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IPFS News Link • United States

"Is The Light At The End Of The Tunnel A Chinese Hypersonic Missile?"

• https://www.zerohedge.com

This week we made our thoughts on the US-China trade dispute pretty clear once again: the market has been far too optimistic, and a sustainable deal is very unlikely to be achievable. Yes, there are counter-arguments such as 'Trump wanting a deal', allegedly; Mnu-China very much wanting a deal, obviously; and Bloomberg now reporting China might soon buy 7m tonnes of US wheat for its state reserves, after its recent shift to drop some regulatory hurdles to other US agri imports.

However, we got a strong 'Exhibit A' for our more cynical view with news that the US will proceed with an extradition request for the Huawei CFO, currently under house arrest in what a Chinese official has dubbed "White supremacist" Canada. The US must formally file a request by 30 January, then a Canadian court has 30 days to look at the evidence and make a decision, after which the Canadian Minister of Justice would issue an order. Note how that timing takes us to around the deadline for the US-China trade talks. Meanwhile, Americans are cancelling travel plans to China on security concerns in case they get "Canadian-ed" by Beijing; and perhaps adding fuel to the fire, an Australian citizen may just have been detained in China too – or at least his family have lost contact with him. And Australia hasn't even said boo to a goose yet, even as it can see the risks that the US-China trade deal being proposed implies China trampling on its WTO commitments and dumping Aussie farm goods for US.

Then we had genuinely market-moving news that US officials had allegedly stated the preparatory talks for the next round of trade discussions in Washington were cancelled due to Beijing's refusal to accept that Chinese firms force the transfer of foreign technology. (Of course, Chinese high-speed trains owe nothing at all to Japan's Shinkansen, and Huawei's phone technology is all completely unique.) Equities tumbled until the head of the US National Economic Council Larry Kudlow came out to say that the report was Fake News, which we have an awful lot of nowadays, even in the serious press, it would seem.

However, even though markets bounced, Larry was not exactly positive. He underlined the scope of US-China trade discussions are now more substantive than ever been before --largely because the US is finally venting its spleen-- but that "enforcement is absolutely crucial to the success of these talks." As I have long quipped, China's cheapest export is indeed talk. After all, two years ago Xi Jinping got a standing ovation at Davos for his fulsome praise of "Davos man"; I had my head in my hands as others clapped, and only now are we seeing editorials noting with puzzlement that those sweet words were not acted on. Indeed, Kudlow made clear: "Promises are great but enforcement is what we want - things like deadlines and timetables and full coverage of the various structural issues. Will this all be solved at the end of the month? I don't know. I wouldn't dare to predict." It is, he added, up to the president to decide "what he can accept or cannot accept." So let's see what the "determinative" January 30-31 meeting between Chinese Vice Premier Liu He and China hawk US Trade Representative Lighthizer achieves. Will it kill the current market buzz?

US Secretary of State Pompeo was certainly a buzz-kill. Speaking via video-link at Davos he lambasted China for its "state-centred economic model, its belligerence towards its neighbours, and its embrace of a totalitarian regime at home." He also reiterated that the US is determined to "rebalance the relationship with China, along with partners in the region and all around the world" and achieve "fair and reciprocal trade agreements". True, he added there would be places where the US and China "can work together" - but at the moment that cooperation appears mostly appears to be that Chinese Treasury purchases ironically pay for US rearmament, and Chinese exports to the US pay for Chinese rearmament. But hey ho.

Also talking of buzz-kill, yesterday's German ZEW survey printed at 27.6 vs. 43.0, far lower than expected, but expectations actually picked up from -17.5 to -15.0, better than expected. But is the light at the end of the tunnel actually a heavily-subsidised Chinese high-speed train (or hypersonic missile) coming towards us? Likewise, UK labour data were good, with more job gains and wages growth up to 3.4% y/y: but will any of that matter if Brexit goes pear-shaped? And back in the US, we are to see competing votes to try to get us out of the government shut-down. Yet can it work given Trump will veto a bill with no wall, and the Democrats will not vote for a bill with a wall? As long as this all rumbles on we don't have the majority of US economic data, so all these discussions about upturn or downturn are even more of a guessing game than usual. The IMF are certainly talking about downside risks and dark clouds gathering, etc.