China, the US: On a slow boat.
Also: Canada, the Philippines, Pakistan, Iran and the foreign exchange market.
CHINA. UNITED STATES. On a slow boat.
Blinken’s visit will help, but there’s a way to go.
Antony Blinken will travel to Beijing on Sunday, his department said Wednesday, the first visit by a Secretary of State since 2018. On Wednesday, foreign minister Qin Gang urged the US to stop meddling in Beijing's internal affairs.
INTELLIGENCE. Talks will ease tensions but won’t herald a new chapter, as some officials have hopefully suggested. China has signalled it wants to reach an accord on trade and economics (even temporarily), but tension persists on security matters, compounded by a recent refusal to meet the US Defense Secretary. Geopolitical interests diverge, whether on Taiwan, Russia, or a Chinese spy base in Cuba. The risk of an accident or misunderstanding remains high.
FOR BUSINESS. US firms are taking matters into their own hands. After recent visits by Elon Musk, Tim Cook and Jamie Dimon, Bill Gates will reportedly meet Xi Jinping on Friday. Firms are mostly committed to staying, albeit with a Plan B in India, but others are eyeing splits. Following ByteDance’s decision to spin out TikTok as a non-Chinese brand, Sequoia Capital acted similarly last week, creating separate entities for its US, India and China businesses.
CHINA. CANADA. Is the Pope a Catholic?
Ottawa freezes ties to China’s infrastructure bank.
Ottawa said on Wednesday it would suspend its membership of the Asian Infrastructure Investment Bank on allegations of Communist Party dominance. The opposition Conservatives and the US have long called for Canada to pull out.
INTELLIGENCE. Nobody should be shocked that an initiative of the Chinese government is an initiative of the Chinese government, but Ottawa’s move gives Beijing more reasons to feign outrage. And as with China’s reaction to Canada’s censure over alleged political interference, the outrage is designed as a warning for others. It won’t matter to the AIIB that Canada (with a 1% holding) will leave, but the bank, and China, need Western members to lend it credibility.
FOR BUSINESS. Canada is a convenient whipping boy for China: it’s close to the US, has many ethnic Chinese, and has a leader others love to hate. But there’s little risk that a dispute will get out of control: their economies are complementary, 77% of Canada’s exports are to the US, and China has but half the investment there that it does in Australia. The AIIB is meanwhile powering ahead. It signed a $400 million loan deal with Bangladesh on Wednesday.
CHINA. THE PHILIPPINES. A ship comes in.
Despite a US shift, Manila’s loyalties remain divided.
A Chinese navy training ship called in Manila Wednesday on a goodwill tour. Last week, the first paying tourists visited a Philippines-claimed sandbar in the disputed Spratly Islands for a so-called ‘Freedom Expedition’.
INTELLIGENCE. President Ferdinand “Bongbong” Marcos has pivoted to Washington since taking power in June last year. Still, while Americanised in culture, Filipino society retains strong links to China, its largest trading partner. Many in Manila’s elite – including the Macapagal-Arroyo and Duterte political clans – are reportedly uncomfortable with a tighter US embrace and more assertive policies on the South China Sea, where maritime claims overlap.
FOR BUSINESS. The South China Sea is a more likely conflict zone than the Taiwan Strait. China has a greater military advantage, and, despite Manila’s alliance with Washington, there are fewer US interests to protect. Yet, while Beijing wants long-term control, it won’t rush. As with the ship visit, Beijing will offer carrots and sticks. It is also playing this strategy in the East China Sea. Last week, Xi Jinping suggested that China may have claims to Japan’s Okinawa.
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PAKISTAN. When it rains.
The International Monetary Fund refuses a rescue.
The IMF on Thursday expressed disappointment with Pakistan's budget but suggested revisions could unlock funds before they expire at the end of June. Thousands were evacuated in Sindh on Thursday ahead of Cyclone Biparjoy.
INTELLIGENCE. Biparjoy won’t have the same impact as last year’s floods, but further IMF delays could tip Pakistan into chaos at a precipitous time. Former prime minister Imran Khan, the country's most popular politician, has been locked in a bitter contest with the government and the military. Foreign currency is running out and Prime Minister Shehbaz Sharif and key lieutenants have been abroad in search of cash. Shehbaz landed in Azerbaijan yesterday.
FOR BUSINESS. Many foreign firms have already left. Others have converted currency in anticipation of possible account freezes, last used in 1998. It is unlikely that Pakistan’s backers in China or the Middle East will let it collapse – Pakistan is too big to fail – but in the febrile environment, anything is possible, particularly if food or fuel runs short. The other impact of the IMF’s hesitation is a further erosion of Western influence, which the US may come to regret.
IRAN. Deal or no deal.
Talk gets louder of an impending US agreement.
The New York Times reported late Wednesday that Washington was negotiating with Tehran on a “political cease-fire”. Benjamin Netanyahu reportedly told Israeli colleagues a “mini agreement” between the US and Iran was imminent.
INTELLIGENCE. There are still too many divergent interests, within and between the key actors, to make more than the most basic deal likely. Backchannel diplomacy almost always occurs, and Washington and Tehran have a lot to discuss, but a US return to the Joint Comprehensive Plan of Action, or similar, seems improbable. And even if such a breakthrough were reached, it would unlikely last long, with strong opposition from Israel and the Republicans.
FOR BUSINESS. Whether or not it returns to oil markets for a freeze on nuclear research, Iran will remain a hard place for foreign firms. The JCPOA did little to ease bank restrictions, and Iran remains on the Financial Action Task Force’s blacklist. Further, sanctions concerning ties to Moscow will remain, as will those from the EU and SWIFT, the West’s financial messaging network. Iran has been working on a SWIFT alternative with Asian partners, due to launch soon.
FOREIGN EXCHANGE. The current currency.
US dollar dominance is unassailable, for the moment.
The Federal Reserve kept rates steady on Wednesday, the first pause in over a year. Treasury Secretary Janet Yellen said on Tuesday she was bullish about the US dollar but expected a gradual decline in its share of global reserves.
INTELLIGENCE. A fall in US inflation to 4% in May and an increase to the debt ceiling on 1 June suggest that threats to the US dollar are over. That is true insofar as the greenback continues to dominate global trade and investment flows. Still, as US sanctions and a slow decoupling from China continue, the longer-term rise of rival currency blocs looks real. Yellen admitted as much to Congress this week, which is itself a sign of the times.
FOR BUSINESS. While capital controls remain, China’s yuan won’t rival the dollar. But if Hong Kong, facing US rates-induced liquidity fears, ditches its dollar peg, this may soon change. The Euro could also be a contender, having kept its share of global reserves around 20%. A BRICS currency is an outside possibility and on the group’s agenda. Egypt wants to join for this reason, and Brazil supports the idea. All nickel and dime stuff today, but don’t pass the buck.
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