Baked Alaska

Chinese stocks crumbled Friday, diving nearly 3%, a slide some attributed to acrimony during high-level talks with US officials in Alaska.

Blame-casting and name-calling in Anchorage marked an inauspicious start to Sino-US relations under Joe Biden, although it’s difficult to imagine how things could possibly get much worse than they were under the previous administration.

Antony Blinken suggested China isn’t committed to a “rules-based order” in the world, and China not-so-gently reminded Blinken that some Americans have had it with racial injustice and myriad societal inequities. “Many people [in America] actually have little confidence in the democracy of the United States,” Politburo member Yang Jiechi chided.

Blinken and Jake Sullivan said the US is “lookin[ing] hard at its own shortcomings and seek[ing] to improve,” an effort they said is the hallmark of “a confident country.”

Notably (and ominously), Chinese delegates told Blinken that the US “isn’t qualified to speak to China from a position of strength.” He also said US efforts to “strangle” the Chinese people have failed. (So much for the notion that four years of economic warfare would break their spirit.)

In any event, Chinese stocks aren’t “speaking from a position of strength,” that’s for sure. In fact, they’re now riding a five-week losing streak, the longest in a half-decade. Call it “five for five.”

Despite economic outperformance, China has struggled to keep a floor under the equity market of late, with state efforts to stanch the bleeding falling short earlier this month.

It’s not clear why anyone would be surprised that Sino-US relations remain tenuous. Regardless of your partisan bent, it’s undeniable that Trump left Biden with an extremely contentious dynamic. The former president made diplomacy even more difficult by telling voters Biden would be a puppet for Beijing. Some reports indicated the outgoing administration deliberately escalated hostilities in the final weeks of the Trump presidency to lock Biden into a hardline position. (Remember the de-listing fiasco?)

Xi’s increasingly assertive stance in Hong Kong (including and especially this month’s decision to stamp out the last vestiges of democratic governance in the city) raises the stakes, as does America’s position on Taiwan.

But it’s not all about geopolitics for Chinese equities. Investors are concerned about relatively tight monetary policy, worries that were arguably exacerbated by the below-consensus growth target unveiled two weeks back. Jitters on Wall Street aren’t helping, and neither is Beijing’s crackdown on big tech. Some worry Tencent is poised to get the Jack Ma treatment. And then there’s Kweichow Moutai’s troubles.

It all adds up to consternation around mainland stocks, which overseas investors were net sellers of on Friday for the first time since March 8.

It’s probably a mistake to read too much into the Alaska mini-debacle. After all, there really wasn’t an agenda, so to speak. Biden spent his first two months in office figuratively (i.e., economically) and literally inoculating US citizens against a virus which was raging unabated just three months back. While relations with Beijing are obviously a top concern, stopping the spread of COVID took precedence.

Without an actual agenda, diplomats were left with little else to do in Anchorage other than enumerate long lists of grievances, some extraordinarily serious, some exceptionally petty.

“What is typically a few minutes of opening remarks in front of journalists for such high-level meetings lasted more than an hour, and the two delegations tussled about when media would be ushered out of the room,” Reuters recounted, adding that “afterwards, the US accused China of ‘grandstanding’ while Chinese state media blamed US officials for being ‘inhospitable’ [and] both sides accused the other of violating diplomatic protocol by speaking too long in opening remarks.”

All that was missing was a Peter Navarro cameo, a Wilbur Ross nap and a Mike Pompeo soundbite.


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12 thoughts on “Baked Alaska

  1. Within this global singularity, with all the speculation and disconnect from all normal economics, it strikes me that this entire pandemic period will come down to Real GDP. That was always a fairly boring thing to look at, but GDP growth has been weak for a long, long time. GDP as a way to show percentage growth of economies is now more important than ever, especially long-term sustainable trends.

    As the pandemic eventually plays out in the long-term, it’s likely that growth will remain below its subpar trend. There may be the premise of a GDP spike within this recovery period, but that recovery will be far less meaningful than the weak recovery after GFC. There may be more excitement about a return to normal, but I seriously doubt that the economy is going to have any sustained GDP growth — and the thing that will tie this together is global GDP, including GDP from China …

    1. This is a reasonable base case: populations haven’t grown, nor has per capita productivity drastically increased, so the long run trend for GDP should be as flat as it has been.

      One variable of interest to me (with my dilettante’s understanding of macro) is the impact of inflationary fiscal policy on GDP. With only 5-10% of global population under loose-spending regimes, I wouldn’t expect a large impact – but if EM were to join the party as their degree of monetary sovereignty increases, that could result in a lasting upward inflection of economic output. (And quite possibly some dreadful knock-on impacts to the environment.)

      1. Inflation seems like bogey monster story that’s based on a handed-down story that got really distorted. Granted things were messed up before and after Volker, the long term historical construct of inflation is almost a non-issue. Of course there have been prior supply shocks and as an example, disruptions with Covid — but in 40 years, the stock market goes up and down and so does GDP (and inflation). There is a relationship of GDP going up and stocks following suit, but not now, we have GDP below where it was in the GFC and stocks zooming into space — that’s in no way sustainable. Furthermore, it’s highly unlikely that inflationary spikes today will help balance out this current imbalance, i.e., I don’t see GDP growth acting as a catalyst that adds rocket fuel to the stock market — if anything, as GDP stagnates and the pandemic fades away, stocks have no place to go, but back towards a lower trendline.

        FRED charts often combine apples and oranges, but here’s a general framework to visually explain the current imbalance:

        1. Concur that inflation in this epoch is completely misunderstood; I don’t claim to understand it, but it’s patently obvious that monetary policy since 1980 or so has not driven inflation, nor has debt-secured fiscal spending.

          Like you, I’m not alarmed about hyperinflation; it’s been running low for so long that we have some making up to do. But, having been primed by Heisenberg’s increasing coverage of MMT-inspired policy thinking, I acknowledge that there are experiments that haven’t been performed yet. We don’t know the impact on inflation of unsecured fiscal spending. Certainly it’s more likely to cause changes in the real economy than central bank money printing, which has caused financial asset inflation and not much else — but what magnitude of change will it cause, and how would it differ if employed by an EM country where the real economy has an enormous amount of unused capacity?

          In the medium-to-long run, things could get interesting.

  2. Should have put this in prior post (from Pew)

    In January 2021, with the pandemic still holding much of the world in its grip, the World Bank estimated that the global economy contracted by 4.3% in 2020, a turnabout of 6.8 percentage points.

    Chart showing the COVID-19 downturn curbed growth in the global middle class, increased poverty sharply in 2020
    The economic downturn is likely to have diminished living standards around the world …

    ==> Regardless of global vaccination pushes and recovery programs, a sustained 3+ year GDP rebound most likely will be below trend IIMHO. I still se a larger threat of disinflation than hyperinflation.

  3. There are also the Uighurs in Northwest China who are being encamped, enslaved, sterilized and killed. I doubt they would say that they have access to a rules-based society, either.

    Hopefully, US corporations continue to spread out manufacturing and not solely rely on China. This will take time, but status quo is not acceptable.

    As far as growth, last time I checked, world population is growing, not shrinking, and the percentage of those who live in poverty is shrinking. Growth areas (Africa and Asia) will all want better electricity, transportation, phones, internet, appliances, better food and clean water, etc. US corporations better figure out how to participate where the growth is, even if it is going to be a difficult road to navigate.
    I just completed a 1000 piece puzzle of the map of the world- quite a humbling endeavor, as I realized how many countries exist that I did not immediately know precisely where they are located. Maybe I am more ignorant than most… in fact, I truly hope that is the case!
    However, what I was thinking about as I worked on the puzzle (using Wikipedia to get a quick overview of some- I really mean “most”- of the countries about which I know very little) is that there is so much opportunity out there. Can we capture enough of it or will we just declare that it is too difficult to achieve growth outside the “highly developed” portions of the world ( the “low hanging fruit”), stay home and continue to demand that more USD be printed, because it seems easier?

  4. Given that China is best credited for taking the long view, I can’t help but think that a lot of its more recent posturing is designed to get us in a corner that will keep us trapped when they finally make a grab for Taiwan. They have hungered for this valuable property for decades and after seeing what has happened in HK, what happens next somehow feels inevitable. The prospect of picking up any support for such a move seems distant, with Putin being a possible exception, so the only possible tactic they can use is to put possible objectors like the US on the back foot.

    1. There was a “wink & nod” relationship between China & Taiwan as long as it was mutually beneficial. So many US investors rightly became confident with the reality behind the mandatory political posturing.

      That changed when the Trump administration forded TSM to stop selling to Huawei and some other PRC firms. TSM obliged. THAT IS HUGE. Rightly or wrongly, TSM is now a political pawn.

      That’s a radical change. If you surf on over to chat room discussions, the fans of “fabless” chip designers like AMD, NVDIA and AAPL continue to assert that it makes sense to outsource actual production to Taiwan rather than maintaining their own on-shore fab capacity. I fear that will prove to be very unwise. Things change and those companies had better rethink their production strategy in light of the growing political risk.

      1. Forced, not “forded”. The lack of an edit function is annoying for haphazard typists like me.

        Again, I fear that forcing TSM to stop selling chips to Huawei and other PRC firms was an act of economic warfare. Think of it this way — imagine if the global chip foundry hub was in Cuba, just 90 miles from Florida. Then imagine that China was able to forced Cuban chip foundries to stop selling products to US customers. How would the folks up in Washington DC react?

        Hope I am wrong about this. I’m not anxious to see us go to war to ensure that US consumers can buy iPhones.

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