set out earlier by the White House. At the individual level, we have seen many protests against measures to contain the virus.

Stop the killing

Meanwhile, protests of another nature have taken over the streets. The endless series of police killings finally sparked a national outrage when images of the Minneapolis police murdering George Floyd were seen around the world. Of course this was nothing new. In fact, over the years many black Americans have lost their lives at the hands of the police. In most cases, the police got away with it. However, in this age of smartphones with cameras and social media, white Americans finally saw what black Americans experience.

Earlier during the coronacrisis, the second rate US citizenship of black Americans was evident in the asymmetric impact of COVID-19 that we noted in the April Monthly Outlook. According to CDC data (Table 1) black Americans have a COVID-19 associated hospitalization rate almost 5 times that of white Americans, adjusted for age. In fact, for native Americans this ratio is even higher. Living conditions, work circumstances and healthcare inequities put several ethnic minority groups at increased risk during COVID-19 according to the CDC.

V or W?

In sharp contrast to the widely broadcast civil unrest, stock markets have rebounded rapidly and the economic data for May and June suggest that the real economy is following. However, we should note that the recovery in the stock markets did not start until after the Fed had cut rates to zero, announced QE Infinity and launched its special lending facilities, which included corporate bonds. The recovery in the real economy follows a sharp contraction caused by the outbreak of COVID-19 and the lockdown that followed. The decline in economic activity in March and April was so steep that it caused both Q1 and Q2 GDP growth to be negative. The rebound we are now seeing is simply the effect of opening up the economy again. This is a mechanical rebound, and as we explained in The Recession of 2020: The Horror Version, we will have to wait until Q4 before we could see demand fluctuations determine GDP growth again. Then we will see how much damage really has been done.

Crumbling institutions

So at the moment there is this sharp contrast between the economic data and stock price levels on the Bloomberg screens and the images and discussions on TV. Note that both types of protests we mentioned, against COVID-19 measures and against racism, reflect a lack of trust in US institutions that predates the outbreak of the virus. In fact, data collected by the Pew Center show that trust in the federal government has fallen since the mid-1960s. In terms of economics, institutions are not working for Americans, unless you are one of the 1%. In terms of civil rights, institutions have failed black Americans and native Americans in particular.

Polarization

What’s more, in a polarized society trust in institutions is likely to be vulnerable. US politics has become polarized. Today, liberals vote for the Democrats and conservatives for the Republicans. This was not always the case however. In the 1950s there were liberals and conservatives in both parties. In fact, while many millennials regard the Democratic party as a beacon of political correctness, this party was a broad coalition that included Southern segregationists (= white supremacists) until the 1960s. Also, both in the Senate and the House of Representatives a higher percentage of Republicans voted for the Civil Rights Act of 1964 than Democrats. However, when Southern Democrats started to switch to the Republican Party after the Civil Rights Act, Northern liberals switched to the Democratic Party and this led to the sorting of liberals and conservatives between the two parties. Subsequently, the two parties were also sorted by race, religion and geography. This sorting process was a prelude to the polarization between the two parties. Political affiliation became part of someone’s identity. This also led to an increased aversion to the other party. The tone between the left and the right has become increasingly hostile. In light of this the polarization that we have seen in recent years is not caused by Trump, rather it is the other way around. The election of Trump is a consequence of this historical process. Polarization made it possible.

Moreover, polarization is even visible in opinions about the coronavirus outbreak (Table 2). With a lack of direction from the federal government, this makes a coherent national policy to get the outbreak under control very difficult.

Only the beginning?

The question is where does the US go from here? If President Trump is re-elected, he will be at the wheel for four more years, but this time without any restrictions imposed by concerns about re-election. If Biden takes the White House, federal policies will shift to the left again (for more details see the May Monthly Outlook). But will this lead to renewed trust in institutions? Perhaps for some on the left, but what about the rest? In a heavily polarized country, there is little common ground. Meanwhile, if right-wing populism is expelled from the White House, this does not mean it is going to disappear. It will only reorganize. Hopefully in the political arena, but we could also see another boost to violent right-wing extremism. In fact, right-wing attacks and plots account for the majority of terrorist incidents in the US since the mid-1990s. In the last six years, this has grown substantially (Figure 4). So no matter who wins the elections, the turbulence in US politics and society is not likely to pass. In fact, what we are seeing now may be only the beginning.

Authored by Nicholas Bailey via JustTheNews.com,

Philadelphia Democratic Mayor James Kenney says his city-wide ban on large events and gatherings through February 2021 does not apply to protests.

“The city’s office of special events will not accept, review, process or approve applications, issue permits or enter into agreements for special events or public gatherings of 50 people or more on public property through the end of February. The moratorium will apply to special events and public gatherings, including but not limited to festivals, parades, concerts, carnivals, fairs and flea markets,” Kenney said during a coronavirus video update on Tuesday.

“In addition, permit applications for residential block permits will not be accepted until further notice. The timeline when such activities may resume will be communicated as soon as possible. To be clear, this hold on large public events does not, does not apply to demonstrations and First Amendment protected activities,” he added.

Just the News reached out to the mayor’s office to learn whether the city will issue formal permits for protests or demonstrations on municipal property during the large-event ban. The office did not respond before publication.

There have been many Black Lives Matter protests taking place in cities across the U.S. during the pandemic since the May 25 death of George Floyd while in the custody of Minneapolis police. Some demonstrations have resulted in destructive protests marked by looting, vandalism and removal of statues from public grounds. 

According to local media reports, Kenney recently waived “all protest-related code violations that were issued over the last month of protests in Philadelphia against systemic racial injustice.”

“My decision to waive these violations is not a statement on the validity of the individual citations,” Kenney said in a statement.

“Rather, it is a recognition of the core concerns that caused thousands to demonstrate on the streets of Philadelphia. In waiving these notices, I recognize that those issues are vitally important, that the pain of those marching is very real, and that their message – Black lives matter – needs to be heard every day until systemic racism is fully eradicated from this city and nation.”