Marco Rubio, Ted Cruz Incur Xi’s Wrath, While China Ponders Expansion Of Yuan’s Global Role

Congratulations are in order for Marco Rubio and Ted Cruz.

They are now officially the target of unspecified Chinese sanctions announced Monday by the foreign ministry. Sam Brownback and Rep. Chris Smith are also targeted in the measures, which weren’t detailed.

The move is retaliation for US sanctions against Chen Quanguo, party secretary in Xinjiang who sits on the Politburo. A trio of other officials were targeted in the US measures announced last week, aimed at punishing China for human rights abuses. It marked the first time the US targeted a sitting Chinese official under the Magnitsky Act.

Congress virtually begged Trump to do something (anything) to send a message to China over its treatment of the Uighurs and other minorities. The House passed the relevant legislation 413-1 in May. It then sat on Trump’s desk for weeks.

Late last month, the president admitted to Axios that he delayed sanctions on Chinese officials in order to facilitate the trade deal, which is now in tatters.

Obviously, the sanctions on both sides are meaningless. Marco Rubio and Ted Cruz likely don’t have substantial assets tied up in mainland China, and I doubt Chen Quanguo was planning any sightseeing tours at the Grand Canyon this year.

Still, this marks more tit-for-tat hostility and it comes during a pivotal week that could see the Trump administration make additional moves aimed at Chinese technology.

Rubio championed efforts to prevent a government retirement savings fund from investing in Chinese equities, a move Trump finally agreed to in May.

Meanwhile, Bloomberg says the spiraling US tensions have prompted a reinvigorated push in Beijing to internationalize the yuan. “A growing number of government officials and influential market watchers have in recent weeks urged greater efforts on the endeavor, which gained renewed significance after China’s new Hong Kong security law triggered the threat of retaliation from Washington”, the article reads.

One stumbling block are capital controls and, generally speaking, the country simply isn’t ready to mount a real internationalization push, especially considering still low foreign ownership of mainland financial assets.

“To do so China either has to open up its capital account, which it can’t do without a crash, or import far more to run a current account deficit, which it won’t do either because that means being more vulnerable too”, Rabobank wrote Monday. “So China must do something China can’t do”.

Bloomberg goes on to note that Beijing could “insist on paying for some imports in yuan, make direct investments abroad in yuan, and provide loans in renminbi”, but the bottom line is that any such effort would, in practice, be aimed at reducing dependence on the US dollar, more than internationalizing the yuan — two sides of the same coin, maybe, but a more defensive than offensive posture.

Goldman raised its target for the yuan late last week. “Until recently our view has been that the risks of escalating disputes with the US ahead of the November election outweighed China’s favorable domestic economic backdrop, but both considerations have arguably turned more positive for the Yuan”, the bank says, adding the following:

First, financial markets may increasingly look through a pickup in near-term noise around the bilateral relationship, because polling data points to higher odds of turnover at the White House next year, which could affect US foreign policy goals and tactics. Second, China’s domestic fundamentals look increasingly solid: growth remains sturdy, the virus is reportedly under control, the trade surplus has expanded, and both equity markets and interest rates are moving higher. As a result, we think the Yuan will participate in broad Dollar weakness, and are revising our forecasts stronger. Specifically, we are lowering our 3m USD/CNY target to 7.05 from 7.25, implying some near-term depreciation in response to a likely pickup in tensions with the US, but a smaller magnitude than we previously expected. We are also lowering our 12m USD/CNY forecast to 6.70 from 7.00, reflecting a generally weaker US Dollar.

In any event, it’s all just another day in the constantly worsening clash of the titans, with this episode featuring cameos by Marco Rubio and Ted Cruz. (Because who doesn’t love a Ted Cruz cameo?)


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