by Greg Valliere, AGF Management Ltd.
DOWNSIDE RISKS EVERYWHERE: Minneapolis riots and fresh virus hot spots are generating headlines this morning — but for the financial markets, the focus is on a looming crisis that could target Chinese banks.
A DEEP ANTIPATHY TOWARD CHINA extends from Washington to Ottawa, from the EU to Australia. U.S. sanctions have had no impact on Chinese behavior, so President Trump may focus on the explosive issue of financial restrictions when he meets the press later today (time hasn’t been set yet).
LOOKING AT THE OPTIONS: The idea of de-listing Chinese companies on U.S. stock exchanges or ending U.S. Thrift Savings Plan investments in Chinese stocks are suddenly seen as insufficient. And the option to curbing Chinese shipments of medical products and pharmaceuticals cannot happen overnight; building new U.S. plants is a longer-term proposition.
A U.S. CRACKDOWN ON HONG KONG imports and exports would have a modest financial impact, so China hawks in the Trump Administration are proposing a much more serious step — sanctions on foreign banks and corporations that deal with Hong Kong banks.
MUCH OF CHINA’S BANKING is conducted in Hong Kong, mostly with U.S. dollars. Could the U.S. penalize foreign banks that deal with Hong Kong banks? Could the U.S. deny Federal Reserve credit lines to Chinese banks? Could foreign banks get cold feet in dealing with U.S.-sanctioned firms?
THESE THREATS HAVE BEEN LEAKED FROM WASHINGTON, provoking a media firestorm in China, where some hawks are warning of a “financial war” that could speed up Beijing’s development of its own digital currency and, potentially, lead to sales of U.S. Treasuries.
AND THE HARD-LINERS have a new issue: a court ruling in Canada on Wednesday that could lead to the extradition of a top Huawei executive to the U.S. Some analysts think this ruling could prompt fresh Chinese sanctions against Canada.
COMPLICATING THIS DEEPENING CRISIS is the Nov. 3 U.S. election. Polls indicate the American public strongly disapproves of Beijing’s role in the pandemic, its crackdown on Hong Kong, and the pervasive hacking of U.S. companies. Both Trump and Joe Biden will compete to blast out the toughest anti-China rhetoric.
WITH TRUMP SLIPPING BADLY IN THE POLLS, he needs fresh issues. He’ll promise a harsh crackdown on the Minnesota rioters, and he will ratchet up the threats today against China. There’s no thaw in sight as a U.S.-China Cold War intensifies — and as hard-liners seek to drag financial institutions into this brawl.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.
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This post was first published at the AGF Perspectives Blog.
