This Tweet by Vice President Mike Pence was sent out last Thursday.
.@POTUS Trump’s leadership is working, and China wants a different American President. China is meddling in America’s democracy. As @POTUS Trump said just last week, we have “found that China has been attempting to interfere in our upcoming midterm election.” pic.twitter.com/EvPQxVlsdq
— Vice President Mike Pence (@VP) October 4, 2018
It didn’t worry American investors as much as it should have, but they might see a different opinion emerge Monday morning in Shanghai when the locals awaken from a week-long slumber and return to the gambling dens of the mainland China equity markets. Don’t be shocked if China opens up limit down on Monday .
The scary thing about Pence’s comments, which came shortly after Bloomberg Businessweek ran a feature report on how China chipmakers were installing devices in Apple and other products in order to spy on tech companies (denied by Apple), is the bit about election meddling.
The 2017 law called the Countering American Adversaries Through Sanctions Act largely made Russia the focal point. But it singled out election meddling as a soft spot for Washington, one which would require Congress to act with potential economic sanctions. If you can sanction Russia for election meddling, why can’t you sanction China? While Washington is known for its mind-splitting hypocrisy, the fact is that Pence opened up a Pandora’s Box. Washington might just sanction China, for real. This would not only be bad for Chinese investors, but multinationals on the S&P 500 would also take it on the chin. Suffice it to say, a Cold War with China, plus a trade war with China, is not only bad for China. There’s the simple math on that one. The Chinese retail investor will weigh on this today, and the rest of this week as the Trump Administration threatens more tariffs.
Short sellers are chomping at the bit. They are pretty firmly in the camp that China loses the trade war. Today, short sellers are wondering if sanctions against China are a possibility. If China is meddling in elections as Pence says, and if the intelligence agencies go along with him on this, then this sets the table for sanction based on the CAATSA law and recently signed Executive Orders (EO). Those orders do not mention any countries by name.
Moreover, sanctions pressure could be used to get Xi Jinping to grant Washington some of its wishes.
Secretary of State Mike Pompeo is off to China on Monday. For Beijing, any sanctions action against them would be a sudden shock to their role in global supply chains. Pompeo’s meetings in Beijing on Monday could help clarify Trump’s intentions. We have seen these meetings go nowhere in the past, however.
China’s central bank is getting nervous. The South China Morning Post reported Sunday that it intends to pump $110 billion into the economy.
Zhang Ming, a researcher with the Chinese Academy of Social Sciences, told the Hong Kong-based daily that the small stimulus package was in response to China facing Trump’s trade headwinds.
“A deepening trade row with the U.S. will weaken the role of trade in growth,” the paper reported from a research note written by Zhang Ming. “If exports slow due to trade disputes, the impact will in turn spread to investment in manufacturing.”
The People’s Bank of China (PBoC) has also been working to keep the yuan from weakening against the dollar, though an eventual weaker currency may be needed if Beijing feels it makes its exports more attractive. A cheaper yuan means lower price tags on Made in China goods.
The PBoC’s foreign exchange reserves fell to a 14-month low in September. Reserves fell by $22.7 billion in September to a still astronomically high $3.09 trillion in the central piggy bank of China. The drop, however, was the biggest since February and much larger than the $8.23 billion in August.
Economists polled by Reuters got the PBoC’s drawdown totally wrong. Survey respondents said reserves would drop by $5 billion.