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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

Economies are sputtering, which means trade war will intensify

Here’s another guesting of our founder and CEO Tony Nash in BFM Malaysia, talking about trade war between US and China. Can these two countries actually decouple? Or is the current supply chain too dependent to do that? Can the economy have the V-shaped recovery that everyone is dreaming of, or is it just an illusion? What can the policymakers do to improve the economic outlook for this year? What can his firm Complete Intelligence see happening based on the algorithms and AI?

 

We also discussed regionalization of supply chain as a result of the Trade War in this QuickHitQuickHit episode with Chief Economist Chad Moutray of National Association of Manufacturers.

 

BFM Description:

The trade wars between the US, China and the Eurozone seem to be gaining momentum. Tony Nash, CEO, Complete Intelligence, offers some insights, while also discussing European industrial activity.

 

Produced by: Michael Gong

Presented by: Wong Shou Ning, Khoo Hsu Chuang

 

Listen to the “Economies are sputtering, which means trade war will intensify” podcast in BFM: The Business Station.

 

Show Notes

 

This is a download from BFM eighty nine point nine. So is the station. Good morning. This is BFM eighty nine point nine. I’m considering that I’m with one shotting bringing you all the way through the 10:00 o’clock in the morning and Rano 76. We are talking about markets, but well above 50 bucks sort of because of that with about 15 minutes time, we’re talking to call you. Ling was an independent panel, a political economist at Ciggy and I’m advisers will be discussing palm oil.

 

BFM: So last night in America, the stock market slumped. Investors are cautious, right How did the markets do?

 

Not so well, because there’s been clearly a resurgence in virus cases in multiple states, which puts into question the economic recovery. So, unsurprisingly, the Dow closed down three percent and S&P 500 closed down 2.6 percent, while the Nasdaq closed down 2.2 percent. Meanwhile, in Asia yesterday, only Shanghai was up, which was up 0.3 percent, while the Nikkei 225 closed down marginally by 0.07 per cent. Hang Seng was down 0.5 percent, Singapore down 0.2 percent, and KLCI was down 0.3 percent.

 

So for more clarity into the whys and wherefores of markets, we’ve got it on the line with us Tony Nash, who is the CEO of Complete Intelligence. Now, Tony, thanks for talking to us. Trump’s getting tough on China rhetoric highlights, well, obviously, the American’s concerns about being too reliant on China. And, of course, we can see that being manifested in the list of 20 companies, which is deems suspicious. In your opinion, can the two economies decouple or other interests in supply chains too heavily aligned?

 

TN: Well, I don’t think it’s possible to completely decouple from China. I think the administration are really being hard on each other. And I think the hard line from the US, you know, it’s relatively new. It’s a couple years old. But I don’t think it’s possible, regardless of the hard line for those economies to decouple and for the supply chain to decouple. We had some comments over the weekend out of the U.S. saying that they could decouple if they wanted to. But that’s just the hard line and unaware of the possibilities. We’ve been talking about, for some time, probably two and a half, three years, is regionalization of supply chains. And what we believe is happening is the US-China relations have just accelerated regionalization. It means manufacturing for North America, moving to North America. Not all of it, but some of it. And manufacturing for for Asia is largely centered in Asia. Manufacturing for Europe, some of it moving to Europe. And that’s the progression of the costs in China. And some of the risks are relative risks to supply chains highlighted by COVID} coming to the realization of manufacturers.

 

BFM: U.S. markets corrected sharply last night. So is the market actually now waking up to the reality that COVID 19 is going to be a problem for economic recovery? And this V-shaped that what many investors thought is probably a pipe dream?

 

TN: I think what markets are realizing is that it’s not a straight line. Well, we’ve been saying for a couple months is that end of Q2 or early Q3, we would see a lot of volatility. Then people started to understand how the virus would play out. Until we’ve had some certainty around the path, we will have days like today. And we’ll have a danger with an uptick as optimism comes back, what’s happening is markets are calibrating. People are trying to understand not only the path of COVID, but what those actors mean—the governments, the companies, the individuals—will do to respond, how quickly the markets come back. But what are people going to have to do? What mitigations that we’re going to have to take? What monetary and fiscal policies will governments take as well? We’re not done in that respect. So more of that’s to come, but we don’t know what’s to come there exactly. Markets have moved a lot on new case count. I don’t believe that it’s the case counts itself because a lot of these are are really mild cases. It’s just the uncertainty around how long it will last. The magnitude and the mitigation that people will take around it. There’s more of this volatility to come.

 

BFM: Tony, you might have seen the IMF‘s growth forecast, which was just announced a few hours ago. They’ve now said that global growth will shrink 4.9 percent for 2020. That’s nearly two percent worse than what they originally thought. And I think the U.S. also marked by an expectation of a negative 8 percent, down from negative 6o.1 percent. Do you think this might cause the policymakers to have an even more vigorous policy response and liquidity into the system?

 

TN: It might. I think the U.S. has shown that it’s not really afraid to be pretty aggressive. I think you may see more aggressive policy responses in other places. Obviously, Japan is very active on the monetary policy side. But we need to see more actual spending and more direct support of individuals and companies to make it through this. So, I do think that, obviously, IMF’s forecast concern people and get policymakers attention. I do think that they’re probably a little bit overblown to the downside, though. So I wouldn’t expect 8 percent decline. I wouldn’t expect a global decline as acute as they’ve stated today.

 

BFM: If you look at oil prices declined last night and I think this is on the back of U.S. crude inventories increasing. But is this also a function of COVID-19 fears in terms of how that may impact the economy’s going forward and consumption of oil again?

 

TN: Yeah, that’s interesting. The oil price is our… I think there are a number of things. The storage, of course, as you mentioned. But there’s also how much are people starting to drive again? What do traffic patterns look like? Also, how much are people starting to fly again? We really need to look at like Google Mobility data. We need to be looking at flight data. We need to be looking at looking to really understand where those indicators are headed. So when we compare a $40 a barrel of oil at $39 s barrel for WTI today, compared to where it was a month ago. The folks in oil and gas are really grateful to have that price right now. And it’s a real progress from where we were a month or two months ago. So I think what people are looking at today is the progress and then the expectation. They’re not even necessarily looking at the real market activity today. It’s all relative to a couple of months ago and it’s all expectations about a couple of months from now.

 

BFM: Last question on perhaps the data that your algorithms generated, Complete Intelligence. What kind of signs and indicators does our technology and the AI tell us about the direction the market’s going forward?

 

TN: Yeah, well, this is where we we pulled our assertion of volatility. We we really expected things to be pretty range traded for some time. So, you know, crude oil is a good example. We were saying back in February, March, the crude oil would end the quarter in the low 40s. This is WTI and here we are. So, with volatility, we’re not necessarily trying to capture the high highs and the low lows. We’re just recognizing that the markets are trying to find new prices. So it’s interesting when you look at things like the dollar. The dollar is a relative indicator for, say, emerging market‘s uncertainty and troubles as well. We did expect a dollar rise toward the end of Q1, early Q2, as we saw. But we haven’t expected the dollar to come back to strengthen until, say, September. So there are a number of indicators around trade or on currencies. And what we’re finding generally with our client base, for global manufacturers generally, are the algorithms… We’ve found that our average-based forecasting has an error rate that is about nine percent lower on average than consensus forecasts. So when we had all of the volatility of the last three, four months, consensus forecasts in many cases were 20 to 30 percent off. Ours were about nine percent better than that. Nobody expected the COVID slowdown. If we look at that from a few months ago, the bias that’s in normally of doing things, negotiating, procurement, supply chain, the revenue, that sort of thing. We take that out and this passionate… I would suggest that there is a lot of passion in the analysis from day to day when you look at three percent fall in markets today, but you can’t extrapolate today into forever. And what we can do with AI is taking emotion out of this, take a rational view of things. And really remove, not all of the error, of course, nobody can remove the error. There area a lot of the error from the outlooks in specific assets, currencies, commodities and so on.

 

BFM: All right, Tony, thanks so much for your time. And that was Tony Nash, chief executive for Complete Intelligence talking from Texas, USA. Interesting that this kind of stuff that he does at his business, tries to remove the emotional, the emotive side of the markets and give something a predictor over the future. But I think that sometimes you can’t discount too much of human emotion because it’s all driven by essentially two emotions, right? Greed and of fear.

 

But you know, basically his nugget is it’s going to be volatile. Right. Hang onto your seats. Right. Because we really don’t know. There’s too much uncertainty out there at the moment. This is a scene where it’s for oil prices or even for equity markets.