Authored by Michael Every via Rabobank,
“It’s Still Good! It’s Still Good!”
Many years ago there was an episode of The Simpsons where Homer decides to roast an entire suckling pig, apple in mouth and all. He even invites over the neighbours to enjoy his culinary triumph, the “Pig de resistance”.
“A toast to the host who can boast the most roast!” says Ned Flanders. This all infuriates his vegetarian daughter, Lisa, who takes the lawnmower and pushes the entire pig, which is on trolley, out of the garden, up a steep hill,…and then let’s gravity go to work. The pig rolls down the hill and crashes at speed through a hedge.
“It’s a little dirty. It’s still good! It’s still good!” cries Homer, running after it. Then the pig goes off a bridge and into the river.
“It’s just a little slimy. It’s still good! It’s still good!” cries Homer from the bridge. Then the pig gets sucked into a drainage hole in a dam, pressure builds up behind it, and it goes flying through the air like a missile on the other side.
“It’s just a little airborne. It’s still good! It’s still good!” bewails Homer.
“It’s gone,” says Bart.
“I know,” concedes Homer.
In the top-floor office of the Springfield nuclear power plant, Mr Burns looks out at the vista and says: “You know Smithers, I think I will donate one million dollars to the local orphanage….when pigs fly.” Both cackle. Then the suckling pig flies past the two stunned men.
“Will you be donating that million dollars now, Sir?” asks Smithers.
“No, I’d still rather not,” replies Burns.
Frankly, the above is as good a description of the US-China phase one trade deal as I can think of (as well as of the general attitudes of the very wealthy). The deal was, on paper, a feast for the US – lots and lots more NET exports to China, promises on other areas of contention, and a monitoring mechanism.
However, even if Covid-19 hadn’t pushed it down the hill, the underlying US-China dynamic would have anyway. The US and China and the market commentariat may be echoing Homer –“It’s still good! It’s still good!”– but this particular trade deal is already in the hole in the dam with water pressure building up behind it. It just hasn’t been violently ejected the thing into the air…yet.
Of course, this is not a new view here. Yet it was further underlined by everything written about China written in the 50-point Trump agenda yesterday, which involves bringing jobs home using tariffs and taxes; it is underlined by the continued US crackdown on Huawei, for example – unless we presume other Chinese firms are going to be lining up to buy semiconductors from the US instead(?); and it is very much underlined by Politico reporting that the White House is considering officially designating China’s treatments of its Uighur minority as genocide, which is about as inflammatory an accusation as one can make – and a Biden campaign spokesperson has already used exactly that term.
Meanwhile, from the Chinese side, The Asia Times’ perpetual Belt-‘n-Roader Pepe Escobar gives a selective reading of the political tea leaves that highlights the following (my comments added):
Beijing won’t shut US businesses operating in China, but new companies wanting to enter the market in finance, IT, healthcare and education services will not be approved (i.e., decoupling).
Beijing won’t dump its US Treasuries (which would be impossible anyway) but is going to sell as much as USD200bn in 2020 (which means nothing at all for Treasuries as someone else will be happily buying them, but makes one wonder what China will be buying…and selling; not to the US and earning USD, presumably?)
CNY internationalization (which is not happening) will be accelerated, including clearing USD through the CIPS system to mitigate any ban on using SWIFT. (Except the US controls the USD and can tell everyone if they use CIPS then they can’t use USD in SWIFT.)
The PLA has been put into Stage 3 alert: all leave has cancelled for the rest of 2020; defence spending will rise to 4% of GDP; and more nuclear weapons will be produced. (Which will raise US-China tensions, is hideously expensive, and will push the fiscal deficit deeper into the red, while dragging the current account in the same direction.)
Chinese is stressing self-reliance and “dual circulation” to focus on its internal market. (Which means they need higher wages for higher spending, which means a loss of export competitiveness and a current account deficit and no self-reliance; unless China decouples from the world.)
The consolidation of the Eurasian integration project in parallel to a global CNY (e.g., economic powers like Belarus?)
In short, China appears determined to go its own way at its own pace, and even if the strategy it publicly suggests it will use to do so is not adequate given the potential pressure points the US can use against it, then it appears Beijing is more likely to adapt than concede. Such adaptation is very unlikely to meet the terms of the US-China phase one trade deal.
Read all the above and then ask yourself: “Is it still good? Is it still good?”
Right now, the answer is yes. However, the water (read: political) pressure is building, and when the time is right for either side… POP!!
The only way to see that isn’t the case is to believe that pigs can fly. Which, oddly enough, seems to be prevalent among many of Mr Burns’ friends in Wall Street, and those buying CNY at 6.90.