Reports that the White House is considering a menu of options to restrict capital flows to China were “fake news” last week, according to Peter Navarro, whose highly contentious remarks during a CNBC interview reinforced the notion that Trump officials have reached something akin to wits’ end with the steady stream of leaks out of 1600 Penn.
Navarro was, of course, being disingenuous. The White House was considering at least three options for choking off US investment in China, although it’s become pretty clear over the past week that delisting Chinese equities from US exchanges is not any semblance of imminent if it’s even being pondered at all. (Treasury said as much and Larry Kudlow repeated the line on Monday.)
That leaves compelling US firms to limit inclusion in indexes and capping investment via government pension funds. We’ve discussed the ramifications of all these potential maneuvers at length.
Fast forward to Tuesday, and Bloomberg reports that the White House is proceeding with deliberations around restricting US government-run pension funds from investing in Chinese enterprises.
Amusingly, the latest discussions around capital flow limitations unfolded “just hours” after Navarro shadow boxed with CNBC’s Kayla Tausche. “It was really irresponsible journalism and the problem we have here … these bad stories push out the good”, Navarro told the network, before suggesting that Bloomberg was attempting to stir the echo chamber. “And what happens is as soon as Bloomberg puts it out there, there’s pressure from others to put it out there”.
That was on September 30. The very next day, Tausche popped up on Twitter claiming to have seen proof that Navarro was lying on national television.
“[The] White House circulated [a] policy memo last week that started [the] discussion process on potential US/Chinese investment limits”, she said, adding that “a source showed me the ‘Policy Coordinating Committee’ memo”.
Sure enough, Bloomberg now says Kudlow’s National Economic Council “convened a policy-coordination committee meeting last Tuesday, which also included officials from the National Security Council and the Treasury Department”. In her reporting, Tausche noted the memo indicated further discussions on the subject were imminent.
Although the White House is said to be “zeroing in” on the pension fund angle with a particular focus on possibly trying to prevent The Federal Retirement Thrift Investment Board from moving ahead with a plan to mirror MSCI’s All Country World Index in its international fund offering to workers, the Trump administration hasn’t ruled out going after index providers. “It’s still unclear what legal authority the White House would rely on to force major indexes to drop certain Chinese companies”, Bloomberg notes.
Chinese stocks are now being included in a trio of major indexes (MSCI, FTSE, S&P) while bonds are being added to a pair of international benchmarks (Bloomberg Barclays and JPM). The moves have catalyzed some ~$60 billion and ~$40 billion of inclusion flows over the past year and a half.
“If US-listed ETFs were restricted from investing in Chinese stocks, we estimate that would impact $530 billion of AUM and potentially lead to $46 billion of selling pressure due to their passive exposures to Chinese stock”, Goldman said last week.
Needless to say, news that the administration is moving ahead with discussions around capital restrictions on US investment flows to China will cast a pall over this week’s trade discussions that were already marred by the Commerce department’s Monday decision to blacklist Chinese surveillance colossus Hikvision, along with a hodgepodge of public security bureaus and other related companies.
Asked on Tuesday whether China would respond to the new blacklist, a foreign ministry spokesperson said reporters should “stay tuned“.