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America The ‘Unreliable Entity’ Prompts China To Establish Corporate Blacklist, Rare Earths Plan Said Ready

Witness the spiraling nature of conflict.

It’s appropriate that the latest escalation in the spiraling dispute between Donald Trump and China is something called an “unreliable entities list”. After all, Trump is, himself, the quintessential example of an “unreliable entity”. If there were a dictionary entry for “unreliable entity”, Trump’s picture would be beside it.

According to China National Radio, citing Ministry of Commerce spokesman Gao Feng (who has been a busy man lately), China will add foreign companies that cut supplies to Chinese companies to the list. The move is intended to punish firms that are engaged in practices which harm the interests of Chinese corporates. Here is the official word:

According to relevant laws and regulations, China will establish a list of unreliable entities, foreign business organizations or individuals that do not abide by market rules and deviate from the spirit of the contract, and impose non-commercial blockades on Chinese enterprises, which seriously damage [their] legitimate rights and interests. Specific measures will be announced in the near future.

Markets were not amused. The news adds insult to the injury inflicted by Trump’s Thursday evening announcement of imminent tariffs on Mexico. US equity futures were on the lows following the “unreliable entities” headline, and USDJPY is at a 108-handle.

The timing of the announcement on the entities list seems designed to hit US markets, although you could say it’s just coincident with Gao’s schedule. Whatever the case, the wording of China’s announcement suggests Beijing could target pretty much any company in the global tech supply chain who cooperates in an effort to undercut Huawei.

Earlier in the session, the market learned that Beijing has a plan in place to restrict US access to rare earths. As Bloomberg originally reported, “the measures would likely focus on heavy rare earths, a sub-group of the materials where the US is particularly reliant on China [and] the plan can be implemented as soon as the government decides to go ahead.”

This comes weeks after Xi’s visit to a rare earths processing plant kicked off rampant speculation about China’s plans and days after Chinese media “confirmed” that the economic weaponization of rare earths is in fact in the cards.

Read more on China and rare earths as an economic weapon

As a reminder, while China accounts for “just” 35% of global reserves, the country produces some 70% of rare earths.

(Goldman)

“Chinese production of rare earths skyrocketed in the 1990s and 2000s”, Goldman wrote this week, noting that by 2005, China’s market share reached 97%. There’s much more on this situation in the linked post above, but the bottom line is that last year, US rare earth consumption came almost entirely from imports and 80% of those imports were from China.

(Goldman)

Apparently, China will focus on dysprosium, which is used in magnets that are common in nearly all cars and a host of consumer goods. As Bloomberg goes on to note, Beijing could restrict yttrium, utilized in lighting and flat screens and also ytterbium.

(BofA, USGS)

Shares of China Northern Rare Earth rose more than 1% on Friday.

“We think the effect of China restricting its rare earth exports to the US could have a much larger impact on the broader market this time around because of the ongoing US-China trade war”, Goldman wrote Wednesday, adding that “such a move on the Chinese side would clearly signal that trade talks with the US are not progressing well and that trade tensions are escalating rather than de-escalating.”

Right. And it goes without saying that the announcement of the “unreliable entities” list only underscores the extent to which the situation is spiraling out of control. The Huawei escalation is proving to be, in hindsight, a crossing the Rubicon moment.

Although Ray’s exposition was somewhat generic, it’s probably worth quoting Dalio’s May 29 post on Friday. To wit:

As someone in these negotiations wisely said, history shows that countries in conflict have seen that such conflicts can easily slip beyond their control and become terrible wars that all parties, including the leaders who got their countries into them, deeply regretted, so the parties in the negotiations should be careful that that doesn’t happen.


 

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5 comments on “America The ‘Unreliable Entity’ Prompts China To Establish Corporate Blacklist, Rare Earths Plan Said Ready

  1. Anonymous

    We have seen China cornering the market on various materials for two decades. Eventually they were going to play that card. Better now than later. We are cornering technology and innovation. Pretty sure that is not the same. One is anti-competitive and the other is claiming market share on free choice and fair competition. Better the US have the backbone now to get this on the table rather than when they corner the market on oil or something that would be much more painful.

    • Harvey Darrow Cotton

      I would slow your roll on the America rah rah stuff. We are importing finished manufactured goods from China, and exporting soybeans, cotton, copper, and corn. We are the debt-fueled deficit country, and China is sitting on a mountain of Treasuries and cash reserves.

    • So what do you suppose the simultaneous attempt a destabilizing Venezuela, Iran , Libya,and Syria as well as beating on the Germans over the Russian North sea Pipeline is all about anyway? Seems this is a do it now or never issue for the US…It may well prompt radical actions by either party…This game ain’t just about Trump and his irrational base….it’s about crowd control and hyping up a Domestic base for some Ungodly reason. Welcome to the world of Geopolitics!!!!

  2. Anonymous

    The ‘stable genius’ Tariff Man is neither stable nor a genius. If he’d waited before the Tariff attack on Mexico, the Mexican Senate likely would have signed the USMCA. Now, who knows?

    It has been surmised Trump didn’t want a trade war on two fronts, so he sent Mike Pence to Canada to expedite Canada’s signing. The he attacks Mexico and possibly undoes all the good work Robert Lighthizer spent months achieving. With Trump as America’s ‘friend’ who needs enemies

  3. Well Mitch, let’s see how much more trouble can the “really big brain” get the US (and the Republicans in particular) into? It doesn’t appear that he’s figured out that the American consumers are paying the tariff costs and now we’re adding in all the products arriving from Mexico which includes a lot of food and autos. A lot of products have already increased in cost without much fuss and certainly nothing from the people monitoring costs and figuring out if inflation is creeping in? Heaven forbid the real inflation numbers be revealed to the populous. I think they will figure it out eventually. And for the Republicans that would not be a good thing. Would it Mitch? Would a loss of supply of rare earths be a problem Mitch? The markets are getting nervous. Is there a point at which he goes too far?

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