China Talk and.. Action

A little-seen report last month suggested the US is rolling out an information offensive against China. Signs of it emerged Thursday and it begs the question about what is the end game for the US. Along with rising bond yields, it contributed to a round of risk aversion that unwound recent moves. The US and Canada jobs reports are due next. 

Bonds flattened out after an early selloff Tuesday but the damage was done as US equity markets sank. The S&P 500 fell 24 points to 2901. The yen was broadly stronger with commodity currencies struggling. GBP bucked the trend on some upbeat Brexit comments from May.

The selling accelerated as VP Pence delivered a comprehensive anti-China speech. There was no new information but he railed against FX manipulation, IP theft and humanitarian themes.This is undoubtedly part of a coordinated White House effort to turn Americans against China, something Axios said was coming in a little-seen report in late Sept.

It came on the same day as a Bloomberg report about tiny backdoor chips planted at Chinese electronics factories that are used to steal corporate secrets. The story relies on three-year old discoveries, so it was likely purposely timed and leaked by intelligence officials.

The politics of it don't really concern us; the question is what will happen next? It's increasingly clear that the US isn't looking to make a quick NAFTA-style agreement with China. An effort to round up public opinion suggests this will be a long-term campaign.

The best case scenario is that this is simply an effort to rebalance trade and protect IP. That may be a protracted battle but the US and Chinese economies are resilient and the fallout would be mostly manageable. The worst case is that this is the first step in a US campaign to undermine China's assent. That would set up more of an existential struggle and a long term battle.

In any case, the market is right to be worried.