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Senator Rubio Says Phase One China Deal Is ‘Not A Win’

Contrary to what has become popular opinion in Trump’s circle and among his biggest advocates on China, Senator Marco Rubio is not a fan of the phase one trade deal.

Once again, this deal is just more corporate money flowing into China. As far as Rubio is concerned, the U.S. is funding a rival state.

He took to The New York Times to explain himself in an op-ed published on Friday.

“Instead of holding China accountable for exploiting American capital markets, this so-called Phase 1 agreement will make sure American capital continues to directly fund China’s state-run economy,” Rubio wrote. “American financing will increase to state-owned enterprises like China Shipbuilding Industry Corporation, which produces about 80% of the Chinese Navy’s main equipment, and Hikvision, whose products Beijing uses to surveil Uighurs in Xinjiang.”

Most of that, however, has nothing to do with the trade deal. That only continues so long as those companies are in the major benchmark equity and bond indexes which include them. Passive investments tracking those benchmarks will automatically invest in those firms, while actively managed funds can easily avoid putting money in those firms.

Rubio is arguably the lone Republican wolf in the Senate trying to get a federal pension fund from investing in the MSCI All Country World Index, which includes a roughly 8% weighting to China equity.

“It’s no secret that Wall Street hated President Trump’s aggressive trade tactics toward China.”

Senator Marco Rubio (R-Fla)

MSCI and others, like the Barclays Bloomberg Global Aggregate Index here at home, have increased the weighting to Chinese securities over the last two years. That means more portfolio money into China.

But the phase one deal also means more U.S. corporate investment into China, something Rubio remains wary of as he sees it as financing America’s biggest rival.

The U.S., under phase one, got China to commit to buying more Made in the U.S. goods, namely auto parts. It is unclear how this plays out as China has its own auto parts industry it will never abandon in favor of the U.S., even if the U.S. was somehow cheaper. China would prefer to get the American company to build and make there for the domestic market, something most companies would do anyway, at least to serve the locals.

A better phase two deal would see some reciprocity on investment.

China investors, by and large, are not allowed to invest in the U.S. stock market. Only high net worth individuals are allowed to put money abroad, while any American citizen can invest in China as much as they like.

Friday’s GDP data out of China featured an as-expected growth rate of 6.1% for 2019, and came with tentative signs of stabilization in Chinese retail and in industrial production. China’s biggest problem in the trade war was stemming the tide of supply chain leaving the mainland. One is left wondering how the economy could be growing above target with a mini-exodus of manufacturing leaving China.

Phase one will be helpful in diminishing those risks going forward. It also reduces the risk for recession.

China’s pledge to avoid currency depreciation in the deal is also positive from a financial market point of view, “given that the exchange rate is a risk-indicator monitored by many equity investors,” says Neil MacKinnon, an economist from VTB Capital in London.

Rubio isn’t worried what the market thinks.

In this case, he is more closely connected to the likes of Bernie Sanders than to Trump. Trump cares — and cares mightily — how Wall Street reacts to his policies. Sanders does not care and his base would be delighted giving the Street a black eye whenever he can.

Rubio would like to see a deal that bans investment in certain Chinese companies, a move that would require index providers like MSCI to conduct due diligence on their listings, something they are not accustomed to doing.

“For decades, China has used Wall Street’s hunger for profit to lure American capital into a trap: the Communist Party’s clear intent of displacing the United States as the world’s economic and military superpower,” says Rubio. “This accord will result in American capital flowing to the government-owned companies that China props up to undermine our country. This is not a win.”

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