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"US - China: Danger of Autumn fall"
What to do when a pandemic has shredded your re-election pitch? Around September is the time for markets to fear the ‘wrong’ answer.
- As with all episodes of escalating US-China tensions, investors must form a view on the risk of the present flare-up triggering a chain reaction or melt down, whatever the conscious intentions of the main actors.
- Last week’s Hong Kong crisis is the exception proving the rule that the protagonist of this overall escalation episode is, once again, Donald Trump – driven now by the imperative of re-modelling his ‘strong economy’ re-election pitch that has been shredded by the pandemic.
- The key to the risks in the present US-China escalation lies, therefore, in the US presidential election; and the period of peak danger will coincide with the height of the election campaign after Labor Day.
- Before assessing that danger, it is worth noting in passing how this episode highlights once again a secular business and investment risk: Trump’s electorally-motivated China bashing has reignited the underlying US superpower competition impulse that is complicated, unlike the original Cold War, by intermeshed economies.
- Returning to the present tensions, there are some reasons to be sanguine: Trump still cares about the ‘Phase One’ trade deal, and Chinese tactical reactions for now remain carefully calibrated, as seen in the management of the recent RMB slide against the US dollar – with ‘wolf diplomacy’ so far kept away from the US itself and deployed instead against US allies (Australia, Canada, potentially the UK in the present Hong Kong fall-out).
- The dual trigger for more serious trouble would be Trump perceiving a heightened risk of election defeat and a material deviation in the path of economic recovery. He might then double down by dialing up confrontation with China.