The U.S.’s lonely clash with China

From: POLITICO's Morning Money - Monday Apr 10,2023 12:02 pm

Apr 10, 2023

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Global finance ministers and central bankers are in Washington for the International Monetary Fund and World Bank spring meetings this week. For the world’s two largest economies, there’s no thaw in sight.

Escalating tensions between the U.S. and China will provide an uncomfortable backdrop to the meetings as policymakers grapple with economic uncertainty in the wake of stubborn inflation, banking sector jitters and tsuris over Russia’s occupation of eastern Ukraine. Those relations got even more icy over the last week in the wake of Taiwanese President Tsai Ing-Wen’s visit with House Speaker Kevin McCarthy, which was followed days later by major Chinese military exercises around the self-ruled island.

As China moves to take a larger role in multilateral organizations like the World Bank, U.S. allies are becoming more vocal in their discomfort with the potential economic pain that could be in store if the Biden administration takes further action to isolate China.

“There are virtually no US allies that are really all-in on the idea of a cold war with China,” Eurasia Group President Ian Bremmer told MM over the weekend. “The politics around the China relationship — which is incredibly toxic and hostile in the United States — that's generally not true [for] really any ally.”

— Case in point: On the heels of last week’s meeting with Chinese President Xi Jinping, French President Emmanuel Macron told POLITICO’s Jamil Anderlini and Clea Caulcutt that Europe should steer clear of any potential conflict between the global superpowers.

“The question Europeans need to answer … is it in our interest to accelerate [a crisis] on Taiwan? No.” Macron said in an interview while aboard his presidential plane. “The worse thing would be to think that we Europeans must become followers on this topic and take our cue from the U.S. agenda and a Chinese overreaction.”

And this: “Europeans cannot resolve the crisis in Ukraine; how can we credibly say on Taiwan, ‘watch out, if you do something wrong we will be there’? If you really want to increase tensions that’s the way to do it,” Macron said.

Another geopolitical flashpoint that Bremmer’s watching closely: President Recep Tayyip Erdoğan’s grip on Turkey.

Why? The Turkish strongman’s economic policies contributed to a sharp devaluation of the lira — which has lost about 80 percent of its value since 2018 — and overwhelming inflation that’s created a cost-of-living crisis for the country's middle class. Support for an opposition party led by former bureaucrat and economist Kemal Kılıçdaroğlu has made the country’s May 14 election a coin toss, said Bremmer, a longtime foreign policy specialist whose firm assesses geopolitical risks.

With its political future uncertain and its economy on the precipice of collapse, “I think a lot of people at the IMF are going to be very concerned,” Bremmer said.

Erdogan has repeatedly rejected any notion that he would turn to the IMF for a bailout if its central bank’s reserves are tapped out. And the IMF’s recent call for Turkey to raise interest rates and grant independence to its monetary policymakers has gone unheeded — at least for now.

“It'll be interesting to see — given Turkey's election coming up and an enormous amount of uncertainty about what's going to happen with Erdogan — what the IMF is saying about a potential package once Erdogan is gone,” Bremmer said.

“[Erdogan] will not go to the IMF. And the successor — if he's out — his successor almost certainly would,” he added. “It's just a very big change in potential political orientation at the same time they're facing a massive economic crisis.”

IT’S MONDAY — It’s a jam-packed week. What should we be looking at? Send tips, suggestions and gossip to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.

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Driving the Week

MONDAY … The IMF-World Bank Group spring meetings kick off at 9 a.m. with remarks from IMF Managing Director Kristalina Georgieva and World Bank President David Malpass … Treasury Undersecretary Jay Shambaugh will discuss the economy at a Brookings Institution event at 2 p.m. … TUESDAY … The IMF will release its economic outlook at 9 a.m. and its global financial stability report at 10:30 a.m. … Consumer Financial Protection Bureau Director Rohit Chopra speaks at a Washington Post event at noon … Malpass will discuss global debt at 1 p.m. … Chicago Fed President Austan Goolsbee speaks at 1:30 p.m. … CFTC Chair Rostin Behnam to deliver a keynote at NCUA’s Capital Markets Summit at 2 p.m. … WEDNESDAY … March CPI will be released at 8:30 a.m. … San Francisco Fed President Mary Daly speaks at noon … The Fed’s March minutes will be released at 2 p.m. … THURSDAY … Malpass and Georgieva hold back-to-back press conferences starting at 7:45 a.m. … Behnam will participate in a fireside chat at an IIF event at 3 p.m. … FRIDAY… Consumer sentiment survey data will be released at 10 a.m. … The SEC will meet at 10 a.m. … Malpass discusses supply chains at 11:30 a.m.

Where’s Lael? — Our Ben White reports. “ Lael Brainard arrived at the White House less than two months ago — after nearly a decade on the board of the Federal Reserve that included a stint as chair of the central bank’s financial stability committee … While those may be excellent credentials for leading a response to the biggest financial upheaval since the 2008 crash, Brainard’s past at the Fed is constraining her from taking a more public role.”

“All of the failure of supervision stuff for the last six to nine months implicates the Fed,” a person close to the White House, who requested anonymity to speak freely about a sensitive personnel topic, told Ben. “And all the investigations will focus on the Fed. There is just no way that can’t be awkward both for Lael and for the White House, even if there is nothing specific she did wrong.”

Gensler’s private funds gambit — From Sam: “Everyone knew that Wall Street would fight SEC Chair Gary Gensler’s bid to crack down on private equity powerhouses and hedge funds. Few predicted the backlash from the investors Gensler is trying to protect… The attempt to tighten the rules around Wall Street firms that now rival big banks in size and political influence is among the most ambitious rulemakings Gensler has undertaken and would mark a major shift in SEC oversight of private markets.

‘It's big. It's very significant,’ Gensler said in an interview. ‘If we can drive greater competition and efficiency through transparency … then the investors — the limited partners — who are representing state pension funds, endowments, universities and various investors benefit.’

The trouble is those investors aren’t on the same page.”

Last hurrah — Malpass will push to make it faster and easier for companies to restructure their debt, he wrote in a blog post on Sunday.

First in MM: Advocates hit back at state threats to CFTC climate agenda — In the coming months, the CFTC plans to roll out how it will address climate-related financial risks in the derivatives markets, an effort that fits squarely within the agency’s current remit, according to a new report published by Governing for Impact, an advocacy group. The report specifically hits back at concerns from nearly two dozen state attorneys general that the CFTC is going outside its lane in looking at climate-related financial risks under the Supreme Court’s decision in West Virginia v. EPA. — Declan Harty

Deposit insurance battle heats up — Our Eleanor Mueller: “More than 20 conservative organizations on Friday spoke out against any expansion of deposit insurance. The groups, led by Americans for Tax Reform, ‘oppose any legislative or regulatory action that would increase the deposit insurance cap or fully insure all deposits at insured depository institutions on a temporary or permanent basis,’ they wrote in a letter to members of Congress.”

— Aaron Klein, a senior fellow at the Brookings Institution, for The Wall Street Journal: “Bipartisan support is growing for unlimited deposit insurance. This should worry everyone, but especially progressives.”

In the markets

RELIEF AT THE PUMP? — The WSJ’s Joe Wallace and Anna Hirtenstein: “A burst of supply from a grab bag of smaller oil-producing countries threatens to undermine efforts by Saudi Arabia and its allies to keep prices high.”

END OF THE RUNWAY — Bloomberg’s Neil Callanan: “Almost $1.5 trillion of US commercial real estate debt comes due for repayment before the end of 2025. The big question facing those borrowers is who’s going to lend to them?”

EARNINGS SZN HAS ARRIVED — The WSJ’s Hannah Miao: “Although Wall Street has been trimming its earnings expectations, investors are looking to this next round of reports for insights into just how much farther corporate profits could fall.”

— The FT: “Options trading surges as investors brace for US regional bank volatility”

SO MAYBE IT’S NOT JUST CRYPTO — NYT’s Tara Siegel Bernard and Ron Lieber: “Increasing attention to suspicious-seeming transactions has led to some people suddenly losing access to their bank accounts. The reasons are often a mystery.”

Jobs Report

David Wertime is now senior policy adviser in the Office of Investment Security at the Treasury Department. He most recently was senior adviser in the Office of International Financial Markets at Treasury. — Daniel Lippman

Regulatory Corner

IRS GROWS — Our Benjamin Guggenheim: “The IRS aims to employ 105,187 workers by 2025, swelling the agency ranks by nearly 50 percent within three years to workforce levels not seen for a quarter-century, according to projections by the IRS obtained by POLITICO.”

UNION GROWTH SLOWS — Our Olivia Olander: “While workers' requests to establish unions are up again this year, the increase seems on pace to be much smaller than the huge spike seen in 2022, according to statistics released Friday by the National Labor Relations Board.”

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