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The new US China tensions in focus

30 March 2021

We have already been here and done this before, as the US Sino trade war has started years back and the stock markets and investors have already checked the subject. Yet as the matter seems to be returning to the spotlight, its importance and risk is even more evident in our view, with possibly more retaliation and tensions to follow. Through this report we will look into the economic circumstances in the US and in China but also overview the reasons behind the US Sino tensions and the potential impact on the financial markets.First, we must note that the matter has made significant headlines at a crucial point when both the largest economies of the world are seeing economic recovery taking place. 

However, in the past weeks the media has highlighted the subject even further after the two sides met in Alaska but did not agree on specific matters.

Economically speaking, the US as at the moment is making fast steps into economic recovery since the pandemic broke out and devastated its economy. Its employment market has improved substantially, after considerable amounts of liquidity has been thrown into the economy as a form of fiscal stimulus and monetary policy. The improvement maybe a result of the fact that the US is speeding up its vaccination program and the economic confidence may have been uplifted tremendously.

On the other hand, China was the only economy globally to finish in green territory in 2020 with its GDP being in the positive. According to various sources China has set a GDP target above 6% for the current year, which again points to economic expansion. Also according to Premier Li Keqiang the achievements of the previous year for China despite economic recovery where bringing emissions lower, investing in innovation and improving a worsening demographic outlook. 

Even though both economies have come a long way since the pandemic hit in their countries, they still have a long way to go and will require much more support from central banks but also governments to return to pre pandemic levels, in our opinion.

From a different perspective, the geopolitical tensions between them were mostly quiet during the pandemic until January 2021 when the U.S. and China signed a 2020 accord to end the trade war. The new deal aimed at easing the tensions between the two sides as the impact from the trade wars in the past years had hurt global growth while the main objective was never reached. Despite the new document being signed, the U.S. tariffs on about $370 billion in Chinese goods, are still in play. Yet as the pandemic is slowly wearing off and the new Biden administration has taken over, the matter is again in the epicenter and the two sides are finding reasons to clearly step on each other’s feet. Some analysts believe that China is more interested to find a solution more than ever at this point, as some U.S. companies have turned to alternative sources for purchases just like Vietnam, Mexico and other countries. This could impact China’s economic performance as the US is one of the largest and demanding markets in the world that could bring in the equivalent of massive revenues for the Mainland.

Furthermore, some of the latest comments of US President Joe Biden were aimed at China and he made it clear that China will have to obey rules as he specifically referred to actions in the North Chinese Sea.

This is evidence that the US continues to be tailing China on its attempts to expand geopolitically with military operations.Yet, the latest blow to the US Sino relationships was the announcement of new sanctions on China by the US, EU, UK and Canada over alleged mistreatment of Uyghur Muslims. This move ignited a storm of resentment from the Chinese and in a coordinated move that sparked an immediate retaliation from Beijing. But the main idea here is that other global powers from around the world are grouping up against China, which tends to enlarge the matter even more. On the other hand, after a few days of the sanctions by Western countries, the Chinese Mainland signed a 25-year agreement with Iran.

It is said that the co-operation consists of sectors like energy, petrochemicals, nuclear power, high-tech and military sectors as well as maritime projects to promote Iran’s role in China’s Belt and Road Initiative, as per the Financial Times. This is not new to us, as China and Iran have always been cooperating and on good terms.

Yet after the latest agreement, it could be said that Iran will officially be assisting China on its expansionary plans. Iran is considered by many a thorn for the US that has been trying to control Tehran for the past decades with sanctions.China’s strategic approach to use Iran as a way to expand and investment may not be seen with a positive view by the European and the US possibly making the tensions even worse. Also another move by China that seems to be adding to the fire is its approach to Hong Kong and its governance. In the past week, Beijing suggested legislation that would strengthen its authority in Hong Kong. These changes relate to the electoral committee that chooses the city's leader, as the Chinese are not willing to have leaders oppose their decisions.

Back in 2019 Hong Kong was battered with internal tensions as the locals demonstrated against Chinese authorities requests.As a conclusion and a final note on all the above, we do not see any side between the US and China backing down in the following year.

As of the damage suffered from the pandemic we see both countries have a lot more room to improve and this is something they will both be capitalizing on in the following months. Also we see both the countries uplifting their operations and competing with each other to the point where both can grow financially and even surpass expectations. We believe the USD could be among the most volatile and influential instruments with precious metals like Gold and Silver becoming more expensive as economies are seemingly willing to take more risk to support their populations.

We do not see the two sides engaging in actions of war unless an emergency breaks out. But, the competition as such could even lift the US and the Chinese stock markets higher, as the competition could force them to work more efficiently. Finally the economic circumstances at the moment make things easier for economies with liquidity being in excess. Finally, market participants are more interested on who will dominate the global economic scene in the present and future. At the moment the US seems to be ahead however the Chinese are picking up.



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