Date: June 25, 2018
U.S. Plans Curbs on Chinese Investment, Citing Security Risk
The Treasury Department is planning to heighten scrutiny of Chinese investments in sensitive U.S. industries under an emergency law, putting Washington’s trade war with Beijing on a potentially irreversible course. Under the plan, the White House would use one of the most significant legal measures available to declare China’s investment in U.S. companies involved in technologies such as new-energy vehicles, robotics and aerospace a threat to economic and national security, according to eight people familiar with the plans. Treasury Secretary Steven Mnuchin, in a report scheduled to be released on June 29, will suggest administering that law through an inter-agency government panel called the Committee on Foreign Investments in the U.S., or CFIUS, the people said, requesting anonymity to discuss the plans. One concept under review would be to create a two-tracked CFIUS process to review investments, with one specifically for China, two of the people said. A Treasury spokesman did not immediately reply to a request for comment. China’s Ministry of Commerce didn’t immediately respond to Bloomberg’s inquiry about the report of planned investment curbs from the U.S. At a regular briefing in Beijing on Monday, foreign ministry spokesman Geng Shuang said China wants the U.S. to treat commercial activities objectively and pointed out that Chinese investment has created a lot of jobs and tax income in the U.S. “It is now clear that Trump’s policy is not about the trade deficit,” said Raymond Yeung, chief greater China economist for Australia & New Zealand Banking Group Ltd. in Hong Kong. “Security risks can be applied to every aspect in a bilateral relationship, investment restrictions in particular.” Stocks fell in Asia with U.S. equity-index futures and the yen advanced as investors assessed prospects for continuing trade tensions.
The Fed Has Enough Room to Combat the Next Crisis
The big news from Federal Reserve Chairman Jerome Powell last week was not so much that he still sees the need for further interest-rate increases despite signs of trouble in the global economy. Rather, the surprise was that he doesn’t believe the U.S. economy is poised to overheat. The takeaway for markets is that there is no impediment to the Fed shifting to a more dovish stance should the economy stumble. A nimble Fed not tied down by immediate inflationary concerns greatly reduces the risk that trade wars or other shocks will send the economy into recession. Central bankers don’t need the room to reverse a recession. They just need the room to prevent one. Within this monetary policy framework, the relatively benign response of markets to rising external risks is understandable. Powell also reiterated the Fed’s basic policy position, which is that the economy continues to power forward at a pace that exceeds its expected long-run growth. That growth keeps pressure on an already tight labor market and will soon send the unemployment rate down to a level not seen since the late 1960s. Given the threat of overheating the economy in this environment, the Fed thinks “the case for continued gradual increases in the federal funds rate is strong.” It is natural to look at the current situation as analogous to the late 1960s and proclaim that inflation will soon accelerate to unmanageable levels. That is a risk. We don’t have many episodes of unemployment at these levels to serve as comparisons, which is why the Fed continues to raise interest rates. But the Fed is not yet overemphasizing these risks, and instead is looking to downplay them. Indeed, Powell made a number of dovish points regarding labor markets and inflation in his recent speech in Sintra, Portugal.
China, Europe Warn Trade War Could Trigger Global Recession
China and the European Union vowed to oppose trade protectionism in an apparent rebuke to the U.S., saying unilateral actions risked pushing the world into a recession. Vice Premier Liu He — President Xi Jinping’s top economic adviser — said China and the EU had agreed to defend the multilateral trading system, following talks Monday in Beijing. The comments, made at a press briefing with European Commission Vice President Jyrki Katainen, come as both sides prepare to face off against President Donald Trump’s tariff threats. “Unilateralism is on the rise and trade tensions have appeared in major economies,” Liu said. “China and the EU firmly oppose trade unilateralism and protectionism and think these actions may bring recession and turbulence to the global economy.” Both China and the EU are coming under pressure from Trump, as the U.S. president seeks to remake a global trading system that he sees as rigged against the world’s largest economy. After months of rhetoric and threats, the trade fight seems to be coming to a head, with Europe imposing tariffs on $3.3 billion of American products Friday in response to U.S. barriers on imports of aluminum and steel. That triggered threats of further tariffs on European cars from Trump. Later this week, the U.S. Treasury Department is expected to release fresh rules on Chinese investment in technology companies, Bloomberg reported on Monday, putting additional pressure on China — which hit back against the plans. Chinese investment has provided jobs and tax income for the U.S., and it should view commercial activities “objectively,” Foreign Ministry spokesman Geng Shuang told reporters in Beijing on Monday. The U.S. is due to impose tariffs on $34 billion of Chinese imports from July 6, and Trump has threatened to impose levies on another $200 billion of Chinese goods. If that threat is realized, it could cut as much as half a percentage point off China’s economic growth, and also hit the American economy, economists have said. Anxiety over the economic fallout is cutting deep in financial markets, with China’s yuan sliding to a six-month low Monday, and the country’s stocks slipping with U.S. index futures.
China to Unleash $108 Billion in Reserve Cut for Some Banks
China’s central bank will cut the amount of cash some lenders must hold as reserves, unlocking about 700 billion yuan ($108 billion) of liquidity, as it seeks to control leverage and support smaller companies. The required reserve ratio for some banks will drop by 0.5 percentage point, effective July 5, the People’s Bank of China said on its website. That’s the day before the U.S. and China are scheduled to impose tariffs on each other. Such a reduction had been widely expected, especially after China’s cabinet said on Wednesday that it would use monetary policy tools, including cutting reserve ratios for some banks, to boost credit supply to smaller companies. Sunday’s cut probably won’t be the last. Analysts expect the bank to further ease policy going forward to help cope with a slowing economy and offset the effects of a crackdown on shadow banking. “While the PBOC reiterated its neutral stance, we think that the move is one step further toward more accommodative monetary policy, which is only fitting given softening growth and mounting trade tensions,” Wei Yao, China economist at Societe Generale SA in Paris, wrote in a note. She expects further cuts in the reserve rate ratios, lower rates on liquidity instruments and a lower interest rate corridor in the second half of the year. The yuan continued to slide on Monday. The benchmark Shanghai stock index is on the brink of a bear market after tumbling almost 20 percent from its recent high, and closed Monday down 1.1 percent. The aim is to support small and micro enterprises, and to further promote the debt-to-equity swap program, according to the central bank. The cut will apply to major state-run commercial banks, joint-stock commercial lenders, postal banks, city commercial lenders, rural banks and foreign banks.