Update: US Equity futures are down following the reports that Trump is planning to restrict Chinese investment in US companies…
And while Chinese stocks are up marginally, Yuan continues to slide as chatter escalates that China is “weaponizing” the Yuan in retaliation to Trump’s actions…
As we detailed previously, this is a notable devaluation…
And most notably it is very focused against the USDollar as USDCNH decouples significantly from the Renminbi basket…
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While most analysis has been focused on the non-tit-for-tat trade tariff responses to Trump’s $450 billion tariff threats against China, it is the Trump administration that is preparing to fire the next salvo in the trade war, and as The FT notes, this move could have even greater long-term consequences for the economic relationship between the US and China than tariffs.
The FT reports that according to officials and people briefed on the discussions, the administration has decided to restrict China’s ability to invest in or acquire US companies in the industries identified by Beijing in its so-called Made in China 2025 plan.
The Trump administration appears likely to invoke an act that allows US presidents broad powers in the event of a national economic emergency, which the president is likely to declare.
The International Emergency Economic Powers Act (IEEPA) dates to the 1970s and has in the past been used mostly to impose sanctions on countries such as North Korea and Iran.
Administration officials argue that the restrictions are needed because the US is in an existential innovation war with China over key technologies that will define the future of the world’s two largest economies.
Although the exact scope of the investment measures is unknown, this level of dramatic escalation implies the China hawks have taken the upper hand in The White House, as is clear by Trump trade advisor Peter Navarro’s comments – aimed directly at Xi’s goal of leading the world in sectors from aerospace to AI…
“China has targeted America’s industries of the future, and President Trump understands better than anyone that if China successfully captures these emerging industries of the future, America will have no economic future, while its national security will be severely compromised.”
However, as we recently noted, China inbound investment has already collapsed in the last six months. According to research firm Rhodium Group, Chinese companies completed acquisitions and greenfield investments worth only $1.8 billion, a 92% drop over the past year, and the lowest level in seven years.
But there is a twist, as Rhodium noted, this is much more than simple M&A, it’s about capital outflows – which will really upset some of China’s wealthiest as they try to find new routes to de-Yuanize their assets…
The rapid decline in Chinese FDI in the U.S. was driven by a “double policy punch” — Beijing cracking down on rapid outbound investment and the U.S. government increasing scrutiny on Chinese acquisitions through the Committee on Foreign Investment as well as taking a more confrontational stance toward economic engagement with China in general.
Kyle Bass is pleased, judging by his latest tweet,
Fantastic reporting from @paulmozur on how the Chinese steal from US companies. US to impose new Chinese investment restrictions this week. https://t.co/vN3McYNGWx
— Kyle Bass (@Jkylebass) June 23, 2018
Confirming his previously noted position that Trump’s trade actions are simply about national security:
Tariffs are simply about national security: Hayman Capital founder from CNBC.
However, there are concerns as to just how this all ends, since as a former Obama administration official noted, the unilateral move by the Trump administration to invoke IEEPA would be unusual.
“That’s a pretty sharp departure from the way things have been done in the past,” adding that
“The Trump administration, kind of across the board, has very much blurred the line and seems to be saying that any significant economic challenge the US faces is also a national security challenge.“
All of which seems to ominously fit the historical path of escalation from ‘trade imbalance’ to ‘hot war’…
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