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US and China: The odd couple, decoupled

This article is originally published at https://www.euromoney.com/article/b1n39tw56vk8fs/us-and-china-the-odd-couple-decoupled

 

The US and China are growing apart by the day, and whether Trump or Biden is in the White House come January may make no difference. What does this mean for financial institutions everywhere?

 

In March 2001, America’s hawkish defence secretary Donald Rumsfeld handed a report to George W Bush. It urged the new US president to see not Russia but China as the primary threat, and to redeploy more military resources to Asia.

 

Doing so would have altered history, but that had other plans. The September 11 attacks redirected Washington’s gaze from Beijing to west Asia. Three months after that, China joined the World Trade Organization and began its rise to become a trading superpower.

 

For 15 years, relations between the two powers were mostly cordial. Then Donald Trump came to power.

 

By now, America’s 45th president’s act is a known quantity. There is a lot of huffing and puffing, but most of it is hot air.

 

Except when it comes to China.

 

On the campaign trail, Trump accused Beijing of currency manipulation, stealing intellectual property and being “neither an ally or a friend” to America.

 

After the election, he dialled up the narrative, appointing Peter Navarro, author of ‘Death by China’, as his trade adviser. Later, he installed secretary of state Mike Pompeo and commerce secretary Wilbur Ross, China hawks both.

 

A trade war followed, then sanctions. Washington imposed tariffs of $360 billion on Chinese goods; Beijing retaliated with $110 billion in tariffs on US products.

 

All of that, it seems, was just a warm-up.

 

Trump banned smartphone firm Huawei from buying US semiconductors; in August, the firm said it was running short of processor chips. He then slapped sanctions on officials in Hong Kong and Xinjiang.

 

Beijing scoffed, but its banks didn’t. Terrified of being cut out of the dollar-funded financial system, lenders including Bank of China and China Construction Bank (CCB) are reportedly weighing up whether to do business with the officials.

 

 

Continuous hits

 

And the hits keep coming. Over the summer, as Covid cases continued intermittently to spike, the White House zeroed in on the financial markets.

 

On August 6, the president’s working group on financial markets – a set of powerful US regulators – said firms might need to de-list from US bourses by January 2022 if they do not provide access to their audit papers.

 

China is the only nation named in the report, and it follows a host of accounting scandals involving US-listed mainland firms, including Luckin Coffee.

 

On August 19, the US state department told American colleges and universities to sell any holdings of Chinese securities in their endowments.

 

It said all endowments, whose total market value is more than $600 billion, had a “moral obligation and perhaps a fiduciary duty” to manage “clean investments and clean endowment funds”, a phrase it left vague – perhaps intentionally so.

 

There are some who dismiss this is as grandstanding, noting the rise in rhetoric in the lead-up to the Republican Party’s convention, taking place now.

 

But this ignores Trump’s record on China. He targets its frailties with laser precision. Beijing has to import high-end semiconductors, so he cuts off that source. China is more dependent on trade with the US than vice versa, so hits that, too.

 

The same is true with those sanctions. No bank, even one run by Beijing, wants to be unable to raise money and lend in US dollars. Until the renminbi is a strong international currency, that will also be an Achilles heels.

 

“The folks advising the White House on China are very smart,” says Tony Nash, a former adviser to think tanks in Washington and Beijing, and founder and CEO of Complete Intelligence, an artificial intelligence and data analytics platform. “The bumbling act is not the reality. These people really know where its pain points are.”

 

 

Future flux

 

The future is in a state of flux and impossible to know, but a few thoughts occur.

 

Some level of US-China decoupling is inevitable. Firms are relocating factories from China to southeast Asia. Japan has set aside $2.2 billion to aid re-shoring.

 

Whoever is in the White House on January 20, rapprochement is unlikely. Relations between the two will be chilly if it’s Joe Biden or frosty if it’s Trump.

 

More Chinese firms will list in Hong Kong and on Shanghai’s Nasdaq-style Star Market, but not all will abandon the US, which offers capital, specialist investors and a chance to get personal wealth far from Beijing’s prying eyes. On August 10, wealth management portal Lufax filed to raise up to $3 billion in a US IPO by year’s end.

 

Will the two countries financially decouple? That is far harder to answer. China will surely seek to make the RMB more globally relevant.

 

Trump may twist the arm of a few college endowments, but it is hard to see big institutional investors dumping their mainland holdings, experts say.

 

If anything, the financial rapport between the two is closer than ever. US investment banks are lining up to buy a majority stake in their China joint ventures. On Monday, China’s banking regulator, the CBIRC, approved a wealth management joint venture owned by BlackRock, CCB and Singapore’s Temasek.

 

Beijing, desperate for fresh sources of capital and for better capital markets, has a few options on the table.

 

“The brilliant move would be to open its stock markets completely to foreign investors,” says one US-based lawyer. “That would make the Nasdaq and NYSE less relevant, which is exactly what the Chinese want.”

 

Either way, after decades of bumping along in a relationship more co-dependent than harmonious, the world’s two great powers seem set to grow apart for good. Who knows if it’s what Trump wants, but it’s what he’s going to get.

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Podcasts

The Dow – Exxon out, Salesforce in

Dow Jones index booted out energy giant ExxonMobil and replaced it with Salesforce. What does it mean to the world economy? Will Tesla be added to the S&P 500 next? The Phase One deal trade went smoothly between China and the US — will conflict like in tech be resolved? And with the recent optimism on COVID-19 vaccines, will transport and hospitality recover and how soon? Our CEO and founder Tony Nash joins the BFM 89.9 team in Malaysia to share his outlooks on these issues and more on the global economy.

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/the-dow-exxon-out-salesforce-in on August 26, 2020.

 

BFM Description

 

Phase 1 US-China trade discussions, Salesforce displaces Exxon in the Dow Jones, Tesla’s fundamentals, and is it time to buy airlines? Tony also gets into his expectations from the Federal Reserve out of Jackson Hole this week.

 

Produced by: Mike Gong

 

Presented by: Roshan Kanesan, Noelle Lim

 

Show Notes

 

Noelle: The S&P 500 and the NASDAQ notched fresh highs. Facebook rallied after unveiling a series of tools designed to expand shopping on its social media platforms.

 

Roshan: The S&P was up 4%, The Nasdaq was up 0.8%. Only the Dow was down. It was down 0.2% and that’s the first day decline for the first time in four days. We take a look at Facebook was up a 3.5% actually overnight in Asia. The Nikkei was up 1.4%, Shanghai was down 0.4%,. Hong Kong was 1.3% and Singapore was up 0.8%. Malaysia, on the other hand, closed down 0.9% yesterday. So let’s take a look at how it open up later today.

 

But right now, we’re taking a look at global markets with Tony Nash, CEO of Complete Intelligence. Tony, thanks for taking the time to speak with us this morning. Discussions between the U.S. and China on their Phase One Deal, a trade deal went smoothly even as other tensions cement in the background. Is this a sign that other disputes, such as the tech conflict, can be worked out between the two nations?

 

Tony: I’m not necessarily sure it means the tech conflict can be worked out. I think it’s possible, but I think it’s more of a sign of the floods that happened in China and the ag supply needs that China has as a result of flooded crop land in China over the summer. There’s been something like $21 billion of economic damage done as a result of the floods. If you look at China’s commitments for US corn, soybeans, soy was up last week. They’re all up more than 100% on last year.

 

Noelle: Looking at the markets, Dow Jones Industrial Average, Exxon was booted out. Is this the beginning of the end for big oil majors or will energy companies catch a second wind as demand recovers?

 

Tony: I live in the town where ExxonMobil is headquartered, and I just don’t see an environment where ExxonMobil necessarily comes back into things like the Dow. Crude oil for the rest of the year, we see it, gradually grinding higher. In 2021, we see some supply issues which would push prices higher. But we’re not necessarily seeing equities like ExxonMobil all that appealing. ExxonMobil’s equity performance over the last four or five years has been terrible. You can’t really blame the Dow and the S&P for booting them out.

 

Roshan: Tony, let’s take a look at the whole replaced Exxon on the Dow Jones — Salesforce. Their stock rose about 3.5% overnight. Now, what’s your outlook on Salesforce?

 

Tony: Salesforce is a very interesting company. There are some client concerns about cost and kind of the necessity of sticking with Salesforce for so many activities. But I think as a shareholder, it’s positive. And the capability that Salesforce has is very good. So it seems like an appropriate add to the index.

 

Noelle: Do you think Tesla is likely to be added to the S&P 500?

 

Tony: It’s possible. I was just looking at the the PE ratio for Tesla. It’s over a thousand. It’s 1,047. You’re typically looking at maybe 15 to 20 or something like that, maybe expanding a bit more. It’s 1,047. Is it possible that Tesla started? Yes, but I think the volatility risk there is quite high. Just since August 11th, Tesla has gained about $700 per share. I think it’s great when it rises. Will it fall? I don’t know. I’m not necessarily calling that. But the volatility risk there is quite high for these indexes that like to be pretty stable industrial gauges.

 

Roshan: I think with those gains, no one wants to bet against Tesla at this point and or even chart the stock at this point. That’s why we’re talking about transport. This sort of airline shares seem to be trending upwards on the last few days based on news positive news around COVID-19 vaccines and treatments. But is it too early to be bullish in the transport sector?

 

Tony: It depends on how bullish you are. I see people saying that within four to six to eight months, there’s an expectation that things will be closer to normal. And I think part of the bullishness is people wanting to get in. There is not necessarily belief that monetary policy like central banks will reel in and will reduce their balance sheet. With this much money in the system and potentially more, it’s possible that, airlines might be something interesting as we get closer to normalization. Assuming that happens, I’m positive about that. Business in the States is slowly normalizing. Kids are slowly going back to school. The normal school year starts about this time. In some states like where I live, kids are going back to physical school, which is kind of a big change from the last six months. So we’re slowly starting to see normalization. And I’m optimistic about things like travel and hospitality.

 

Noelle: All eyes will probably be on what the Fed will cover on Thursday. What do you expect to be in their statements?

 

Tony: I hate to say this because everyone says that we’re kind of in uncharted territory. Right? It’s very cliche by now, but we are in danger of the US economy slowing. We’ve seen some of the initial excitement we saw in July and early August start to slow with jobs. The jobs numbers last week were over a million again. And so I think the Fed is worried because employment is one of their mandates.

 

We may see additional aggressive intervention by the Fed to make sure that the economy continues to come back. I think they have to be careful because it is an election year and they don’t want to be seen as being political. But I think the economic reality is that they have to. I think both the Fed and the Treasury, there are programs in the States like the Paycheck Protection Program, which helps small businesses get through the worst days of kind of COVID and that’s run out. And I think a lot of small businesses are really in trouble now because we haven’t seen things normalized. I think the Fed will come back with a bit more. I think the Treasury, once Congress is back in session, Treasury will come back with a bit more as well, support for individuals and for small businesses.

 

Roshan: All right, Tony, thank you so much for your time this morning. That was Tony Nash, CEO of Complete Intelligence, giving us his view on the inclusion of a Salesforce into the Dow Jones, among other things. Interesting times. I mean, Exxon, I think the Dow Jones is a price weighted index. So it does work differently from the S&P 500. But it is a milestone, right? It is. It is something to note the fact that Salesforce also is a very enterprise driven solution.

 

So that’s an interesting addition there. But Tesla. Tesla has been a very interesting stock to watch. I think it was what I was listening to a podcast yesterday about how even the shorts that still used to be a favorite among short sellers. And they’ve just I mean, if you are short seller of Tesla earlier this year, you would be deeply, deeply in the red at this point.

 

Noelle: Yeah. So I think that a lot of questions are whether it should be included in the S&P 500. Granted, the value of his stock has risen really significantly. I think questions about the quality of earnings, whether they can be sustained, you know, if the share price to frothy. So these are some questions that the committee will still need to confront. And I guess like what you know, what Tony’s saying at S&P 500 Committee, they will look for stability, right? They wouldn’t want to keep kicking out the stock in and out. So, yeah. So maybe, OK, set up. The Tesla may not be added.

 

Roshan: And of course, we’re all paying attention to what’s going to happen in Jackson Hole this weekend on the virtual Jackson Hole.