Global Courant 2023-05-18 15:28:19
TOKYO — Japan’s decision to hold the Group of Seven (G-7) summit in Hiroshima this weekend seems to be getting more and more “on the nose” by the day.
Concerns that Russia would use nuclear weapons against Ukraine were part of Japanese Prime Minister Fumio Kishida’s analysis in choosing the city to be the first military target of such armaments in human history. Since that call, however, two economic nuclear options have emerged to fuel a bull market in Hiroshima symbolism.
One is the standard drama that threatens to restore the US from developing country status. Republicans toying with financial Armageddon have led US President Joe Biden to cut short his Asia trip and cut stops in Australia and Papua New Guinea.
The other is how to play the Chinese “decoupling” dynamic that threatens to blow up global markets – and the Global South countries receiving Kishida invite to the G-7. Along with Canada, France, Germany, Italy, the UK and the US, Japan has invited leaders from India, Brazil, South Korea, Vietnam, Australia, and countries of the African Union and the Pacific Islands.
But try as they may to send a clear message of unity to China, G7 officials are likely to find that domestic divisions undermine grand statements, let alone bold concerted action.
Biden will surely face a deluge of questions about default risk. Within weeks, says US Treasury Secretary Janet Yellen, Washington will run out of cash. If so, all hell would break loose for every economy represented in Hiroshima – and those far beyond.
“If it ultimately defaults on US Treasuries, it would undermine the integrity of the world’s most popular ‘risk-free’ assets used in central bank reserves, low-risk private investments and as collateral,” said economist Will Denyer of Gavekal Research. . “It would disrupt the global financial system and undermine the reserve status of dollar-denominated assets.”
Between Japan, China and other major Asian holders of US government debt, this region sits somewhere near US$3.5 trillion in government bonds. But Asia’s real exposure is to trade-dependent economies, which would be turned upside down by the resulting rise in global bond yields, falling equity prices and volatile exchange rates.
The mere risk of the US missing a bond payment would wreak havoc. Joseph Abate, strategist at Barclays Plc, thinks the US Treasury could fall below $50 billion between June 5 and June 15.
Beyond the dramas facing the G-7, this is a 100% self-inflicted threat to the global system fabricated in Washington by cowardly US legislators.
Craven: U.S. Speaker of the House of Representatives Kevin McCarthy could soon preside over the first-ever U.S. default. Image: CNN Screengrab
Sushil Wadhwani, chief investment officer at PGIM Wadhwani, notes that “in an increasingly polarized environment, politicians will need to see significant market turbulence to reach an agreement.”
As such, adds Wadhwani, “there are concerns that the market is complacent and investors could be in for a sudden shock. Investors would not want to see an unexpected fiscal tightening at a time when the risks of a US recession are already mounting and the likelihood of a hard landing is increasing.”
This all plays into China’s hands. Of course, Chinese leader Xi Jinping will not be happy with the way a US bankruptcy derails his economy’s ability to meet this year’s 5% growth target. Nor would Beijing be happy about suffering epic losses on the $865 million value of U.S. Treasury bonds it owns.
Still, Kishida’s Japan would lose more $1.1 trillion of the US national debt. And by playing Russian roulette again with America’s creditworthiness, Republicans led by US House Speaker Kevin McCarthy would make Xi’s plea to him that the global economy needs an alternative to the dollar.
“Again,” because the last time Republicans played games with raising the debt ceiling on Washington’s ability to borrow, in 2011, Standard & Poor’s snatched its AAA credit rating.
As this reckless game plays out again, Xi’s pro-yuan lobbying effort is getting a lot easier. If not the yuan, perhaps a “BRICS” currency as Brazil, Russia, India, China, South Africa and other anti-dollar hegemonic forces join forces.
You could argue that decoupling efforts are a nuclear option all their own. The trade wars that former President Donald Trump unleashed against China between 2017 and 2021 have seriously disrupted the dynamics between the US and China. But Biden’s surgical focus on Chinese companies’ access to vital technology — and the U.S.’s urging allies to get involved — accelerated the decoupling train.
This weekend’s stop in Hiroshima is an opportunity to gain more clarity on what an economic separation from China Inc would entail and, more importantly, how to do it without devastating Asia’s 2023 and beyond. Even the basic terminology is complicated, with some G-7 members and other leaders visiting Hiroshima preferring “risk-free” phraseology.
The Biden White House has ambitious plans for the weekend. As the Wall Street Journal reports, “the US and its allies stand ready to ramp up pressure on China” with “an expected joint statement rejecting the use of economic retaliatory measures against nations over policy disputes and other disagreements.”
The WSJ adds that “the expected statement is not expected to name any country,” but “comes as concern grows among the US and its allies about Beijing’s increasing use of what its critics call ‘economic coercion’ to to show his displeasure with other countries.”
The decoupling between the US and China is gaining momentum as countries around the world are pressured to take sides. Image: iStock
A wrinkle few saw coming is how Europe’s position on China has become in many ways more hostile than Biden’s. This could open up an opportunity for the US to take something of a middle ground. Yet the leaders of the largest and medium industrialized economies will find it almost impossible to cut commercial ties with China.
Just discerning where G-7 economies end and China begins will be a formidable task. Chatter about industry reshoring, supply chain foreclosure and technology self-sufficiency is making for great politics but uncertain economies from Washington to Berlin to Tokyo.
Yet a recent report from S&P Global Ratings calls the process “inevitable,” despite growing knowledge that it “will be costly” to the global economy.
“The transition of global technology from China will put a strain on efficiency and may require significant management attention over the next three to five years,” said S&P credit analyst Hins Li. “In addition, companies moving capacity out of China risk losing access to that market, which many entities rely on for much of their growth.”
Nevertheless, Li points out, all available data shows that the biggest global players in the tech industry are loosening their ties with China. The catalysts range from China’s manufacturing disruptions amid Covid-19, geopolitical tensions and a sharp escalation in restrictions on technology exports. This created a bull market in “concentration risk” in boardrooms around the world.
In its report, S&P zooms in on global laptop production. In 2021, China’s share of global laptop production will exceed 80%. By 2025, S&P thinks the stock will fall by at least 10-20 percentage points. This will be a direct result of the biggest tech names reallocating manufacturing capacity out of Xi’s economy.
For handsets, S&P estimates China’s share of manufacturing will drop 5 percentage points to 15 percentage points by 2025. The share of iPhones Apple Inc makes in China will drop as rivals like India up their production stakes. S&P notes that India’s iPhone industry is likely to at least double by 2025. That compared to the average single-digit percentage of total production today.
“Spreading out operations will not be as efficient as using giant factories in China that maximize economies of scale and draw on existing robust supplier networks, infrastructure and talent pools,” writes S&P. “Some companies may be able to keep excess capacity in China in case they experience production issues when starting up new locations.”
Still, this weekend’s G-7 talks will bog down in petty power struggles and a deluge of side issues that will take leaders to Hiroshima. Adding to Biden’s debt default nightmare, French President Emmanuel Macron is facing public outcry at home over moves to raise the national retirement age from 62 to 64 later this year.
Macron’s team, meanwhile, is feuding with Italian Prime Minister Giorgia Meloni, who has called it a “far-right government” with a policy mix “unable to solve Italy’s migration problems”.
Ukraine says it needs bigger and better weapons to beat Russia. Image: Twitter / New statesman
The G-7 confab also comes as Ukraine seeks additional aid, both financial and militarily, and Russia continues to dig for the long haul. In addition to concerns over Vladimir Putin’s threats to use tactical nuclear weapons in the conflict, G-7 leaders are sure to be questioned about how Moscow’s economy skates around global sanctions quarter after quarter. Support for Taiwan will also come up early and often.
Also likely to feature in G-7 discussions and press conferences: Turkish President Recep Tayyip Erdogan’s political survival instincts ahead of the second round of elections on May 28. This drama in Turkey, a NATO member, will be instrumental in the course of everything from the dynamics between Russia and Ukraine to the state of affairs in the Middle East.
Still, the 800-pound gorilla in the room will be the standard madness following Team Biden at every turn during all these discussions. Defusing that existential threat to global stability 7,000 miles away in Washington will be easier said than done.
Follow William Pesek on Twitter at @William Pesek
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