Where are the America Hands? China Interpreted Trump Tweets as Weakness

Earlier today I posted Trade Deal Closer Than Ever or Never Coming. More details have emerged in a WSJ report: Why China Decided to Play Hardball in Trade Talks

An April 30 tweet, in which Mr. Trump coupled criticism of Mr. Powell with praise of Chinese economic policy, especially caught the eye of senior officials. “China is adding great stimulus to its economy while at the same time keeping interest rates low,” Mr. Trump tweeted. “Our Federal Reserve has incessantly lifted interest rates.”

“Why would you be constantly asking the Fed to lower rates if your economy is not turning weak,” said Mei Xinyu, an analyst at a think tank affiliated with China’s Commerce Ministry. If the U.S.’s resolve was weakening, the thinking in Beijing went, the U.S. would be more willing to cut a deal, even if Beijing hardened its positions.

Trump is setting Powell up as the deserved scapegoat should Fed-stimulated asset bubbles burst. If the Fed doesn't cut, cuts too late or cuts too little, Trump will blame the Fed for wrecking the economy. He only loses if the Fed cuts rates and the economy/markets sink into deep deflation, but in that case, it's the nightmare scenario where the Fed is out of bullets.

The ultimate stumbling block for the U.S. is China hasn't reformed as expected, and it follows a pattern with the rest of mercantilist East Asia. South Korea and Japan hammered the U.S. auto industry. China, with almost 10 times the combined population of those nations, could wipe out any U.S. industry of its choosing as automation accelerates.

The stumbling block for China is the same as it has been for going on two decades of stalled reform: the CCP doesn't want to relinquish control over the economy. Small and medium businesses still cannot obtain capital. If China won't help its own domestic private economy, why would they allow foreign companies superior market position? It isn't going to happen.