Why the Balloon Was a Disaster for China

THE ISSUE OF CHINESE SPYING dominated Washington this weekend, with enough hot air to inflate a balloon. There was the usual political bickering but the most intriguing angle was whether this incident reflects instability in Beijing.

CHINA WAS EXPECTED TO LAUNCH a charm offensive in 2023, in an effort to soften its image as a secretive bully. Now it will take many months to get Beijing-Washington relations back on track.

THE BUZZ IN DIPLOMATIC CIRCLES was that Xi Jinping and his top aides may have been blindsided by the balloon; there are so many Chinese espionage operations that this one may not have attracted much attention initially.

THE FINANCIAL TIMES REPORTED THIS WEEKEND THAT “The Chinese were caught off guard and didn’t have a story yet. We made clear that we knew exactly what was going on and needed rapid actions … It took them much longer than necessary to get back to us” as China changed its story frequently.

THIS RAISES A TROUBLING ISSUE: Are factions within the Communist Party power structure trying to undermine the president? The very well plugged-in David Ignatius of the Washington Post reports that “Intelligence analysts are considering the possibility that the Chinese military or hard-line elements within the leadership deliberately sought to sabotage the Blinken visit.”

IF THAT’S THE CASE, THE BALLOON HAS BEEN A DISASTER FOR CHINA: Beijing will be on the defensive as talks resume about an eventual Blinken visit, and there’s a virtually unanimous opinion in Washington that sanctions won’t be lifted — they may even be strengthened.

THE INCREDIBLE JOBS REPORT last Friday has two major implications: First, it points to at least another couple of 25 basis point rate hikes, and it demolishes the argument that the Fed might be easing by fall.

SECOND, IT GIVES JOE BIDEN an opportunity to boast tomorrow night in his State of the Union address. Many Democrats are still lukewarm about Biden running again, but we defer to James Carville, who famously said “it’s the economy, stupid.” The economy is quite strong, and Biden will take credit.

Related: Republicans Flirt With a Very Risky Issue: Cutting Social Security

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.