Market Overview

China tensions escalate toward new cold war

The growing divide between China and the U.S. is expected to accelerate, disrupting long-running economic ties and forcing investors to reassess their view of global markets. Tensions escalated this week after the U.S. claimed two Chinese hackers were targeting American companies working on virus research and were stealing information from companies around the world, both for profit and on behalf of the Chinese government. Then, the U.S. ordered the shutdown of China’s Houston consulate, claiming it was a necessary step to protect intellectual property and the data of private citizens.

Wall Street firms have been examining the implications of the reversal of a decades-long effort to form a more symbiotic relationship between the world’s two largest economies. One consistent view is the world will be far more polarized, with economies and companies gravitating toward either a Chinese or an American orbit.

The latest friction nevertheless had little market impact as major averages opened slightly higher Wednesday. Beijing vowed to retaliate unless the U.S. rescinded the order to close the consulate. Longtime market bull Ed Yardeni warns that in addition to the coronavirus, the deteriorating relationship is one reason why he sees the potential for a market pullback of more than 20%.

Analysts expect to hear more anti-China rhetoric as the November presidential election gets closer. The Trump administration’s actions against China are also likely to mount.

“On one hand, they want China to buy agricultural goods, but on the other hand, it’s very effective making China the target,” said Jimmy Chang, chief investment strategist at Rockefeller Asset Management. “You will see both parties coming up with anti-China positions as a way to win votes. I do think there’s a bipartisan consensus to get tougher on China. I do anticipate after the election things will move at a faster pace.”

Chang said that from the Chinese perspective, being tough on the West could play well at home. Neither side is likely to reverse course. At a symposium Tuesday, China President Xi Jinping vowed to continue strengthening China’s domestic market while further opening to foreign investors. Xi was quoted as saying China was “on the right side of history” in its continued commitment to globalization, and he encouraged Chinese companies to expand operations overseas.

The fraying of the U.S.-Chinese relationship also intensifies the divide on national security issues The U.S. objects to China’s claim of dominance in the South China Sea, and Asian countries who benefit from trade with China also look to the U.S. as a counterbalancing force.

For U.S. companies selling goods in China, he said the government could make it more difficult in terms of tariffs or by creating a backlash against foreign products to favor domestic companies. A transition phase as companies shift their production is likely to have a mixed impact on companies.

Market risks are rising as US, China tensions escalate toward new cold war, CNBC, Jul 23

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