Strategy Note /

US-China: an ugly turn at a bad time

  • US-China friction: eg coronavirus name and origin, journalist expulsions, Taiwan jets, Kudlow on US corporate relocation

  • Risks increase for Phase 1 trade deal, Hong Kong, credibility of China virus data, and, ultimately, a drift to cold war

  • Risks (proxy conflict) and opportunities (competing capital inflow) for EM caught in the middle

US-China: an ugly turn at a bad time
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
18 March 2020
Published byTellimer Research

Escalating tensions at a time that calls for cooperation; the cold war end-game

Tensions between the US and China have clearly escalated in recent days: the 17 March effective expulsion of leading US journalists from China (and Hong Kong), which follows US restrictions on Chinese journalists earlier this month, is merely one example. In the context of the global coronavirus crisis, during which one would expect such geopolitical tensions to moderate, this increased friction is noteworthy and concerning. 

The end game for this trajectory of events is a full-blown cold war between the US and China, with, for example, the abandonment of phase one of the trade deal, US corporate relocation from China back home, further erosion of the "one country, two systems" constitutional principle for Hong Kong, more territorial challenges in the South China Sea among the staging posts on this path. 

For countries caught in the middle, which include all of the emerging markets, the implications are mixed: on the one hand, steady-state global growth (trade) falls in the event of sustained US-China friction and, on the other, that rivalry may create a competitive tension in flow of capital into or trade access for these countries (as components in the strategy of these global powers to build geopolitical allies).

It may be premature to consider such an extrapolation and the pressures for more global cooperation may prevail but, either way, the sense is building that so many aspects of the world will not simply revert back to how they were prior to the coronavirus. 

Risk of less confidence in China's coronavirus data

A separate risk resulting from the specific measure of expelling journalists from some of the most followed newspapers in the US is that foreign investors start to cast greater doubt the veracity of data from China on the number of coronavirus infections, recoveries and deaths. This would have repercussions for estimates of the length of global disruption related to the virus. 

Given the context of the coronavirus crisis, this is more than mere mud-slinging

  • US and China tit-for-tat effective expulsion of journalists;
  • US President Trump's pointed reference to the "Chinese virus";
  • US national security adviser O'Brien criticising China for suppressing coronavirus data;
  • US economic adviser Kudlow's comment that US firms may receive tax write-offs for expenses related to relocation back to the US from China;
  • Taiwan air force jets scrambled to warn of Chinese counterparts;
  • China foreign ministry spokesperson Zhao questioning if the US was the origin of the virus;
  • Serbia president's highly critical remarks on the EU and complimentary ones on China;
  • China's very public show of international medical assistance to countries where there is a sense of disappointment with international efforts (e.g. Iran, Italy, Spain) or where the coronavirus has presented China with an opportunity to reaffirm close relations (e.g. Ethiopia, Namibia).