China's Economic "Super-Weapon" Would Devastate Its Rare-Earth Exporters

https://www.zerohedge.com/news/2019-05-21/chinas-economic-super-weapon-would-devastate-its-rare-earth-exporters



[size=23]China's Economic "Super-Weapon" Would Devastate Its Rare-Earth Exporters[/size]




[size=10]by Tyler Durden
Tue, 05/21/2019 - 18:05



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Submitted by Michael Every of Rabobank
Earth
With nationalism to the fore, for a change, talk of a “people’s war”, and with China telling the US it has “unwavering resolve” to fight “bullying” --a change from “imperialism”, which China itself is now accused of in some quarters-- President Xi Jinping went to visit a rare earths facility yesterday. That was no accident. Nothing in Chinese politics is an accident. It was a signal that China can turn off the taps on rare earths exports to the US if pushed much further. Yet such a step would devastate its rare earth exporters; it would show the world they cannot rely on China as a supplier; and it would be the final(?) nail in the coffin of a ‘macro 101’ model of how the world works. (As if that is needed a day after US President Trump publicly stated he’s “very happy” with the trade war and that the Chinese economy won’t be number one on his watch.)
After all, rare earths aren’t actually rare. Lots of countries, including the US, Japan, Brazil, India, and South Africa, have them in abundance. China only controls 80% of global supply because it subsidised its state-owned firms until they achieved economy-of-scale dominance in the same way as it is seen trying to do in other industrial sectors, which has generated the current China backlash. In short, mercantilism–meets-Mr.Magoo-free-markets means Beijing got the whip hand over the industrial global supply chain for a vital input in order to save a few dollars. One sees why it’s time to say goodbye to macro 101. Indeed, if there aren’t governments planning to massively boost rare earths output in Australia, California, India, Japan, Vietnam, and Brazil, etc., then I will eat my hat. China will soon find that its latest economic ‘super-weapon’ is another dud.



Wind
You want to see a real super-weapon? Look at the US decision to cut Huawei off from Western technology yesterday. How is Huawei supposed to function without the high-end silicon chips China can’t make, and which neither US nor European firms will now supply? It has 12-months of stock…and then what? (And in terms of the global economic impact, please note South Korea’s May 1-20 chip exports plunged -33% y/y before any of this happened!) Equally, how is Huawei supposed to sell 5G phones when it cannot update Google’s Android software? Of course, some say China will develop its own high-end silicon chips and proprietary operating system (OS). It might do that…but that’s a very hard thing to achieve when cut off from the West – and it’s much harder to do than digging up rare earths. If China could just do it, why hasn’t it until now? Because they believe in macro 101? Really?! Indeed, the announcement today that Huawei will roll out its own OS imminently looks like ‘wind’ to me… unless it is called “Ban-droid”. Will it come bundled with the Little Red App of Xi Jinping thought? As someone said on Game of Thrones when it was still good, “Power is power.” And this, is power, folks. Not visiting a rare earths factory for the cameras.
However, the White House has just announced the Huawei hamstringing will be delayed by 90 days, with existing equipment to be serviced for that period, not new products, presumably to allow room for that crucial G-20 head-to-head between Trump and Xi, and also to allow US firms to gird their loins for the disruption that this ban is going to cause. Can we agree that the stakes for that G-20 are going higher and higher, especially for China? As such, this is still very much a long USD, short CNY, if indirectly, and EM FX environment as we get to see the full power of this fully operational battle station. The Fed’s Powell meanwhile says “the outcome of the trade negotiations is not known, is highly uncertain, and it would be premature” for the Fed to make a judgement (and hence rate call) on the back of it. Not known, yes; uncertain, arguably no. The balance of risks must be clear, even to the Fed(?)
Fire!
It would be tempting to shift to talk about Iran or North Korea under that sub-heading (Trump has just said again that any Iranian action will be with “great force”), but I turn to the RBA. Just days after the election, the (comprehensively recidivist) Australian Prudential Regulation Authority –which presided over an epic housing bubble driven by lax lending standards-- is about to loosen its loan guidance again. Instead of most lenders having to assume a 7.25% mortgage rate ahead when assessing a borrower’s repayment ability --as opposed to 10x income interest-only loans on fantasy income-- the new rule will be to assume rates 2.5% above the current mortgage rate. Does this mean the Aussie bubble is baaaack? Nope. But it means the RBA are going to cut aggressively, because when borrowers had to assume a 7.25% rate regardless of where the actual interest rate was, there was no advantage for the housing market in cutting. Now there will be: if the RBA slashes rates 125bp, for example, all of that can get passed on. So, RBA, fire!
Indeed, the RBA’s minutes today showed the conservative bank noting “…members considered the scenario where there was no further improvement in the labour market in the period ahead, recognising that in those circumstances a decrease in the cash rate would likely be appropriate….” In short, they have now moved from expecting the labour market to get better to admitting that even if it stays the same, rather than unemployment rising, a cut is warranted! That door to easing is easing open. We next hear from Governor Lowe later in the day, and one wonders if he will also signal this more clearly?



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https://thedailycoin.org/2019/05/21/trade-talks-are-dead-and-so-u-s-consumers-should-brace-for-a-long-bitter-painful-trade-war-with-china/

Trade Talks Are Dead, And So U.S. Consumers Should Brace For A Long, Bitter, Painful Trade War With China
BY MICHAEL SNYDER · PUBLISHED MAY 21, 2019 · UPDATED MAY 21, 2019


Trade Talks Are Dead, And So U.S. Consumers Should Brace For A Long, Bitter, Painful Trade War With China by Michael Snyder for End of the American Dream

There is not going to be a trade deal between the United States and China any time soon, and that is going to mean a tremendous amount of pain for the U.S. economy.  For months, hope that the U.S. and China would soon reach a trade deal helped to elevate global financial markets, but now that hope has disappeared.  In order for a trade deal to happen, the two sides have to talk, and at this point no negotiations are scheduled.  And unless one side or the other decides that they are willing to move dramatically from their current positions, there really isn’t any reason to talk.  In fact, the Chinese government is openly saying that it is in “no rush” to negotiate with the United States…

Quote :

Beijing is in “no rush” to resume trade talks between the U.S. and China, the according to the South China Morning Post.
After CNBC’s Kayla Tausche reported on Friday that trade talks between the U.S. and China have stalled, Chinese analysts said China is prepared to suspend meeting if President Donald Trump wasn’t “prepared to be realistic,” the Chinese newspaper said Saturday.

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If Trump was willing to back way down and give the Chinese everything that they want, of course China would be more than happy to resume negotiations.
But that isn’t going to happen.  Instead, the Trump administration demonstrated their resolve by sailing a U.S. Navy vessel into disputed waters in the South China Sea on Sunday.  The following comes from Zero Hedge…
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Quote :

Once again risking a confrontation with the Chinese Navy (at a particularly sensitive time, given where we are with the trade war) the Navy carried out another “freeop” in the South China Sea over the weekend.
A US Navy Arleigh Burke-class destroyer sailed within 12 miles of a disputed shoal, ignoring Beijing’s repeated warnings to stay away.
On Sunday, the USS Preble, a destroyer armed with Tomahawk missiles, sailed along the Scarborough Shoal, directly challenging China’s disputed claim to the area.

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Every time we send a warship into the South China Sea, it drives China up a wall, and the Trump administration understands this very well.
Such a move definitely “sends a message” to China, but it also makes a trade deal much less likely.
Subsequently, Chinese President Xi Jinping just happened to decide to tour a rare earth production facility on Monday.  Here is why that was so important…

Continue Reading / End of the American Dream>>>

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