Read Time: 6 mins
Chris Kushlis, Fixed Income Sovereign Analyst,
How rising US-China tensions could unsettle markets.
For financial markets, the trade deal collapsing poses the biggest danger
Here we highlight five key areas investors need to watch over the coming months.
President Trump has threatened to walk away from the trade deal signed in January, leading officials in China to threaten the same. The risks of the deal breaking have clearly risen. Let’s not forget that the trade deal’s biggest achievement was putting a restraint on further tariff escalation. Therefore, in the scenario where the truce doesn’t hold and the US walks away first, it’s possible that existing tariffs on
imported goods will be raised further. In response, China might decide to weaken the renminbi. For financial markets, the trade deal collapsing poses the biggest danger.
Technology is an area of great competition between the two countries.
Technology is an area of great competition between the two countries. While the US seeks to maintain its position as a leader in technology with less reliance on China in the supply chain, China is striving to become more self-sufficient and a future tech powerhouse. The recent step-up in tensions on this front is related to Chinese telecommunications giant Huawei Technologies. Last month, the US announced tighter restrictions on the ability of Huawei to use US technology or software design in the manufacture of its semiconductors outside the US.
The new rules, which are scheduled to come into effect this September, will apply some pressure, but it’s unlikely that the US Commerce Department will make them so tight as to be highly disruptive. China’s options to retaliate on tech in the near term are limited. Medium term, the goal is self-reliance, and China’s government continues to invest in building an indigenous chip capacity that can compete at the frontiers of tech.
There have been a few developments on this front lately. Of particular note was the US Senate passing a bill that could stop some Chinese companies from listing shares on US stock exchanges unless they adhere to certain US accounting regulations, such as for audits. This has the potential to affect some of China’s tech giants, although they could shift their listings to other places, such as Hong Kong. The bills also currently propose that any delisting would not happen until 2025 (or that there would be a three-year grace period for China to reach agreement on compliance with the regulations), so companies would have time to relocate listings or put in place the measures needed to comply.
Separately, the US Federal Retirement Thrift Investment Board, which manages government retirement funds, walked away from plans to invest in Chinese stocks this year following heavy pressure from the Trump administration. This is a symbolic move, but it is not expected to have a significant immediate financial impact on China. What could be more meaningful is if other public pension plans at the state and local levels in the US also come under pressure to exclude Chinese securities. So far this doesn’t appear to be the case, but it’s important to monitor.
Congress is considering a number of anti-China bills that cover a wide range of topics, including a coronavirus responsibility act, stripping China of sovereign immunity against lawsuits, and new bills on Xinjiang and Tibet, as well as others. Here, it’s important to watch whether bills that pass make punitive actions mandatory or allow the executive latitude to decide how to impose any penalties.
Here it’s important to monitor developments in Hong Kong, Taiwan, and South China Sea. What has garnered a lot of attention recently is Hong Kong. In response to China proposing to move ahead with a national security law for the territory, the US announced that it no longer considers Hong Kong autonomous from China. As a result, the US could impose a range of measures, including targeting sanctions on Chinese officials and removing Hong Kong’s special trading status. As Hong Kong’s exports are relatively small, the latter is manageable.
The stakes turn higher if the activities and movement of top-level officials are targeted or if sanctions are imposed on Chinese financial firms. Indications are that the measures won’t go that far, which is encouraging.
In the South China Sea, the US continues to push its naval patrols while China continues to build its presence and target ships from other countries. These naval maneuvers have not led to any major incidents, though the possibility cannot be discounted.
With respect to Taiwan, the US continues to support the government in a high-profile way. Most of these acts are symbolic but in a way that appears to edge toward treating Taiwan as de facto independent, which is a clear red line for China. The current Taiwanese government, while advocating for independence as a long-term goal, is not inclined to escalate the situation right now with any such declaration.
Monitoring these five factors will be important as the US election campaign intensifies over the coming weeks and months. Further escalation and deterioration in any of these areas has the potential to impact investor sentiment and ignite volatility in financial markets.
Sign up for US Equity insights from T. Rowe Price
Share this article:
You might be interested in…
See our comprehensive range of US equity funds
This site is intended for financial intermediaries in the United Kingdom. I have read the terms detailed below and confirm that I am a financial intermediary and that I wish to proceed. By accessing this website, you consent to T. Rowe Price collecting information by way of cookies.
Information contained in the T. Rowe Price website is not intended for investors in any jurisdiction in which distribution or purchase is not authorised, including the jurisdiction of the reader of this information, where applicable. For example, the information herein is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of United States persons.
Information obtained from this site is intended specifically for the individuals who have agreed to these Terms and Conditions and may not be redistributed without prior consent from the T. Rowe Price Legal department.
The information is designed for professional investors, including financial intermediaries or members of the media, and is published for informational purposes only. In particular, the information is directed at only informing persons falling within one or more of the following categories:
(a) A government;
(b) A bank or insurance company;
(c) A pension fund or charity;
(d) Persons whose ordinary activities involve them, as principal or as agent, in acquiring, holding, managing or disposing of investments for the purposes of a business carried on by them or whom it is reasonable to expect will, acquire, manage or dispose of investments for the purpose of such a business;
(e) Persons whose ordinary business involves the giving of advice, which may lead to another person acquiring or disposing of an investment or refraining from so doing;
(f) Representatives of the media for corporate and background information about T. Rowe Price.
Persons who do not fall into one of the above categories should not act upon the information contained herein.
Certain persons may have access to information regarding the T. Rowe Price Funds SICAV, an investment company incorporated as “Société d’Investissement à Capital Variable” (‘SICAV’) under the laws of Luxembourg and the T. Rowe Price Funds OEIC, an open-ended investment company (‘OEIC’) incorporated in England and Wales. The sub-funds referred to on the site are only offered by the current prospectus. The prospectus contains more complete information about the sub-funds, including investment objectives, charges and expenses. However, the prospectus and other information relating to the sub-funds will not be intentionally distributed to persons in any country where such distribution would be contrary to local law or regulation.
Past performance is not a guide to future performance. The value of securities and any income generated from them might decrease as well as increase. Changes in rates of exchange may also have an adverse effect on the value, price or income of securities. Investors should also be aware of the additional risks associated with investments in emerging markets, high yield securities and smaller companies.
This information herein does not constitute investment advice and the products described may not be available to or suitable for all investors. You should consider, if appropriate, obtaining independent professional advice before making an investment decision.
Unless otherwise noted, the content appearing in this Section of the T. Rowe Price website has been issued by T. Rowe Price International Ltd, 60 Queen Victoria Street, London EC4N 4TZ, which is authorised and regulated by the U.K. Financial Conduct Authority with the reference number 194667.