The big driver of change in the world order is the escalating US-China tension, delegates at the ASI conference heard on Monday.
What happens next with the escalating US-China trade war has important implications for the shift in trade and capital flows, currencies and the re-drawing of geo-political alliances, according to Luis Oganes, JP Morgan’s head of currencies, commodities and emerging markets research.
Oganes splits the US-China relationship into three areas – trade, technology and finance which will all have different degrees of ‘decoupling’.
He predicted that the trade relationship will become less intense as China has become an independent source of global growth and demand. “That relationship will become more transactional,” he said.
Despite the fight between the two superpowers becoming more confrontational, Oganes does not see that affecting their financial relationship given China now makes up 39 per cent of the MSCI Emerging Market index and is promoting the Yuan as a global currency.
“Also, China might still open their markets to banks, insurers and asset managers but if the trade and technology relationship deteriorates that could affect finance,” he added.
“But we’re not seeing that.”
In a panel discussion, Executive Director, Policy, Asia Society Richard Maude, said the pandemic sent shockwaves through a world that was already undergoing profound changes.
“China is not just more powerful but under Xi Jinping, more authoritarian, more nationalistic, and more ideological as the communist party sees itself struggle for survival against liberalism and capitalism over which it must triumph.”
And that throws up additional problems he told the panel.
Maude said China has gotten caught up in the US election with both sides not wanting to look weak. This was significantly compounded by the COVID blame game
Worryingly, he added, the possibility of a hot war is not as remote as it once was.
“I don’t think anyone wants it but Beijing could stumble into a war over Taiwan or any of the other flashpoints like the India/China border, North Korea and the South China sea.”
On foreign relations with China, the foreign policy expert added that they won’t get any easier no matter who wins US presidential election. “Whatever the outcome, you can expect much tougher, tenser and more difficult clashes.”
Nor will navigating China get any easier for Canberra. “Our own relationship is rocky and no amount of good relationship management will make it less tense since the policies Beijing objects to have bi-partisan support at the federal level.”
“We can expect things to be bumpy for the foreseeable future.”
“It doesn’t mean we should give up on trying to stabilise the relationship but it is going to be hard as long as China keeps metering out economic punishment in the hope of forcing policy changes.”
Importantly, he said the US-China trade war is running through the multilateral system. From where Maude sits, it is now a much bigger struggle over who gets to shapes global norms, rules and standards.
The third panellist Jim Christodouleas, PwC’s head of banking and capital markets, told delegates that the consultant is predicting a snapback scenario as a catch-up in demand will follow the discovery of a vaccine. “That’s our base case,” he said
But by the same token, he is allowing for a dramatically broad range of negative outcomes. Importantly, he is not seeing any tangible evidence of these scenarios being priced into equities, options or the gold price.
“The situation warrants more caution than there appears to be in many people’s base cases.”
Panellists discussed the importance of moving away from globalisation as a second driver of change in the world order and argued that US consumers had not benefited from globalisation – that it had not been worth the job losses suffered by the middle classes. In contrast, they said globalisation has been a more positive story for Australia.