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Oct 29, 2019

Analysis | The Finance 202: U.S., Chinese investors complicate Trump hawks' push to sever economic ties

By Tory Newmyer


THE TICKER

An investor walks by an electronic screen displaying stock prices at a brokerage house in Beijing. (AP Photo/Andy Wong)
U.S. and Chinese investors keep plowing capital into each other’s countries despite the economic battle lines drawn by the trade war. 
The phenomenon illustrates the deeply entangled relationship between the world’s two largest economies and the difficulty Trump administration hawks face as they push for a decoupling. 
Consider Silicon Valley. Chinese investors continue pumping money into start-ups and venture capital funds there, in spite of a 2018 law intended to curb foreign access to technologies that could compromise U.S. national security.
“Key rules for implementing the law are yet to be defined, often leaving investors and entrepreneurs to determine what deals are permissible,” the Wall Street Journal’s Heather Somerville reports. “Also, many U.S. tech entrepreneurs want to nurture connections to China.”
The investments are flowing the other way across the Pacific, too. 
And this has some members of Congress and the Trump administration crying foul, arguing American dollars shouldn’t be underwriting investments that run counter to U.S. interests. And, as the New York Times’s Ana Swanson reports, they want to do something about it by seeking to block the federal government’s employee retirement fund from making a planned switch in the mix of its investments next year that would boost its Chinese holdings.
It’s part of a wider effort by American policymakers to apply greater scrutiny to the investment ties between the countries. “In recent months, officials have been making more frequent calls to re-examine China’s presence in the stock portfolios of American investors,” Swanson writes. “Administration officials, including members of the National Security Council, have begun pressing the Securities and Exchange Commission to increase scrutiny of Chinese firms, which have long skirted the auditing and disclosure requirements of American stock exchanges, putting investors at risk. Chinese law restricts the company documentation that auditors can transfer out of the country, limiting their visibility to American regulators.”

Hikvision cameras in an electronic mall in Beijing. (Fred Dufour/AFP)
A bipartisan group of senators led by Sens. Marco Rubio (D-Fla.) and Jeanne Shaheen (D-N.H.) have zeroed in on the Thrift Savings Plan, the retirement vehicle for federal workers. They wrote the board governing the plan last week asking it to reverse a decision allowing workers to invest in a fund that includes Chinese companies, per Swanson. The Trump administration recently blacklisted one of them, Hikvision, which makes surveillance gear Beijing used to target Muslim Uighurs.
“Business leaders and Wall Street executives have started pushing back, saying efforts to restrict investment constitute government interference and could destabilize financial markets,” Swanson writes. “When policymakers begin to pull the threads of financial connections between the United States and China, it’s not clear how much they will unwind, they say."
And efforts by lawmakers to tighten the screws on incoming Chinese investment appear to have come up short so far. The 2018 law to expand the powers of Committee on Foreign Investment in the U.S. initially chilled Chinese venture investment in the U.S.: It dropped 27 percent in the first six months of this year compared to the second half of last year, as the Journal’s Somerville reports. “But Cfius appears ill-equipped to police the venture-capital industry, current and former government officials say,” Somerville writes. “The government also hasn’t codified which technologies are off-limits to foreigners, so some startups and investors don’t see the need to file with Cfius.”
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MARKET MOVERS


Trader Michael Capolino works on the floor of the New York Stock Exchange. (AP Photo/Richard Drew)
S&P 500 sets new record. The Post's Thomas Heath: "U.S. stocks soared to new heights as the busiest week of earnings season kicked into gear, buoying anxious investors who are anticipating key news on jobs and interest rates this week. The Standard & Poor’s 500 index closed at 3,039, up almost 0.5 percent, eclipsing the broad market’s previous high of 3,025 from July 26. The Dow Jones industrial average and Nasdaq composite index were close behind, sending stocks upward in what is historically a bumpy month for markets. The Dow closed at 27,090, up about 0.6 percent on the day.
"The Dow is short about 1 percent from its record close of 27,359, set July 15. The tech-rich Nasdaq closed at 8,325, up 1 percent but short of its all-time high of 8,330 from July 26.All three indexes are racing toward finishing October on the upside. The tenor of the earnings season, so far, has bucked worries about corporations underperforming, with technology leading the way on upbeat reports from Microsoft, Intel and AT&T. The new economy fueled markets despite last week’s downbeat forecast from industrial bellwether Caterpillar, and big misses by Wells Fargo and Goldman Sachs."
Jay Powell faces another tricky meeting. WSJ's Nick Timiraos: "Federal Reserve Chairman Jerome Powell will walk a tightrope this week over whether and how to signal a potential timeout in rate cuts following an expected reduction on Wednesday. Markets largely expect another quarter-percentage-point rate cut at the Fed’s Oct. 29-30 meeting. It is the Fed’s next step that is uncertain, and investors will closely watch for clues in the central bank’s policy statement and Mr. Powell’s press conference...
"Without signs of a sharper deterioration in economic data, officials on Wednesday may seek to tamp down on expectations that they will keep cutting rates—including at their final scheduled meeting of the year in December—absent broader signs of weakening in the economy. At the same time, soft economic data of late could make officials uncomfortable delivering an 'all clear' signal, particularly because any residual damage from the U.S.-China trade war may not yet be fully reflected."

TRUMP TRACKER

TRADE FLY-AROUND:

A truck carrying a cargo shipping container enters a shipping terminal at the Port of Los Angeles. (Patrick T. Fallon/Bloomberg News)
Trump sounds bullish note on U.S.-China talks. Politico's Allie Bice: "Trump said Monday that negotiations for the so-called phase one of the United States' trade deal with China were 'ahead of schedule.' 'We are looking probably to be ahead of schedule to sign a very big portion of the China deal, and we’ll call it Phase One but it’s a very big portion,' Trump said. 'That would take care of the farmers. It would take care of some of the other things. It will also take care of a lot of the banking needs.' The comments come ahead of Trump’s meeting with Chinese President Xi Jinping for the Asia-Pacific Economic Cooperation summit in Chile on Nov. 16-17."
— Exports, imports drop: “U.S. exports and imports of goods both slumped in September to the weakest levels in more than a year, the latest sign [Trump’s] tariffs are weighing on the economy,” Bloomberg News’s Reade Pickert reports.
“The steeper decline for imports unexpectedly narrowed the merchandise trade deficit to $70.4 billion from $73.1 billion in August, according to Commerce Department data released Monday that compared with a projected gap of $73.5 billion in Bloomberg’s survey. The figures add to indications that Trump’s trade policies are challenging American companies as rising tariffs aimed at China muddle supply chains and add to uncertainty. Other data have shown that the tensions with China have helped to reduce business investment and slow the pace of hiring.”
— Huawei and ZTE might be barred from key government subsidy: “The U.S. telecommunications regulator plans to vote in November to designate China’s Huawei Technologies and ZTE Corp. as national security risks, barring their U.S. rural carrier customers from tapping an $8.5 billion government fund to purchase equipment or services,” Reuters’s David Shepardson reports.
“The Federal Communications Commission also plans to propose requiring those carriers to remove and replace equipment from such designated companies, FCC officials said ... [the agency said] a meeting said it plans to vote to ask carriers how much it would cost to remove and replace Huawei and ZTE from existing networks and to establish a reimbursement program to offset the costs of removing the equipment [at a meeting set for Nov. 19].”
A view from China: “Slowing economic growth. A rancorous trade war. Recalcitrant protesters in Hong Kong. A mass die-off of pigs and surging food prices. The frustrations are piling up for China’s leader, Xi Jinping,” the New York Times’ Chris Buckley reports before a major Communist Party meeting later this week.

POCKET CHANGE


Neighborhoods in Las Vegas as seen in 2009. (Jacob Kepler/Bloomberg News)
— Number of home equity lines continues to dwindle: “A once-popular loan Americans use to finance home renovations and college tuition is slowly dying, slashing a lucrative source of revenue for the nation’s largest banks,” Bloomberg News’s Gwen Everett and Shahien Nasiripour report.
“Home equity lines of credit, open-ended loans that homeowners tap for cash using their properties as collateral, exploded in the run-up to the housing crash a decade ago, doubling in volume from 2003 to 2006, according to the Federal Reserve Bank of New York. But a resurgent housing market after the Great Recession hasn’t brought with it a return to Helocs, as they’re commonly known.”
  • Meanwhile, the mortgage market is sizzling: “The mortgage market turned red hot over the summer, posting its biggest three months since the financial crisis,” the WSJ’s Ben Eisen and Laura Kusisto report. “Lenders extended $700 billion of home loans in the July-to-September quarter, the most in 14 years, according to industry research group Inside Mortgage Finance. Mortgage originations for the full year are on pace to hit their highest level since 2006, the peak of the last housing boom.”
— Former top Bush economic adviser quits GOP: "The Republican Party has largely become the Party of Trump," Greg Mankiw, Harvard professor and former head of the Council of Economic Advisers under George W. Bush, wrote in a blog post on his decision to become an unenrolled (independent) voter in Massachusetts. "Too many Republicans in Congress are willing, in the interest of protecting their jobs, to overlook Trump's misdeeds (just as too many Democrats were for [Bill] Clinton during his impeachment). I have no interest in associating myself with that behavior. Maybe someday, the party will return to having honorable leaders like Bush, [John] McCain, and [Mitt] Romney. Until then, count me out."
  • He plans to vote in the Democratic primary now: "The Democratic Party is at a crossroads, where it has to choose either a center-left candidate ([Joe] Biden, [Pete] Buttigieg, [Amy] Klobuchar, [Andrew] Yang) or a far-left populist ([Elizabeth] Warren, [Bernie] Sanders) as their nominee for president. I intend to help them choose the former. The latter propose to move the country too far in the direction of heavy-handed state control. And in doing so, they tempt those in the center and center-right to hold their noses and vote for Trump's reelection."

AT&T CEO Randall Stephenson. (Reuters/Carlos Barria)
— AT&T reaches truce with hedge fund: “AT&T Inc. reached an agreement with an activist investor that had been pressuring the telecom giant to revamp its strategy, and said its chief executive would stay at the helm through next year,” the WSJ's Drew FitzGerald and Corrie Driebusch report.
“Chairman and CEO Randall Stephenson has used big acquisitions of Time Warner and DirecTV to turn AT&T into a major media provider, a shift that activist Elliott Management Corp. had called into question. Mr. Stephenson said … that AT&T would forgo big takeovers in the coming years to focus on improving the bottom line. The company reported another quarter revealing the challenges of moving beyond its traditional telephone business. Overall, quarterly profit and revenue declined from a year earlier. AT&T’s core cellphone business gained subscribers, but more than one million customers abandoned the company’s DirecTV unit.”
— How a New York securities law could doom Exxon: “The trial of New York’s $1.6 billion securities-fraud lawsuit against Exxon Mobil begins its second week Monday, after a series of witnesses failed to provide any concrete evidence that the oil giant knowingly misled shareholders about its climate change accounting,” Bloomberg News’s Erik Larson reports.
“New York has argued that Exxon intentionally misled investors by publicizing a ‘sham’ proxy cost, tricking the market and thus inflating the company’s stock price. Exxon contends that the two costs are used for different purposes, and that New York is conflating them to show a discrepancy where there is none. [New York Attorney General Letitia] James sued under New York’s Martin Act, which empowers officials to target a wide range of corporate behavior that may negatively impact shareholders. While New York claims Exxon intentionally misled shareholders, under this securities law it doesn’t have to prove intent to win.”
— Local governments try to regulate guns with taxes: “Tacoma, Wash., could soon become one of a handful of U.S. cities to levy high taxes on gun sales, opening a new front in the battle over how much power local governments have to regulate firearms,” the WSJ’s Zusha Elinson reports.
“Washington and 44 other states ban cities and towns from making their own gun laws. But the proposed tax in Tacoma, which would collect $25 per gun sale to fund violence prevention programs, is modeled on a law in neighboring Seattle that has already passed muster with the state supreme court. Opponents of the proposal, which would also collect taxes on ammunition, have said it would force gun shops out of the industrial port city of 215,000. In Seattle, lawmakers projected $300,000 to $500,000 a year in gun taxes, but last year received only $77,642 because gun stores moved away.”

MONEY ON THE HILL


Boeing CEO Dennis Muilenburg. (Shannon Stapleton/Reuters)
— Looking ahead to this week’s Boeing hearings, which start today: “Boeing Co. President Dennis Muilenburg faces lawmakers this week outraged over a pair of disasters that raise questions about the safety of the company’s marquee jet and could result in tightened oversight of the world’s biggest planemaker,” Bloomberg News’s Ryan Beene and Courtney Rozen report.
“The hearings will test the strength of Boeing’s relationships in Washington, where the company is seen as an American success story. It’s also become a power player due to its lavish contributions to politicians of both parties and an army of lobbyists that advance its commercial and military business lines.”
  • What Muilenburg will say: “Muilenburg plans to acknowledge that his company made mistakes when he faces lawmakers this week who are looking for answers …,” my colleague Ian Duncan reports. “‘We know we made mistakes and got some things wrong,’ Muilenburg said in prepared testimony to a Senate committee reviewed by The Washington Post. ‘We own that, and we are fixing them.’ For Muilenburg, who was recently stripped of his role as chairman of Boeing’s board, the planned testimony is part of a campaign to win back public trust and to satisfy regulators — even as experts say the company is following its typical playbook after a crash, earning it a reputation for withholding information and pointing to others as blameworthy.”
AIG was feted on the Hill, and nobody mentioned its bailout. Politico's Zachary Warmbrodt: "American International Group — once one of the most scorned corporations on Capitol Hill for its pivotal role in the financial crisis — got a Washington birthday bash on Monday night with help from House lawmakers. Little more than a decade after the U.S. government committed $180 billion to avert the collapse of the insurance giant, AIG used the hearing room of the House Ways and Means Committee to host a 'centennial congressional reception' to mark the New York-based company's first century in business...
"Ways and Means Committee Chairman Richard Neal (D-Mass.) presided over the event, which featured AIG CEO Brian Duperreault and other company leaders... More importantly, it had bipartisan support, with senior House members from both parties in attendance alongside finance industry lobbyists."

Lobbying expenditures by Facebook, Amazon and Apple are on pace to hit records this year. The companies are taking steps to present a positive message to Washington.
WSJ

THE REGULATORS


Mark Calabria, director of the Federal Housing Finance Agency. (Zach Gibson/Bloomberg)
Fannie, Freddie regulator pushes privatization plan. WSJ's Andrew Ackerman: "Fannie Mae’s and Freddie Mac’s federal regulator took new steps to privatize the mortgage-finance companies on Monday, telling the firms to help lay the groundwork for their own transitions out of an 11-year government conservatorship. In new policy goals, the Federal Housing Finance Agency for the first time released formal objectives calling for Fannie’s and Freddie’s return to the private sector. The companies have been in government conservatorship since the 2008 financial crisis. FHFA Director Mark Calabria, who took over the agency in April, is pressing to privatize the mortgage-finance companies, which back around half the nation’s mortgage market."

CHART TOPPER


Washington Post Fact Checker Glenn Kessler says Trump earns Two Pinocchios for his claim that household median income has surged under his presidency after modest increases under his two predecessors. While the pace of growth appears to have picked up, Trump is mostly enjoying a continuation of a trend: "When we compare the last 31 months of Obama to the first 31 months of Trump, the trend is even clearer," Kessler writes. I"n those 31-month periods, median household income rose 5.6 percent under Obama and 7.1 percent under Trump, respectively. That gives a slight edge to Trump but remember these monthly numbers bounce around a lot, so it’s unclear whether the recent pace under Trump can be maintained. In any case, the economic record of the two presidents is far closer than suggested when including the effect of the recession under Obama’s numbers."

DAYBOOK

Today:
  • The House Financial Services Committee is scheduled to mark up a 10-year extension of the Export-Import Bank
  • General Motors, BP, Amgen, Kellogg, Pfizer, MasterCard, Mattel, Electronic Arts, Allstate, ConocoPhillips, Yum China, Xerox, Denny’s and GrubHub, report their earnings
Wednesday:
  • The Financial Services Committee continues its markup
  • Apple, Facebook, AK Steel, Lyft, Sony, Starbucks, Yum! Brands, McKesson, General Electric, MetLife and MGM Resorts are among the notable companies reporting their earnings
  • CFTC Chairman Heath Tarbert keynotes the annual Futures & Options Expo. in Chicago
Thursday:
  • Fiat Chrysler, Re/Max Holdings, Bristol-Myers, Clorox, Cigna, DuPont, Altria, Royal Dutch Shell, Sirius XM and Sanofi are among the notable companies reporting their earnings
Friday:

THE FUNNIES

From The Post's Tom Toles:

BULL SESSION


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