with Bastien Inzaurralde
That move followed China's decision last week to kill Qualcomm’s $44 billion purchase of Dutch chipmaker NXP — a move observers called retaliation for U.S. tariffs, despite Chinese claims that it was based solely on antitrust concerns. Chinese regulators reviewed the deal because Qualcomm is a major player in the country's semiconductor market, gathering nearly two-thirds of its revenue there last year.
And at least one iconic American brand operating in China blames the tension for a drop-off there: McDonald's CEO Steve Easterbrook said on the company’s second-quarter earnings call last week that the “uncertainty of the trade discussions” has had a “big impact within that market.” Easterbrook said the trade fight “has clearly hit the markets, which in turn has hit consumer confidence. So, we are keeping a close eye on that and adjusting our plans so that we can be competitive.”
William Zarit, who chairs the American Chamber of Commerce in China, tells me both the chamber and the U.S. embassy in Beijing are looking out for reports of similar experiences. Neither has noted an uptick in complaints. “It doesn’t seem to be starting in force,” he said. “Having said that, it certainly could, and I wouldn’t be totally surprised if it does.”
Beijing could send an even louder signal by taking aim at a couple of high-profile mergers. Walt Disney Co.’s $71.3 billion bid for 21st Century Fox’s entertainment assets needs Chinese regulatory approval. Investors are already nervous. “Some investors are concerned that China might use this deal to retaliate against as much as $500 billion in import tariffs threatened by [Trump], who called Fox co-chairman Rupert Murdoch to congratulate him when the transaction was unveiled in December,” Bloomberg News reported Friday. “That’s one reason why Fox shares are trading as though there’s about a 20 percent chance the deal will fail.”
Along those lines, defense giant United Technologies has acknowledged its $30 billion buyout of aerospace company Rockwell Collins could face peril. The company’s chief investment officer said at a June investment conference that the Chinese could block the deal. “That is something you always have to think about or worry about,” he said.
Zarit agreed that nerves around both deals are valid. “I think it should be a concern,” he said.
It comes down to simple math. If the Trump administration continues ramping up tariffs, Beijing soon will lose its ability to match the levies, dollar for dollar, because China only imports $130 billion worth of American goods. Chinese leaders have made clear they will look to other means to keep up. Those could involve devaluing the yuan or selling off U.S. debt — moves that observers handicap as unlikely.
But the country has already demonstrated a willingness to make life difficult for foreign companies whose governments get crosswise with it. Last year, when South Korea deployed a U.S. missile defense system the Chinese government interpreted as a threat to its sovereignty, Beijing responded by directing a boycott of Korean goods, including cosmetics, electronics, and Hyundai and Kia cars.
A review of mentions of China in second-quarter earnings transcripts, assembled by Hamilton Place Strategies, turns up lots of mentions of tariffs but no similar suggestions that companies are facing what may be consumer boycotts (besides McDonalds, maybe). Yet other anecdotal evidence suggests American exporters are encountering new hurdles, as my colleague Danielle Paquette reported earlier this month: A shipment of cherries was quarantined until it spoiled and was sent back, for example; and pet-food makers and others have reported more rigorous port inspections.
And as Beijing looks to solidify ties to Europe as a potential bulwark, the government is handing European companies an edge over their American competition. Earlier this month, when Chinese trade officials huddled in Berlin with their German counterparts, German chemicals giant BASF earned Chinese approval for a $10 billion plant in southern China. “Requests for similar wholly-owned projects from BASF’s U.S. competitors, however, so far have been snubbed by Chinese authorities,” The Wall Street Journal noted at the time.
“There’s a dial in the halls of the leadership compound, it’s labeled ‘retaliation,’ and it’s always on,” one veteran Chinese trade watcher tells me, requesting anonymity to speak frankly about the situation. “The question is, is it at level 2 or 5 or 8 or 10?” Either way, some companies looking to expand in China are going to face even tougher choices. “What you’re going to see is companies structuring deals and maybe even divesting assets in China. It’s a new world, and companies are going to have to take note of that.”
|You are reading The Finance 202, our must-read tipsheet on where Wall Street meets Washington.|
|Not a regular subscriber?|
— Ross hopeful about NAFTA. Bloomberg News's Reade Pickert, Jenny Leonard, and Andrew Mayeda: “Negotiations with Mexico on an update to the North American Free Trade Agreement are going well and may be close to wrapping up, U.S. Commerce Secretary Wilbur Ross said. 'Our immediate, most close-to-completion negotiations are with Nafta, particularly with Mexico,' Ross said Monday at a conference in Washington, adding that President-elect Andrés Manuel López Obrador has 'wasted no time' appointing a new trade team. 'There’s a pretty good chance that we could be on a pretty rapid track with the Mexican talks.' ”
— Chinese investment dips. WSJ's Josh Zumbrun: "The cumulative level of Chinese investment in the U.S. declined in 2017, according to a new Commerce Department report, showing Chinese investors’ enthusiasm for American assets was waning even before trade tensions ramped up. China’s total direct investment position fell to $39.5 billion in 2017 from $40.4 billion the year before, according to the report. China’s appetite for U.S. investment had picked up in recent years, nearly quadrupling from 2014 to 2016. Yet despite some high-profile transactions and rapid growth, China isn’t a large investor in the U.S., making up less than 1% of the more than $4 trillion of foreign direct investment in the country last year. Beijing maintains tight controls on capital that have held down outward investments from China and tightened those controls last year."
Pompeo announces Indo-Pacific plans, knocks China. The Post: "Secretary of State Mike Pompeo on Monday announced $113 million in new technology, energy and infrastructure initiatives in emerging Asia at a time when China is pouring billions of dollars in investments into the region. Amid increased U.S. trade frictions with China, Pompeo’s announcement sought to build on President Trump’s 'Indo Pacific' strategy that aims to cast the United States as a trustworthy partner in the region.
"Pompeo said the United States was seeking a 'free and open' Asia without domination by any one country, in what appeared to be a reference to China’s growing economic clout and heightened tensions in the disputed South China Sea. 'Like so many of our Asian allies and friends, our country fought for its own independence from an empire that expected deference,' Pompeo told the U.S. Chamber of Commerce business group. 'We thus have never and will never seek domination in the Indo-Pacific, and we will oppose any country that does.'"
Ross says U.S. can withstand trade pain. Bloomberg: "The U.S. can deal with the pain of a trade dispute with China because of the strength of the American economy, [Ross] said. It makes more sense to take an 'aggressive stance' with China when the U.S. economy is doing well, Ross said, citing an unemployment rate that’s hovering around its lowest level since 2000. 'That’s the right environment within which to do it, because there’s more ability for the economy to absorb whatever short-term problems may come,' he said. 'I liken it a little bit to going on a diet: It’s no fun in the beginning, maybe a little bit painful, but at the end of the day you’re kind of happy with the end result,' Ross said Monday."
— Doubts about farm aid. The Washington Post's Caitlin Dewey: “Trump has committed $12 billion to protect American farmers hurt by his trade war, setting off a political firestorm over trade policy. But growers of soybeans — the single largest agricultural export to China, worth $12.4 billion — have largely escaped financial damage thus far, raising questions about the purpose and timing of the bailout, say economists, commodity traders and farmers. While soybean prices have plummeted in recent months as China slapped tariffs on $45 billion of U.S. goods, the complexity of the markets where they are sold has insulated many growers from financial harm in the short-term. 'We probably don’t need [the aid] on our farm,' said Anna Balvance, who raises soybeans and cattle in northern Iowa and is expecting strong profits this season. 'A lot of guys are skeptical of it. It’s not going to change the way we do business.' ”
— More trade war layoffs. The Post's Heather Long: “Jane Hardy, the chief executive of a company that makes lawn-care equipment, says she had to lay off 75 employees this summer because of [Trump’s] trade war. As she fights to keep her southern Indiana business going, Hardy is one of several manufacturers warning the White House that, unless they see relief from the tariffs soon, job losses will mount and factory closures are likely. Trump has repeatedly said he would protect American farmers in the trade war, last week setting aside $12 billion to help them, but he is facing pressure to extend aid to other industries if the tariffs remain in place or get extended to more products. Extending those bailouts would be an expensive proposition. The U.S. Chamber of Commerce on Monday estimated the total price tag could hit $39 billion if Trump compensated the losses across all industries.”
Caterpillar avoids trade fallout. Reuters's Rajesh Kumar Singh: “Caterpillar Inc. on Monday gave a promising outlook for the global economy despite ongoing trade tensions and mounting cost concerns, and the heavy-equipment maker lifted its full-year earnings forecast after quarterly profits nearly doubled. The Deerfield, Illinois-based company now expects adjusted profit per share to be in a range of $11 to $12 in 2018, compared with $10.25 to $11.25 projected earlier. The second increase to the profit outlook in the past two quarters helped somewhat allay investors’ concerns that the industrial cycle and even broader economic activity are approaching their peak. . . . Caterpillar said it has not yet seen the impact of ongoing trade tensions on its business, but said tariffs are estimated to inflate material costs in the second half of 2018 by up to $200 million.”
- “Giuliani: ‘Collusion is not a crime.’” The Hill's Avery Anapol.
- “Giuliani won’t explain the ‘very nasty’ business relationship Trump says he had with Mueller.” The Post's John Wagner.
- “Manafort made more than $60 million in Ukraine, Mueller says.” Bloomberg News's David Voreacos and Andrew M Harris.
— No rate hike expected. The Associated Press's Martin Crutsinger: “The Federal Reserve will meet this week to assess an economy that has just enjoyed a healthy spurt of growth but faces a flurry of trade fights pushed by [Trump] that could imperil that growth over time. If those concerns weren’t enough, Trump has openly expressed his displeasure at the Fed’s interest rate increases — something no president has done publicly in more than two decades. No one expects the Fed to announce a rate increase when its latest policy meeting ends Wednesday. But the central bank is widely expected to set the stage for tightening credit again in September for a third time this year and then likely raise rates once again by December. This year’s rate increases follow three hikes in 2017 and one each in 2015 and 2016.”
— Correction looming? Bloomberg's Dani Burger: "The market’s leaders have gone missing this earnings season. For Morgan Stanley, that’s a worrying sign that the stock rally may have exhausted itself. Despite more than 85 percent of S&P 500 members beating analyst estimates, the type of pro-cyclical companies you’d expect to surge amid banner earnings have been falling behind. Not even the biggest winners of the year are posting reliable gains, as earnings misses from the likes of Netflix Inc. and Facebook Inc. hamper the momentum trade. As such, risks to the July stock rally are building, and with peaking growth rates and extended positioning, the three-day slide that started Thursday will only get worse, Morgan Stanley analysts said. 'The selling has just begun and this correction will be the biggest since the one we experienced in February,' Morgan Stanley equity strategists led by Mike Wilson wrote in a note Monday."
— Tesla eyes Europe. The Wall Street Journal's William Boston and Tim Higgins: “Tesla Inc.’s international expansion is gaining momentum, with authorities in Germany and the Netherlands initiating talks with the company to build its first major European factory. The Silicon Valley car maker, which this month announced plans to build its first overseas plant in China, has had preliminary discussions with two German states vying to host a so-called Gigafactory in Europe to build electric cars and their batteries under one roof, officials involved in the talks said. The talks are still in their early stages, and might not yield an agreement, the officials said. Tesla has also discussed an option to build the plant in the Netherlands, said a Dutch government official, who declined to say if that option is still being pursued.”
— Shareholder sues Facebook. The Post's Hamza Shaban: “Days after Facebook’s stock suffered the largest drop in Wall Street history, a shareholder sued the company, accusing the social media network of making misleading statements about its user numbers and operations. The plaintiff, James Kacouris, filed the lawsuit Friday seeking class-action status and to recover damages. Kacouris alleged that Facebook and its chief executive, Mark Zuckerberg, violated federal securities laws by misleading shareholders about the company’s number of active users and the slowing growth of its revenue. Kacouris also named Facebook chief financial officer David Wehner in the lawsuit, filed in U.S. District Court for the Southern District of New York. Facebook said in its earnings report last week that it anticipated slower revenue growth and slimmer margins in the future, in part to improve the safety and privacy of the platform.”
— CBS hires law firm to handle Moonves allegations. WSJ's Joe Flint and Keach Hagey: "CBC Corp. said its board of directors was in the process of selecting an outside law firm to handle an independent investigation into allegations Chief Executive Leslie Moonves sexually harassed women. No other actions were taken on the matter at the Monday board meeting. In advance of the meeting, which was long scheduled ahead of CBS’s second-quarter earnings, some directors had discussed whether Mr. Moonves should step aside during the probe... CBS’s statement Monday made no mention of Mr. Moonves’s status. The investigation is in response to a New Yorker article published Friday, in which six women who had professional dealings with Mr. Moonves between the 1980s and late 2000s claimed he sexually harassed them."
— T-Mobile and Nokia strike deal. Reuters's Eric Auchard: “T-Mobile U.S. named Nokia to supply it with $3.5 billion in next-generation 5G network gear, the firms said on Monday, marking the world’s largest 5G deal so far and concrete evidence of a new wireless upgrade cycle taking root. No. 3 U.S. mobile carrier T-Mobile — which in April agreed to a merger with Sprint to create a more formidable rival to U.S. telecom giants Verizon and AT&T — said the multiyear supply deal with Nokia will deliver the first nationwide 5G services.”
— Trump administration mulls cap-gains tax cut. NYT's Alan Rappeport and Jim Tankersley: "The Trump administration is considering bypassing Congress to grant a $100 billion tax cut mainly to the wealthy, a legally tenuous maneuver that would cut capital gains taxation and fulfill a long-held ambition of many investors and conservatives. Steven Mnuchin, the Treasury secretary, said in an interview on the sidelines of the Group of 20 summit meeting in Argentina this month that his department was studying whether it could use its regulatory powers to allow Americans to account for inflation in determining capital gains tax liabilities. The Treasury Department could change the definition of 'cost' for calculating capital gains, allowing taxpayers to adjust the initial value of an asset, such as a home or a share of stock, for inflation when it sells... The move would face a near-certain court challenge."
Democrats were quick to blast the proposal. Senate Minority Leader Chuck Schumer (D-N.Y.) called it an "outrage" and said it showed "Republicans' true colors." Their midterm ads on this are already writing themselves.
— Steyer's $110 million plan. Politico's Edward-Isaac Dovere: "Tom Steyer has set plans to spend at least $110 million in 2018, making the billionaire investor the largest single source of campaign cash on the left and placing him on a path to create a parallel party infrastructure with polling, analytics and staffing capabilities that stand to shape and define the issues the party runs on in November. Steyer is building out an operation that’s bigger than anyone other than the Koch Brothers — and the billionaire and his aides believe the reservoir of non-traditional voters he’s already activated could become the overriding factor in House and other races across the country. Yet Steyer’s oversized role also stands to position him squarely against Democratic Party leadership, which has shown little appetite this fall for pursuing one of his signature causes: impeachment."
— No Koch support for Cramer. The Post's Michelle Ye Hee Lee: “The Koch political network announced Monday that it does not currently plan to support GOP Rep. Kevin Cramer in his effort to unseat Sen. Heidi Heitkamp in North Dakota, one of the most vulnerable Democrats up for reelection this November. Heitkamp’s race is a top pickup opportunity for Republicans, who are trying to retain their slim two-seat majority in the Senate. Heitkamp, the only Democrat who holds statewide office in North Dakota, is running for reelection in a state that [Trump] won by more than 35 points. Koch network also has no current plans to back Senate candidates in Nevada and Indiana, two key red-state races that are pickup opportunities for Republicans this fall, according to details it released Monday.”
Trump lashed out at the Kochs in a pair of tweets this morning:
The globalist Koch Brothers, who have become a total joke in real Republican circles, are against Strong Borders and Powerful Trade. I never sought their support because I don’t need their money or bad ideas. They love my Tax & Regulation Cuts, Judicial picks & more. I made.....— Donald J. Trump (@realDonaldTrump) July 31, 2018
....them richer. Their network is highly overrated, I have beaten them at every turn. They want to protect their companies outside the U.S. from being taxed, I’m for America First & the American Worker - a puppet for no one. Two nice guys with bad ideas. Make America Great Again!— Donald J. Trump (@realDonaldTrump) July 31, 2018
— SEC's new crypto czar wants industry to engage. Bloomberg's Ben Bain and Matt Robinson: "The U.S. Securities and Exchange Commission is well known for bringing landmark cases against the biggest names in finance. But its powers to punish individuals and companies can also be intimidating, something that’s very much on the mind of Valerie Szczepanik, the SEC’s new top official overseeing the nascent cryptocurrency industry. In taking her new job last month, she left the regulator’s vaunted enforcement division and joined a less renowned SEC unit that oversees initial public offerings and other corporate stock sales. A key reason for the less-confrontational approach: digital-token enthusiasts’ deep mistrust of government. They’re hesitant to discuss their business with the SEC’s market cops out of fear of being investigated, or even worse, shut down."
Trump: “I would certainly meet with Iran if they wanted to meet.”
San Antonio shark miraculously rescued after being stolen from aquarium:
How Bruce Lee changed Hollywood: