‘Cold War 2.0’ Is Still A Thing. And One Bank Is Astounded At The Lack Of Media Coverage

Over the last several days, I’ve spent quite a bit of time talking up the prospect of renewed tensions between Washington and Beijing.

It’s not that “Trade War 2.0” (or “Cold War 2.0”, if you like the hyperbole) is “more important” than news about the reopening of western economies following COVID-19 lockdowns. Rather, it’s that these issues are inseparable. The coronavirus is yet another chapter in the increasingly dreary tale of Sino-US relations under Donald Trump.

I don’t mean to suggest that Trump’s stance towards Beijing has been totally misguided. I do think it’s fair to say it’s been mostly misguided, though, and it’s equally fair to assert that US foreign policy has been even more unpredictable and ham-handed than usual under this administration. Trump’s nostalgia for the mercantilism of a bygone era is quixotic, at best, and his protectionist/nationalist policies are often couched in xenophobic terms, which is a dark road on which to travel.

But when it comes to China, Trump accidentally stumbled into a few battles that are actually worth fighting, not the least of which involves pressuring Beijing to improve its human rights record.

Make no mistake: There is no stopping China from overtaking the US as the largest economy on the planet over the longer-run. And militarily, the Chinese are nearly (if not quite) America’s equal. What China will never likely have, however, is a monopoly on the world’s reserve currency. Given the inevitability of China’s rise, it’s not a terrible idea for the US to throw the weight of the dollar and, if necessary, access to the US financial system, around if it means pushing Beijing in the “right” direction on key issues.

If the future of the planet is Bipolarity, both superpowers have to be at least some semblance of sane when it comes to things like human rights, and at least pay lip service to international democratic norms. It’s true that America’s human rights record is far from admirable, especially as it relates to far-flung military expeditions. But 2020 US doesn’t run a web of internment camps aimed at perpetuating the overt repression of an entire ethnic minority. (When it comes to oppressing minorities, the US prefers to lean on the covert oppression embedded in American-style capitalism instead.) Trump goes out of his way to undermine press freedom in America, but there is no such thing as the “press” in China – there is only outright state propaganda. China is not a democracy and doesn’t pretend to be one. Period.

All of those things have to change, otherwise we’ll end up with a world half-run by an unapologetic Communist autocracy. I realize that doesn’t sound like something I’d normally say in these pages, as it’s a tacit admission that some of Trump’s policies vis-à-vis Beijing aren’t totally without merit. But at this point, Trump has become such an easy target (last month he publicly suggested Americans inject bleach and household cleaner directly into their veins to help guard against coronavirus) that his shortcomings as a leader hardly bear mentioning. He’s completely hapless and clearly not in full possession of his faculties. We all know that. It’s on full display in each and every tweet. Every public utterance is cringeworthy. Most of his supporters on Capitol Hill admit as much in private. It is what it is. Barring some left-field scenario that sees him attempt to extend term limits, he’s got, at most, another five years in office. He may be gone within months.

But Trump or no Trump, the world is likely in for a protracted period of tense Sino-US relations. It just happens that the current occupant of the Oval Office harbors delusions of restoring America’s manufacturing glory, a vision that’s manifested in a highly damaging trade conflict which has become inextricably bound up with other issues, including human rights and national security.

The point is: China needs some prodding. And not because we need to curtail the country’s rise, but precisely because that rise is inevitable.

The pandemic is an aggravating factor. Now, lawmakers have another excuse to turn the screws on Beijing and that’s exactly what’s happened over the past week.

Late Monday, the Trump administration banned the Federal Retirement Thrift Board from implementing a planned shakeup that would have entailed investing some government employee savings in Chinese equities. It was the first nod towards implementing restrictions on the flow of capital to China.

On Tuesday, Lindsey Graham introduced a bill which requires the White House to certify that Beijing has provided an adequate account of the origins of the coronavirus under threat of sanctions.

Then there’s the ongoing push to pressure China over its treatment of the Uighurs and widespread repressive tactics in Xinjiang. That push gathered momentum last year, and in October, Trump blacklisted a hodgepodge of surveillance companies. But Congress is hardly satisfied.

And don’t forget about Hong Kong and the protesters.

This collision course is the big news, and it’s been eclipsed by painstakingly rendered human interest stories documenting incremental efforts at reopening various economies.

One person who’s incredulous at the lack of coverage for the apparently imminent spiraling of tensions between Washington and Beijing is Rabobank’s Michael Every.

In a note called “1, 2, 3, 4, Sanctions”, Every begins as follows:

The title of today’s Daily may go over the head of those who don’t speak French (even very poorly, like me). It nonetheless still coveys a message, I hope — albeit one that has yet again gone right over the head of Bloomberg. Our ‘go-to’ market news service had decided that its daybreak headlines for me were: a US virus reopening story; a record US budget deficit, and; President Trump tweeting about negative rates. All of them are newsworthy — but none of them are new.

He then chides the media. “The on/off reopening is already a meme we know well [and] the record budget deficit is a surprise how?”

And on negative rates, he simply refers to Trump’s penchant for superlatives: “Why wouldn’t Trump push for the US to lower-er than the lower-er-est rates out there when the the US budget deficit is about to get as big as it is in Japan?”

So, what does Every think matters? Well, US-China relations, that’s what. To wit (abridged):

What Bloomberg doesn’t mention as major news is that the US Senate is set for action as soon as this week o approval of a bill that would impose sanctions on Chinese individuals seen as responsible for human rights abuses in Xinjiang. We are hence edging closer to it taking a veto from Trump to avoid it becoming law, which he did not do on legislation focused on Hong Kong. Furthermore, another group of Republican senators has proposed the COVID-19 Accountability Act [which could ultimately entail] an inability for China to access US dollars. Either bill would severely impact already dented US-China relations – especially on the back of the US decision on de facto capital controls on China.

For much of the trade war, Trump complained he was constrained by overly hawkish Fed policy – that Jerome Powell was putting the US at a disadvantage.

That’s no longer the case. If anything, policy is looser in the US than it is in China, although we’re likely to see more easing from the PBoC in due course.

Bloomberg’s Simon Flint has a cautiously benign view on the situation. “Discussions about allowing US entities to hold China accountable for COVID are possible, but those have so far caused very little stir in markets and that seems likely to sustain”, he wrote Monday, noting that “China would presumably refuse to pay any such attempted demands and any escalations – seizing Chinese assets, suspending interest payments – seem too extreme an abrogation of international norms to get serious consideration”.

Fingers crossed on that. But as Rabobank’s Every notes, “Trump already has zero rates and the Fed buying trillions in assets, and he and everyone knows they will do more if markets fall”.

What does that mean? Well, for Rabobank, it raises a simple question: “Why not push back against China to provide political cover?”

Food for thought.