Earlier today, Rabobank’s Micheal Every lamented that “One Day The Main Story Will Not Be US-China Relations… But Today Is Not That Day.” And with the US now commencing a lockout of Chinese telecom giant Huawei, with Beijing vowing to retaliate against Boeing, Qualcomm and Apple, tomorrow isn’t looking good either, nor the next day, or the day after. In fact, it is safe to say that the increasingly belligerent rhetoric – and deeds – between the US and China will continue to escalate until the Nov 3 election, and potentially beyond it.
There is a very simple reason for that: in a nation that seems impossibly divided on most issues and is ideologically polarized more than ever in history, China is the one thing that more than two-thirds of Americans can agree on, and they agree that they simply do not like China.
Commenting on the chart above, Goldman says that the bank sees risk of “further bilateral disputes ahead, especially as the coronavirus pandemic and low energy prices may make it more difficult for China to meet the trade deal’s $200bn purchase agreement.”
At the same time, Goldman also believes the upcoming US presidential election, “coupled with deteriorating sentiment towards China among Americans, will make it harder for US policymakers to strike a conciliatory tone on China.”
Indeed, as the chart above shows, Americans’ views toward China have worsened significantly in recent years, with the percent holding an “unfavorable” view of China reaching an all-time high in the latest Gallup survey. In fact, if there is one thing that still unites both Republicans and Democrats, it is their shared hatred of China, which of course is music to Trump’s ears as he keeps escalating tensions with Beijing into November.
Taken together, Goldman thinks that “the risk of tariff concerns re-escalating cannot be ruled out, and the risk of
non-tariff action has risen.”
And while the bank estimates that potential trade tensions have not been a significant driver of China-related assets, and coronavirus developments will likely continue to be the more meaningful determinant of risk appetite, Goldman expects “US-China tensions to increasingly come into focus as we head towards US elections in November, presenting downside market risk and the potential for an abrupt shift in near-term valuations.”
As such, the former central bank incubator (and current subprime lender) recommends that investors consider adding hedges for this risk through USD longs versus CNH, especially as we find that the CNY has tended to depreciate against the Dollar when new tariffs are announced, which may be because the currency acts as a direct offset to tariffs.