To that, reports that US officials are pressing China to remove subsidies on certain industries as a prerequisite to the removal of sanctions can be discounted out of hand as a non-starter. Barring an intense escalation of pressure, that simply is not going to happen, certainly not in exchange for the removal of tariffs – even the Trump administration’s pressure could not get Beijing to move on subsidies.

We have also heard rumors that former Defense Minister Shigeru Ishiba, who polls just behind front runner Taro Kono, another former Foreign Minister, Defense Minister, and current vaccine czar, may choose not to run.

Ishiba is relatively popular among the rank-and-file LDP members who are not members of parliament, but his group has only 17 lawmakers, which is less than the 20 supporters needed to run the race. Ishiba may announce that he will give up and throw his support to Kono.

That further boosts the likelihood that Kono, who is popular among the general electorate because of his image as a reformer, will win.

Our understanding is that John Kerry, after he arrived in Tianjin on August 31, then set up a virtual meeting with Wang. But the topic of Kerry’s conversation with Wang was not climate, but bilateral relations.

According to Chinese sources, Kerry also asked Wang to convey to Xi that Biden hopes and looks forward to holding bilateral talks with Xi in Rome.
But before the two leaders can meet, the two sides need to show some consensus on major issues.

Separately, President Xi Jinping discussed the US-China tech rivalry, negative list, and opening of China’s markets at a meeting in Zhongnanhai on Friday. Excerpts are included below:
“The most powerful weapon against the US all-round containment of China is to focus our efforts on our own affairs and to strive to develop our economy, high technology, and the military…. Opening up is one of the best weapons against the US to contain China…We must continue to welcome and support the development of foreign enterprises in China including US enterprises as long as do they do not become pawns of Washington against China. Relevant departments should speed up formulating and introducing the 2021 version of the national negative list for foreign investment ASAP.”
Xi added, “The competition between China and the US is fundamentally about talent and high technology…We must always adhere to the development of the industry-oriented real economy, must not learn from the US or must not be capital-oriented. A capital-oriented economy is fragile, built on bubbles and vulnerable to a single blow…
“We must ensure the stability of the financial system and eliminate any potential systemic financial risks firmly, forcefully and in a timely manner. While ensuring an average annual economic growth of five percent in the next 10 years, we must ensure high-quality and steady economic development, and we must never neglect medium – and long-term development goals for the sake of short-term economic growth.

Furthermore, our understanding is that if the Eurozone data stays roughly on expectations over the next two weeks, the ECB will most likely decide to tweak its PEPP purchases modestly downwards for the fourth quarter when the Governing Council meets next on Thursday, September 9.

Federal Reserve Chair Jerome Powell’s remarks will be viewed as the consensus view of the Board. Powell is slated to discuss the economic outlook and it is hard to imagine he could do so without shedding some light on the tapering discussion. Powell can firm up the view that tapering will occur in 2021 simply by reiterating the main themes of the most recent minutes and position the Board as more hawkish than the position elaborated by the most dovish members of the Board. This is my expectation.
Bottom Line: There will be a lot of tapering talk on the “virtual” sidelines at Jackson Hole. The weight of that talk will be on the hawkish side and lean toward tapering this year. Watch for that side, however, to follow Kaplan’s lead and offer additional caveats about the current Covid surge. What we are really looking for, however, is how closely Powell follows the positioning of the minutes and Clarida for evidence that the consensus on the Board is falling in line with a taper this year if Covid allows.

Second, the latest Covid wave is likely to hit Asia hard (low rates of vaccination will likely combine with the more transmittable Delta variant) and create a fresh series of supply shocks. See this, for example:

Nissan says its huge factory in Smyrna, Tennessee, will close for two weeks starting Monday due to computer chip shortages brought on by a coronavirus outbreak in Malaysia.

We are probably going to see more of these stories in the weeks ahead.

The Politburo’s over-arching directive for monetary policy is to ensure a balance of general money supply and social financing, to ensure the supply and price stability of bulk commodities, and to keep the country’s macro leverage ratio “basically stable.”
The meeting stressed the by now familiar, and slightly more dovish imperative that prudent monetary policy should maintain “reasonably ample” liquidity and support the continued recovery of small and medium-sized enterprises as well as stressed industries.
As to targets, sources indicate that new loans in H2 of 2021 will be guided to remain at or slightly above year-ago levels, and the People’s Bank of China will opt to use “low-profile tools” to quietly inject long-term liquidity.
The PBoC is also expected to cut the Reserve Requirement Ratio (RRR) for some financial institutions in a targeted way, but not to adjust (cut) the policy interest rate.

The ECB had agreed to commit to a symmetric inflation “aim” of around 2% already in 2019 under then-President Mario Draghi, even while its formal target has remained a slightly lower, and more unwieldy, “close to, but below 2%.” But the codification of this symmetric 2% goal into a formal inflation target is still significant, and indeed, ECB President Christine Lagarde proudly flagged the upcoming July 22 Governing Council as one worth watching in that it will be now incorporating the new ECB target into its forward guidance on interest rates.

In the process, Lagarde may have been perhaps raising expectations for changes to policy as well.

** On forward guidance, the Governing Council will need to change its current commitment to keeping interest rates “at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 percent within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics” to reflect the new 2% symmetric target, and the desire to hit that target on a “sustainable” basis.

** But on a pragmatic level, rate hike expectations are already more or less flat until 2024, and so an argument can be made that the ECB commitment to keeping rates at the current -0.5% is already more than baked into markets.

Fedspeak picks back up a bit this week. The highlight will be Chair Jerome Powell’s Monetary Policy Report testimony at the House (Wednesday) and Senate (Thursday). I expect Powell will lean on a generally dovish story that commits to sustained policy accommodation even as he opens the door for tapering later this year.

The People’s Bank of China announced on Friday a cut in its Reserve Requirement Ratio (RRR) of 50 basis points for eligible financial institutions starting on July 15 to support the real economy.
As had been picked up in the press, Premier Li Keqiang at a State Council executive meeting on Wednesday called for a timely cut to the RRR for banks to support the real economy, but he also warned officials to avoid “flood-like stimulus” and to keep monetary policy stable.
After the meeting, China’s top financial officials met and decided to announce an RRR cut of 50 basis points on Friday. The message Beijing is now seeking to convey is that the move does not mean that China’s economic growth has lost momentum, and indeed one of these officials states that he is sure that China’s GDP will keep above 8% year on year in Q2.

Didi’s decision to go public in the US was made without consulting the Cyberspace Administration of China and the Ministry of Public Security and does not conform to the position of the Central government. Even if Didi continues to list in the US, its domestic business will suffer a huge contraction. As far as I know, about 20 central ministries and commissions, including the PBoC and CBIRC, have decided in the last two days to ban their staff from using Didi during official duties. If Ant group’s plans to list in Hong Kong and Shanghai were just a mistake, Didi’s IPO is [an] extremely black deed.

Altogether this argues for the dots to edge higher in 2022 and 2023 such that the median FOMC participant anticipates a rate hike in 2023. I think any reasonable forecast likely has the economy meeting the Fed’s employment and inflation objectives as early as the end of 2022 and as such it doesn’t seem particularly credible within the context of the new framework to not expect a rate hike in 2023.

*** Our understanding is that at a State Council Executive Meeting held in Zhongnanhai on Wednesday morning, Beijing time, Premier Li Keqiang said that while China now imposes a 25 percent general corporate tax rate (with exemptions for a few industries such as semiconductors), which is higher than the proposed minimum global corporate tax rate, we (China) are inclined to endorse the G7’s minimum global corporate tax deal at the G20 Finance Ministers and Central Bank Governors Meeting that will be held in Venice on July 9-10th. ***

...The EU and US will also commit to putting an end before July 11 to the long -standing conflict over aircraft subsidies in the Boeing-Airbus wars, and in doing so will prevent an escalation of the retaliatory measures that the EU has warned it could impose under WTO rulings should there be no deal by that date...

...The Russia Nord Stream Angle

Biden seems to have won Berlin over into a more robust stance against China in large part through bribery — by giving up on his initial promise to block the completion of the Nord Stream 2 gas pipeline that is set to provide cheap Russian gas to Germany.

Controversial in both the US and EU, the government of Chancellor Angela Merkel had been fighting tooth and nail to complete that project, over objections that the pipeline will increase Europe’s dependence on fossil fuels, on Russia for energy supplies, with all the security implications involved, and in the process weaken Ukraine as a transit country for the existing Russian gas pipeline.

China’s retaliatory measures against EU officials over criticism of its human rights, which led to the suspension of the EU-China Comprehensive Agreement on Investment in the European Parliament, did help to play into US hands – indeed, even before swearing in on January 20, 2021, the incoming Biden administration had sent informal signals to the EU in late 2020 to refrain from signing the CAI before consulting with the US.

There is some speculation now that Biden will also use the dropping of White House opposition to the Nord Stream 2 pipeline when he meets on Wednesday in Geneva with Russia’s President Vladimir Putin as a reminder of America’s clout and of potential rewards that could come to Russia through better relations with the US.

While the Nord Stream compromise might serve on the margins to soften an otherwise ice-cold bilateral relationship between Moscow and Washington, whether it does much more than that will remain to be seen.

** In addition to a global minimum tax, and indeed as a condition of that agreement with the United States, the G7 also struck a deal on the even thornier issue of a cross-border digital tax, agreeing in its communique that the largest and most profitable multinational digital firms [read Google, Amazon, Facebook, Apple, Microsoft, etc.] will have to pay [some] tax in the countries where they operate, not just in their tax-based domiciles.

The G7 will commit to “properly embed” climate change and biodiversity loss in economic policymaking and will use carbon pricing as a policy lever. Central banks, and supervisory agencies, are to treat risks posed by climate change as financial risks.

The G7 will agree that the global financing system needs to be “greened” to better price climate risks and will call for mandatory climate related financial disclosures from companies to help markets value shares accordingly.

To avoid many different standards around the world for what constitutes a “green” or “sustainable” investment, the G7 will pledge to work among themselves and with other international partners towards one common line.

The meeting warned of shocks overseas, and sought to deal with imported inflation, and to enhance expectations management with well-prepared policies. We noted that much more aggressive fiscal stimulus and strong economic recovery expectations in the US have resulted in rising inflation and have boosted global asset prices, triggered more capital flows to the US from emerging markets, and increased debt risks in emerging economies. We should pay attention to the changes in monetary policy in emerging economies, which may result in a short-term impact on our financial system.

Liu He’s Opening Comments:
The extraordinary quantitative easing and huge stimulus package of the US are creating a new round of global inflation and asset bubbles, which are likely to cause sharp turmoil in global financial markets over the rest of the year. If that is so, it will have a negative impact on China’s economic growth, as well as on the RMB (renminbi), domestic stock, and bond markets.
I therefore decided to hold the FSDC meeting [to deliver] a strong warning. The most important topic of the meeting is to strengthen risk management and prevent financial risks. We have made risk management a priority for the financial services industry and the country. It will help reduce or avoid negative outcomes while building a solid foundation for rapid and continued growth.

Lest there be any questions as to the seriousness of Beijing’s efforts and its intentions, a very senior official source had this to say after the ban:
There is no doubt that this time we have cracked down on encrypted virtual currency more severely than in September 2019, and the price of virtual currency will be hit even harder than last time. We must provide an absolutely safe financial environment for the pilot and promotion of the digital RMB in China [our emphasis added].