Let us hope that Peter Navarro’s comments to Fox News on Sunday aren’t indicative of what kind of week it’s going to be on the geopolitical front.
“If TikTok separates as an American company, that doesn’t help us”, Navarro insisted, during a characteristically inflammatory diatribe. Trump is “just getting started”, he added, warning that the administration is poised to take “strong action” against the popular app, as well as WeChat for what he called “information warfare” against the US.
Trump and Mike Pompeo suggested last week the US may ban TikTok, in yet another incremental escalation in “Cold War 2.0”, which isn’t going to end no matter who occupies the Oval Office.
Although Joe Biden may well take a different approach when it comes to confronting Beijing, “blame China” is a rallying cry with bipartisan appeal. It is by no means clear that a Biden administration would “take it easy” on the Chinese, especially given the necessity of retaining at least some of the populist appeal which resonated with supporters of Elizabeth Warren and Bernie Sanders.
Of course, to let Navarro tell it, Biden sits on the Politburo. “Joe Biden is the candidate of the Chinese Communist Party”, he charged, before regaling America with his theory about COVID-19.
“We were cruisin’ along until the Chinese hit us with that deadly weaponized virus”, he told Fox. He then said China had a “down economy” last year, without specifying what that meant. China’s economy expanded at nearly three times the rate the US grew in 2019.
To be clear, Navarro’s remarks aren’t always worth mentioning, but they are right now for two simple reasons.
First, relations between the administration and China are the worst they’ve ever been and, on Friday, Trump essentially admitted that Navarro was not misinterpreted late last month when he declared the trade deal between the world’s two largest economies dead.
While the president didn’t go so far as to concede that China won’t be making good on its commitments under “phase one” of the agreement, he did say that “phase two” isn’t likely to proceed anytime soon. With just over six months left in 2020, the math doesn’t look good for Beijing hitting the mark on its year-one purchase quotas, which means the first phase isn’t really operational either.
On Thursday, the US sanctioned Chen Quanguo, party secretary in Xinjiang. It was the highest-level sanction ever dealt in the country, US officials said. Meanwhile, deliberations are ongoing as to how the administration plans to punish China for the implementation of the new national security law in Hong Kong. Last week, reports indicated that at least some lower-level officials have floated the notion of undermining the Hong Kong dollar peg, a ludicrous suggestion that analysts and economists described as a “wacky idea“.
Against this exceptionally fraught backdrop, Navarro likely has carte blanche to push the envelope, especially as everyone on both sides of the aisle jostles for position to see who can be “toughest” on China ahead of November.
Second, China reports Q2 GDP as well as June activity data this week. China’s economy of course posted an unprecedented 6.8% contraction in Q1. Economists are looking for a 2.5% expansion in Q2.
In May, Beijing abandoned its GDP target for 2020.
April marked the first on-year gain for industrial output since the epidemic began, and May’s numbers showed a further uptick. Retail sales, though, remain subdued, a sign that domestic demand is sluggish even as factory output has improved.
Beijing dealt swiftly (and adeptly) with a COVID outbreak tied to a food and vegetable facility in the city last month. Analysts don’t generally see that having a material impact on the figures due this week.
PMIs in China have rebounded sharply. In fact, the Caixin services gauge rose to 58.4 for June, the highest since April 2010.
Meanwhile, Chinese officials will need to decide what message to send to retail investors after a stunning rally tacked more than $1 trillion onto the country’s equity market in the space of just a handful of sessions this month.
After initially encouraging the mini-mania, Beijing appeared to have second thoughts by the end of the week. On Friday, state media tried to throw a bit of cold water on the surge, which had already drawn comparisons to the country’s infamous 2014/2015 boom and subsequent bust.
This is all crucial to the geopolitical and macro narratives.
So, in addition to the evolution of America’s rapidly worsening epidemic, big bank earnings, and a set of possibly useful data points in the US, investors and traders will need to keep one eye on China this week.
As for Navarro, he’ll have both eyes trained on Beijing, as is his wont.