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