The world could be moving to a bifurcated economic system centred around the United States and China – including separate capital markets – within the next decade, according to Yves Bonzon, the chief investment officer of Swiss private bank Julius Baer.
The Trump administration has reportedly been discussing limiting financial investments between the two countries and a potential delisting of Chinese companies on US stock exchanges until Beijing agrees to reforms, a concept raised by former Trump adviser Steve Bannon earlier this year.
The US Treasury denied last week there were plans to stop Chinese companies from listing in the US, a denial that was echoed by Trump’s chief economic adviser Larry Kudlow who said on Tuesday that delisting of Chinese firms was “not on the table”. Kudlow said the administration was instead exploring protections for US investors in China.
The ongoing trade war between the two countries could result in a “bipolar world” by 2030 with decoupled Chinese and US economic and financial cycles, as well as separate technology ecosystems, Bonzon said.
“The fundamental beta of the two markets will therefore be independent,” Bonzon said. “This will be the greater return of international diversification. Owning both China and US assets will led to a more robust portfolio than holding one or the other.”
The US and China have been embroiled in a trade war for more than a year, during which the world’s two biggest economies have placed tariffs on hundreds of billions of each other’s goods. Trump is trying to use tariffs and other tactics, such as blacklisting of some Chinese companies, to force Beijing to change decades of industrial and trade policy.
A delegation led by Chinese Vice-Premier Liu He is in Washington this week to continue trade negotiations, but hopes are not high that a deal can be struck to end tensions that have weighed on global trade and caused businesses to delay future investment because of uncertainty over future trade policy. The International Monetary Fund said this week that the trade war could cost the global economy US$700 billion by 2020.
In April, a bipartisan group of more than three dozen US congressmen and senators, including US Sen. Marco Rubio, called for stricter disclosure requirements for Chinese companies. Rubio has since sponsored a bill proposing that Chinese firms and other companies that decline to open their audits to US regulators be delisted.
If the Trump administration were to restrict Chinese listings, one question is whether the Hong Kong stock market would be the most likely home if Chinese companies were to move their listings from the US.
Chinese e-commerce giant Alibaba Group Holding - the parent of South China Morning Post - is exploring a secondary listing in Hong Kong estimated at US$10 billion, while Semiconductor Manufacturing International Corp. (SMIC), China’s biggest chip maker announced in May it planned to delist from the New York Stock Exchange.
“It is not clear that Hong Kong would be the most likely beneficiary,” said Steven G. Cochrane, chief Asia-Pacific economist at Moody’s Analytics. “It is possible London would be more of a beneficiary as Chinese companies are looking to tap global investors already familiar with the London exchange. Second, Hong Kong does have some advantages over markets in mainland China as investors may feel more secure with the open and transparent legal structure of Hong Kong. But some trends suggest that Hong Kong may struggle to remain a location of choice for China-related investments.”
The number of Chinese firms seeking initial public offerings (IPOs) in Hong Kong have been declining in the past 18 months, Cochrane said, citing data from the Hong Kong Securities and Futures Commission.
While he doubts the likelihood of the Trump administration cutting off Chinese companies from US capital markets, Cochrane said such a move could contribute to the “eventual decoupling” of the two economies, particularly if accompanied with continued high tariffs on each other’s goods.
“When economies reduce trade and protect industries and markets at home, inefficiencies arise as capital and production shift to locations with less comparative advantage, due to differential costs of labour, intermediate goods or transport services,” Cochrane said.
“As costs rise, demand for goods and services is reduced, which slows the pace of overall growth in the economy. When there is reduced competition, there is less incentive to innovate and improve efficiencies, which means that productivity growth will slow, further reducing the pace of economic growth. Undoubtedly there would be winners and losers across industries but the net effect would be to hinder income growth and overall economic growth in the US, in China, and globally,” Cochrane said.
The trade dispute, combined with actions such as potentially restricting Chinese access to US markets, could work against the Trump administration’s goals – notably by increasing the acceptance of the yuan as a global reserve currency, Bonzon said.
“This is another chapter in abusing the position of the dollar, weaponising the dollar,” Bonzon said. “Ultimately, this will lead to the demise of the dollar privilege and the role of the US currency as the only global reserve currency. They are slowly, but surely cutting the branch on which they’re sitting.”
Given the growing bipartisan support among American politicians to contain China, the US is not likely to change its tone dramatically even if Trump is not re-elected in 2020 as US president, Bonzon said.
“I think the train has left the station,” Bonzon said.
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