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Tuesday, September 14, 2021
A geopolitical struggle barely in the early stages, with big implications
At the height of former President Donald Trump’s trade war with China in 2019, I wrote about the hydra-headed controversies that were turning Sino-American flashpoints into an epochal fight for geopolitical dominance.
In short, there was a growing realization that tunnel vision over tariffs was obscuring paths in which the two world’s largest economies were heading toward a head-on collision rather than collaboration.
Fast forward to the present day, and the situation is arguably more grim than it was just two years ago. Superimposed against the larger narrative of COVID-19 (and for now, we’ll gingerly sidestep the radioactive topic of the virus’ origins), a revanchist Beijing is playing aggressive offense on multiple courts, and rattling markets in the process.
On Friday, an already jittery stock market took a leg lower after Bloomberg reported that the Biden administration was weighing a probe of Chinese subsidies. And on Monday, Alibaba (BABA) and electric vehicle stocks tumbled on reports of possible government intervention in both sectors.
And we haven’t even scratched the surface of a brewing controversy over Beijing cracking down on gaming in ways that may ricochet across electronic sports.
“We really are not even in the beginning stages of the [tech] crackdown,” Wolfpack Research founder and CIO Dan David told Yahoo Finance Live. “China is going back to a policy of total control, and they don’t want people having the kind of addiction to gaming that maybe we have here.”
Therein lies the rub, with Wall Street analysts like Deutsche Bank’s Alan Ruskin warning of China’s ability to make a “tenuous and twitchy” market even more volatile.
While stocks have taken bad news mostly in stride, Ruskin cautioned that widening U.S.-China policy divergences are a threat to global growth, and the ability of stocks to keep defying gravity.
According to the analyst, “the U.S. and China are the most important moving parts in the global risk equation, whether it be near-term cyclical or long-term structural forces. The U.S. is reaching a stage where it is becoming a less positive force for risk, while China shows no capacity, desire or willingness to take up the running.”
The wild card in all of this of course is the Delta variant, which is showing no signs of slowing. While most countries are slowly adapting to a pandemic that’s becoming endemic, China’s heavy-handed “zero COVID” approach is a threat to growth, and supply chains that are already disrupted to the point of rupturing all together.
Combined with amplifying fears that the Chinese economy is slowing, and you have a potentially toxic brew that investors could be forced to swallow — sooner rather than later.
“As long as vaccines continue to roll out and prove effective against COVID-19 and its variants through the fall, pandemic uncertainty will fade from market concerns and the volatile U.S.-China relationship will return to center stage,” wrote Christopher Smart, Barings Investment Institute’s chief global strategist, on Monday.
“The consequences for the world’s geopolitical balance remain far from certain, but at the very least markets can expect more drama from sanctions, tariffs and regulatory uncertainty,” he added.
Late Monday, Goldman Sachs issued a report exploring whether China was still "investable." The bank's analysts ultimately arrived at the view that recent events are "largely consistent with the goal of achieving sustainable and socially responsible growth, suggesting limited damage to China’s longer-term growth and investment prospects," regardless of the short-term impact.
Yet, that one of Wall Street's biggest names is even asking the question is quite telling. China's strong-arm tactics are putting Western companies on notice that the lucrative business detente they've enjoyed for decades may be in jeopardy.
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