The Dow careened toward a substantial pullback on Tuesday after the Trump administration stunned Wall Street by escalating tensions with Beijing just days before Vice Premier Liu He will lead a delegation to Washington to resume trade negotiations.
As China schemes to narrow the scope of those trade talks, the White House appears to be retaliating by adding more Chinese companies to a government blacklist, along with moving forward with discussions about reducing access to Chines stocks in federal pension portfolios.
Dow Spirals Toward Triple-Digit Pullback
Wall Street’s major indices did not take those escalations in stride. The Dow Jones Industrial Average plunged 225.81 points or 0.85%, dropping the index to 26,252.21.
The S&P 500 dropped 23.49 points or 0.8% to 2,915.30. All 11 primary sectors reported declines, with financials, health, and industrials all sliding more than 1%.
The Nasdaq declined 55.50 points or 0.7% to 7,900.79.
New Trade War Escalations Pummel the Dow Jones
With US-China trade talks set to resume in just two days, the backdrop does not provide much encouragement to investors who would like to see officials make tangible progress toward a trade deal, and potentially even shake hands on another tariff truce.
The fleeting “goodwill” period is all but forgotten, and tensions will be high when Liu He sets foot in Washington on Thursday.
Already, China had sought to leverage the political damage from President Donald Trump’s impeachment fight to remove core US demands from the agenda and pressure the White House into signing a Beijing-friendly trade agreement.
Now, the Trump administration is striking back.
Trump Administration Widens Trade Blacklist
Reuters reports that the White House added eight Chinese companies and 20 public security bureaus to its trade blacklist, effectively barring them from purchasing components from US companies.
The expanded blacklist now includes several multibillion-dollar companies, including $42 billion video surveillance gear manufacturer Hikvision, $4.5 billion AI startup SenseTime, and $4 billion deep learning startup Megvii.
The Trump administration denied that the move was related to the trade war, instead touting it as retaliation for China’s “brutal suppression of ethnic minorities,” including the Uighurs, Kazakhs, and other Muslim minorities in China.
However, the timing of the announcement cannot be ignored, given that the administration’s blacklisting of Huawei has been a significant sticking point in trade war negotiations.
White House Moves to Reduce US Investment in China
Meanwhile, Bloomberg reports that the Trump administration is moving forward with discussions about adopting new policies to limit US capital flows into China, beginning with restricting the ability of government pension funds to invest in Chinese stocks.
Ugly start to the day:
1) White House zeroes in on limit to Chinese stocks in government pension funds
2) China halts #NBA broadcasts
3) China says “stay tuned'' for retaliation over US tech blacklist pic.twitter.com/xDs4uAR0z7
— Divya Balji (@divyabalji) October 8, 2019
Derided as “fake news” by administration officials less than two weeks ago, the White House has reportedly convened a policy-coordination committee to discuss the matter. Officials have also mulled regulations that would allow the government to limit the presence of Chinese stocks in indexes – and by extension, index funds.
Once again, the administration denies that the move is at all related to the trade war. Rather, National Economic Council Director Larry Kudlow alleged that the government is concerned about investor protection.
“What we’re looking at is U.S. investor protections, transparency and compliance with a number of laws,” Kudlow said Monday. “There’s been complaints by the stock exchanges about this, the SEC has heard complaints, so we’ve opened up a study group to take a look at it, but we’re very early in our deliberations.”
Kudlow denied that the White House has any plans to delist Chinese stocks from US exchanges, which is another controversial strategy officials have reportedly discussed.
China Vows to Retaliate, May Cut US Visit Short
Beijing has vowed to retaliate against Washington for those twin escalations, and according to the South China Morning Post, Chinese officials have severely tempered expectations for this week’s round of negotiations, the 13th since the trade war began in 2018.
One anonymous source even told the publication that China’s delegation has already discussed cutting the visit short, departing on Friday evening rather than Saturday morning. “There’s not much optimism,” the person said.
Judging by the Dow’s Tuesday plunge, there’s not much optimism on Wall Street either.
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