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, CNBC reported.
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.
“Given, the Covid-19 crisis, how China handled the early stages of it and now the imposition of the national security law on Hong Kong, it’s really difficult to see how the U.S. and the West and China can get back to normal,” said Jimmy Chang, chief investment strategist at Rockefeller Asset Management. “The decoupling will only gain momentum in the coming year, unless there are major policy shifts within China. At this point, it doesn’t look likely.”
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 Beijing vowed to retaliate unless the U.S. rescinded the order to close the consulate.
Chang argues that investors should be paying even more attention to the unraveling relationship between Washington and Beijing. He said they instead are focusing on how world markets are benefiting from massive fiscal and monetary stimulus. The resulting relocation of supply chains and shifting trade patterns could have significant impact on some companies and economies.
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%.
In its second-half outlook, BlackRock said the pandemic is fueling dynamics between the U.S. and China that were already underway.
The “rivalry looks set to affect nearly every dimension of the U.S.-China relationship — regardless of the U.S. election outcome,” the firm said. “Other countries will increasingly be pushed to choose sides. Decoupling is focused on — but not limited to — the technology sector. This means investors need exposure to both markets, especially as the center of gravity of global growth is moving to Asia.”
The markets for the most part have looked past the tension, but there could be periods of unease that could create headwinds.
“I think you only need to roll back the clock 12 months to a moment when these kinds of pronounced frictions between the U.S. and China, particularly around escalating trade disputes, had a real impact on risk-on risk-off sentiment,” said Mike Pyle, BlackRock’s global chief investment strategist.
Pyle said there were recent signs of that when Secretary of State Mike Pompeo took action to decertify Hong Kong’s status as separate from China and deny visas to some Chinese nationals.
Asian equities responded to that as well as to the U.K.’s recent announcement that it would ban Huawei from its 5G network. The U.K. followed the lead of the U.S., which has cracked down on the Chinese telecom giant and restricted access to U.S. suppliers because of allegations of cyber espionage.
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