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'Political posturing': Why escalating U.S.-China tensions are not rocking markets


Tensions between U.S. and China have escalated once again , but investors wouldn’t know it based on the muted response they have seen in the markets thus far.

It’s not exactly a trade war, but U.S. President Donald Trump has made an effort to reignite his country’s feud with China over the past month. Most notably, Trump issued an executive order banning video-sharing site TikTok, which is owned by Chinese tech company ByteDance, unless its U.S. business is sold. Receiving less attention is the tit-for-tat political fight the two are entrenched in that has seen each side close down a consulate belonging to the other and levy sanctions against politicians.

Last year in the midst of the trade war, each one of these actions would have likely injected volatility into both the U.S. and Chinese markets. This time around markets are ignoring the rising tensions as investors are calling Trump’s bluff.

“There’s the belief that in a U.S. election year, a lot of this is political posturing,” said Michael Arone, chief investment strategist at Boston-based State Street Global Advisors. “Most Americans have a great deal of skepticism regarding China so it’s an easy way (for Trump) to win political points.”

Since the U.S. first admitted it was thinking of banning TikTok in mid-July, the S&P 500 is up nearly four per cent. In China, both the Shenzhen Component Index and the Shanghai Composite Index have been more volatile, although they always are, but are essentially flat in the same time period. On the news of Trump’s executive orders last week, both indexes appeared as if they were heading for a sizeable sell-off before they rebounded. That suggests to Arone that Chinese investors also haven’t hit their “greatest anxiety levels” yet.

Tyler Mordy, president of the Toronto-based Forstrong Global Asset Management Inc., likened the market’s reaction to the first and second waves of COVID-19. The first wave of COVID-19 tanked the market — nobody knew the extent of the damage that it could have on global economies and so they panicked just like they did during the first round of tensions during the trade dispute.

“And when you get the second wave, the mystique is gone,” said Mordy.

China, Mordy said, also doesn’t appear ready to up the ante. Chinese officials have been “biting their tongues” in the current dispute because their top goal is to preserve economic growth, Mordy said.

Even China’s state-backed media has begun to reflect this strategy. The Global Times, a mouthpiece of the Chinese Communist Party , published a column on Sunday arguing for restraint because the latest U.S. measures were only attempts to gain traction in the election.

“If we ignore those actions and meet them mainly with ridicule, then we might gain more international support than be directly confronting them,” the editorial said.

That’s why Toronto-based Purpose Investments chief investment officer Greg Taylor recommends that investors continue doing what they have so far in response to the building tensions: “Keep your head down,” he said.

That should also be the case when it comes to Chinese stocks that are no longer red-hot due to the tensions. The tensions may not be affecting U.S. markets, but Chinese markets have begun to trade sideways.

Much of that change is due to the weakness in Chinese tech stocks trading on both Chinese and U.S. exchanges. Alibaba Group Holding Ltd. is down about five per cent since reaching an all-time high in early August. Tencent Holdings Ltd. is down eight per cent since reaching its own high.

Frank Holmes, CEO of the Portland-based U.S. Global Investors, is discarding the recent movement in these stocks because they remain fundamentally strong. Even if the U.S. goes through with its threat to delist certain Chinese American Depositary Receipts or limit the business that Chinese tech companies can do in the U.S., it won’t matter much to companies such as Alibaba that draw a majority of their revenue from Asia.

The scenario could change, if Trump crosses a line and begins to make threats regarding trade, analysts think. The latest feud has mostly been a political one and that’s why it’s had little effect on the markets, Holmes said. The markets would react differently if Trump begins to threaten tariffs, for example, but Holmes doesn’t think it’ll come to that.

“Trump is the only president that gets up in the morning, looks in the mirror, checks his hair and then checks the stock market,” said Holmes, explaining that Trump knows trade rhetoric could lead to a sell-off that he would be blamed for just before an election.

There’s always a risk of that happening, Taylor said. But his recommendation to retail investors is to either hold on to Chinese stocks or look to add them as an election play.

“I think if you got any hint that (Joe) Biden was going to be more China friendly and win the election then maybe you can start thinking about a position in some of these ADRs,” he said. “The growth story isn’t going away.”

Financial Post

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