Rabobank: The US And China Can No Longer Both Blow Bubbles At The Same Time

By Michael Every of Rabobank

Different Types of Competition

With today being the US Memorial Day holiday to commemorate its fallen combat soldiers, it’s likely to be a quiet start to the week for markets. However, the US holiday provides a platform for some sober reflection on more contemporary forms of competition

First, a former PBOC official says the rapid rise in CNY against USD probably won’t last, and that the Chinese currency is “overbought”. That looks a further jaw-boning attempt to shift market expectations away from the idea that Beijing is going to allow CNY to keep appreciating. In short, this looks a form of ‘FX War’, a long-running source of tension between different economies, because they are a zero-sum game. Of course, current PBOC officials point out the initiator can be seen as the US, via its extraordinary monetary and fiscal policies.

Indeed, the SCMP flags “China calls for global action to stop big flows of pandemic-fuelled hot money”, as the vice-chair of the China Banking and Insurance Regulatory Commission calls for tougher international oversight to stop hot money flows, and for tougher “monitoring” of international capital flows. Yet outright controls would be needed to stop what happens in the US spreading elsewhere; and indeed within China there was a vow to crack down on “market manipulation”, a threat which has arguably led to a drop in commodity prices.

A key message here is that despite Western delight at post-virus re-opening and ludicrous levels of market liquidity, our global system is still no more stable, nor our global recovery more balanced and sustainable, than in the troubled past. A second implied message is this: with China now an economic giant, can both it and the US stimulate à outrance without bubbles and *global inflation* emerging? If not, this is again a zero-sum game. If the US goes the ultra-easy route, then China perhaps cannot: and obviously that has serious implications when both behemoths have a political growth imperative. Therefore, we also see the push-back on the FX front (ZH: as confirmed by today’s FX RRR hike, the first in 14 years).

Yet that is just one front where pushing may occur. In remarks last week, US President Biden stated:

• “In the coming weeks, my administration will take steps to combat these supply pressures, starting with the construction materials and transportation bottlenecks, and building off the work we’re doing on computer chips.” The latter involves cajoling firms to shift semiconductor production back to the US – will other sectors now follow?;

• “Three decades ago, the US was #1 –and some would argue #2– in the world for R&D spending –research and development– as a share of our economy. You know where we are now in the international competition? We’re #9. We must be #1 in the world to lead the world in the 21st century.  It’s a simple proposition.” Contrast that with the headline: “Chinese President Xi Jinping seeks to rally country’s scientists for ‘unprecedented’ contest”, which adds “promises to boost investment and free scientists from bureaucracy” and “Xi says country must seek breakthroughs in areas such as artificial intelligence and semiconductors as he warns of major battle between great powers.” But back to Biden;

• “Investment in high-growth industries like clean energy and electric vehicles – it’s not just we want to deal with the environment. We want to lead the world in exports of these new technologies instead of ceding the global market and job creation to the Chinese.” So the US wants to be less of a net importer, and to seize global market share back from China. Imagine what the FX implications are there for a world dependent on exporting to the US to earn USD; and

• “100% of our investment is going to be guided by one principle: Make it in America…I promise you, there’ll be no contract let to a foreign company or any of the product down the line…They’re going to find the job here in America, I promise you, or they’re not going to get the contracts.” Whether this is delivered or not, the overall rhetoric is completely zero-sum.

Meanwhile, as we search for a binary rather than analogue answer, within three months, the US intelligence services will release their conclusions as to the origins of Covid-19. This obviously has the potential to sour US-China relations well beyond financial markets. Indeed, the UK’s Daily Mail alleges a report will shortly be published in the Quarterly Review of Biophysics Discovery which makes explosive related claims.

Even more worryingly, the editor of China’s The Global Times has argued: “As the US strategic containment of China has increasingly intensified, I would like to remind again that we have plenty of urgent tasks, but among the most important ones is to rapidly increase the number of commissioned nuclear warheads, and the DF-41s, the strategic missiles that are capable to strike long-range and have high-survivability, in the Chinese arsenal…We must be prepared for an intense showdown between China and the US…The number of China’s nuclear warheads must reach the quantity that makes US elites shiver should they entertain the idea of engaging in a military confrontation with China. On this basis, we can calmly and actively manage divergences with Washington to avoid a minor incident sparking a war.”

Perhaps against the backdrop of insanely destabilizing global liquidity, a MAD (Mutual Assured Destruction) defense policy is ironically appropriate: and Vegetius (“Si via pacem, para bellum”) would certainly approve. However, Vegetius never said “Si vis pacem para commerciaque” – if you desire peace, prepare for free trade. Or joint-venture wealth-management services.

Which, shifting geography, leaves the EU in a pickle given it only knows how to do free trade. It certainly doesn’t know what to do with a Belarus whose President Lukashenko just had a bear-huggy visit to Russian President Putin, where he procured a USD500m loan, and who has threatened to “allow migrants and drugs to flood into western Europe if sanctions are imposed on his country following the forced landing of a Ryanair passenger plane.” History suggests this can sometimes be followed by an EU deal involving money transfers the other way. Yet a further Belarussian journalist was apparently seized late Sunday local time; and Belarus has launched criminal cases against the mayor of Riga and the Latvian foreign minister for “inciting ethnic hatred.” In short, we are watching to real time to find out what EU “open strategic autonomy” means in a world of zero-sum US-Chinese competition, and where even tiny Belarus can thumb its nose and make threats.

The EU’s mood will not be helped with the release of a report stating the Danish secret service helped the US spy on Germany’s Angela Merkel: so even friendly Europeans spy on each other. Imagine what those who aren’t such good friends do. Whisper it – but it might not just be all about free trade!