“We Don’t Want Your Nice, Cheap Stuff, Thanks”

By Michael Every of Rabobank

Thinking you can successfully forecast what markets will do is a fool’s game. However, some recent financial market headlines were easy to forecast years ago. Markets didn’t, and are still failing to join the dots between said headlines and what they imply for asset prices.

No markets-based forecasting skills were needed to predict: Yellen says China’s rapid buildout of its green energy industry ‘distorts global prices’ (Reuters); Yellen to Warn China Against Flood of Cheap Green Energy Exports (New York Times); Janet Yellen says China’s giant EV push ‘distorts global prices’ and hurts workers around the world (Fortune); Janet Yellen warns China against clean energy dumping (Financial Times). Instead, you had to recognize that:

Our global system was imbalanced, seeing subsidized industrial goods supply agglomerate in China, and debt-driven consumer demand in the Anglosphere – and this would end in a huge crisis. Which it did in 2008, catching most in markets by surprise.

Negative rates and QE into bank reserves would not solve the West’s core problems – and public anger would see a populist policy shift. Moreover, the response in China would not be to ‘pivot to consumption’ to rebalance the world economy, but to double down to cement their global position. For those who didn’t read Marx, the clue was on the national flag: the hammer and the sickle aren’t symbols of consumer spending and the “fictitious capital” of asset prices, but of physical production of agri/industrial goods.

History said the West would try reflation and protectionism / industrial policy to match China. In the US, this would have a national security component, as Pentagon began to worry about its purported Chinese rival. All of this would create geopolitical tensions, accelerating the process of reglobalisation away from China, and towards onshoring, near-shoring, and friend-shoring – and physical rearmament. I laid this out as a strategic hypothesis years ago. I didn’t see Covid as an accelerant, but I did warn Russia invading Ukraine would trigger a global meta-crisis based on the above analysis.

So, color me unsurprised the US says it won’t allow China to dump green tech on it. After all, it isn’t an isolated case. We have the clear threat of US (and maybe EU) tariffs on Chinese EVs. We have ever-growing restrictions on the use of US/Western technology in China – indeed, the US just asked its allies not to service chip-making gear in China, to which we see ‘Don’t meddle with our tech access, China’s Xi warns Dutch PM Rutte’: as the likely next NATO head, he isn’t likely to bend to that pressure(?) And, less heralded, yesterday also saw Chinese rail company CRRC withdraw from a bid for a Bulgarian public tender amid an EU inquiry designed to stop state subsidies distorting its single market.

In short, forecasts assuming goods deflation is sustained are (geo)politically naïve. Yes, China *wants* to flood the world with even more cheap goods higher up the value chain. Yes, struggling Western consumers might like to buy them. No, Western governments are not going to let them if it means deindustrialisation when the link between industry and national security has been violently rammed home in multiple geographies. Our Aussie/Kiwi analyst Ben Picton notes even so laissez-faire that they are lazy fare Australia just announced it will be trying to produce its own solar panels as part of the government’s new ‘A Future Made in Australia’ plan, suggesting industrial policy and an expansive fiscal budget to come. But where we go from there is far harder to forecast, and even to think about for some.

Will China get dragged into an FX devaluation race to the bottom alongside JPY and KRW, taking other Asian and EM FX down with it? The signals from the PBOC are mixed, but the tail risk should be clear. The logical thing to do would be for China to allow CNY to strengthen, *if* it wanted to pivot to consumption and import more to rebalance the world economy. But it arguably doesn’t want to, so it won’t. In which case, while we are back to the fool’s game of market forecasts, just how foolish some calls might look in hindsight needs to be underlined. Would the West shrug a weaker CNY off, or would tariffs and industrial policy arrive faster?

At which point, the West has opted to reflate, without integrated supply chains and with a tight labor market, which is inflationary; and with huge fiscal deficits and very high debt levels to boot. But what’s the (geo)political alternative? This Daily has regularly floated a hypothetical unorthodox fiscal-monetary-industrial policy hybrid policy for that challenge. (As in another FT headline, ‘Top Fed official says ‘no rush’ on rates after ‘disappointing’ data’: but note Waller is the new, old Powell, who shows what the Fed might look like in just one possible future, and not the one in our present, from the balance of other FOMC comments of late.)

Yet what would China do with its flood of new production if the West won’t buy it? There’s a limit to how much can be channelled into new markets in the Global South; like the West, they don’t make anything much to sell back to it. As such, they can borrow from China for a few years, and then have their own consumer busts and political backlash. All of that would add to the pressures on an already-buckling global system.

Then things would get very hard to forecast, whatever your market or fundamental view: but holding to “We always want nice, cheap stuff” as your lodestone will only make it harder.