Daily Comment (August 12, 2021)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

Good morning.  U.S. equity futures are mostly steady this morning.  Financial markets are broadly steady, consistent with late summer trading.  Our coverage kicks off with news from China followed by the international roundup.  Economics and policy follow, and we close with our usual pandemic update.

China: U.S./China relations are taking on Cold War characteristics and Lithuania has Beijing upset.

  • One of the features of the Cold War was how the U.S. and U.S.S.R. used various tactics to steer nations into their respective camps. The Soviets used force (Eastern Europe) and supplied critical exports (Cuba) or military equipment (Egypt, India).  The U.S. provided security at low cost (Japan, Europe, Canada), market access (South and Central America), shared intelligence (U.K., Australia, New Zealand, Canada), and military aid (Southeast Asia).  After the Cold War ended, much of the U.S. assistance remained, although the domestic political support has waned over the years.  As relations between the U.S. and China devolve into a cold war, both nations are offering carrots and sticks to build alliances.  Although the U.S. has officially indicated that it won’t force nations to choose, recent actions suggest otherwise.  In Brazil, the U.S. is pushing the country to abandon Huawei (002502, CNY, 5.17) telecommunications equipment.  Brazil is a longtime user of China’s technology and getting it to give up on Huawei will be difficult.  According to reports, Jake Sullivan offered NATO membership if Huawei is forced out of Brazil.  Brazil is deeply reliant on China so prying the country away from Beijing will be difficult.
  • Lithuania has become a problem for Beijing. The Baltic nation has allowed Taiwan to open an office in the country under its own name, which smacks of statehood, something China opposes.  China has recalled its ambassador to Lithuania in protest.  As expected, state media is making all sorts of threats against Lithuania, including severing diplomatic relations, but there are limits to Beijing’s actions.  Lithuania is a small country, but it is a member of the EU and if China pushes aggressively, it could trigger a broader European reaction.
  • Evergrande (EGRNF, USD, 0.80), the troubled Chinese property developer, confirmed it is in talks to sell assets in a bid to improve its financial situation. China’s growth since the Great Financial Crisis has been debt-fueled and trying to bring debt growth under control will almost certainly lead to lower growth.
  • Michael Spavor, a Canadian citizen, has been sentenced to 11 years in prison on spying charges. It is improbable that Spavor is a spy (although that doesn’t mean Canadian intelligence doesn’t talk to him); instead, he is being used as leverage in the extradition case of Ming Wanzhou, the CFO of Huawei whom the U.S. accuses of violating Iranian sanctions.  The U.S. has protested the sentencing, but we doubt this will have much of an effect.
  • General Secretary Xi has been steadily reversing the policies of Deng. The latter opened the economy and, to some extent, opened the country socially as well.  As Xi has consolidated power, behavior control has become part of his policy.  The latest area seeing a crackdown is post-work bar tours and “harmful karaoke.”
  • There are reports that China is using subsidiaries controlled by the Xinjiang Production and Construction Corps to export goods produced in the region that may involve detained labor.
  • Another element of Xi’s policies is the favoring of state-owned enterprises. This bias is undercutting small enterprises, which were important to the Chinese economy during the Deng years.  According to reports, small businesses are closing, putting pressure on the economy.
  • Although data for female participation isn’t calculated in China, anecdotal reports suggest women are increasingly working in construction as male workers become less available.
  • China has built two aircraft carriers and is working on a third. Interestingly enough, analysts are not all that concerned as there is a growing consensus that these vessels are becoming vulnerable to countermeasures.  Thus, it begs the question as to why China is building these, especially when it has developed missiles dubbed as “carrier killers.”
  • The Belt and Road project is facing rising criticism over human rights abuses. On a related note, Beijing is increasing its investments in Myanmar.

 International roundup: North Korea won’t be ignored and details on the activities of Russian mercenaries comes to light.

Economics and policy:  Policy tightening beckons and tax revenues rise.

COVID-19: The number of reported cases is 204,917,702 with 4,327,872 fatalities.  In the U.S., there are 36,193,574 confirmed cases with 618,496 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high frequency data on various factors.  The CDC reports that 409,566,315 doses of the vaccine have been distributed with 353,205,544 doses injected.  The number receiving at least one dose is 196,077,952, while the number receiving second doses, which would grant the highest level of immunity, is 167,105,507.  The FT has a page on global vaccine distribution.

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