It is not a good day for Asian equities; it is a bad day for banking stocks in Singapore; and things are not looking rosy in the near future.

It is a “tale of two cities” whereby we have a Bull Run in the US and a bear market in China while Hong Kong and Singapore are neither here nor there. As Asian countries lean more and more towards China for trade, the age-old correlation to the US market becomes eroded. This is the key reason, in my opinion, that has caused the underperformance of the Singapore stock market apart from domestic issues facing our economy.

“When elephants fight, it is the grass that suffers”, according to an African proverb, thus countries that do business with both China and US are sandwiched between the two economic giants that are trying to outdo each other.
What are the things that China and US are fighting for?

Political Hegemony

In one corner we have a country that believes in democracy and liberalism, used to the idea of being the leader of the world after being dragged into international affairs when Japan dropped its bombs on Pearl Harbour. From being involved in World War II to the Korean War and the Vietnam War, the US during these periods had one enemy: the communist Soviet Union.

It was so used to having an enemy that it felt isolated when the “evil empire” collapsed. For more than two decades, US hegemony was unchallenged until China’s emergence. China, according to the West, will be a threat to the US because of human rights issue, Taiwan issue and many others. The most prominent threat that China is perceived to pose is that of US dominance in Asia. The US is not prepared to lose “half the world” to another major power.

President Donald Trump, aged 72, was around 30-ish during the days of the Cold War and heightened protectionism. If that had shaped his political thinking, then we should not be surprised that some of his policies smacked of the 1980s.

China, on the other hand, is “xenophic” having experienced humiliation at the hands of foreign powers. Its rise to prominence has made the US sit up and take note, wary of the imperialistic past of the “Middle Kingdom” whereby the emperors made its neighbours (vassal states) pay tribute.

China did itself no favours by attempting to build “barricades of artificial islands” in the South China Sea while, at the same time, courting the friendship of countries through economic aid and the well-publicized One Belt, One Road initiative. Despite denying the fact that China is not challenging for global supremacy, her actions in recent years have proven otherwise.

If Trump were really “insane” in wanting to seek the total collapse of this new “evil empire”, then we are in for a very tough ride as long as he remains US President. But he is not insane, as his recent moves to destabilize China and strengthen US’ bargaining chips are really impressive.

Economic Battle

The trade war is the current battlefield of both giants. Nobody has the time and resources to engage in a conventional war unless it is a sure win and only if it is about controlling oil reserves.

US is China’s biggest customer yet the latter is seen to be slapping the face of its customer while the former is now bent on reducing its trade deficit with the rest of the world especially China. To reduce the deficit, Trump launched a trade war – one that has created uncertainty and disruptions to global trade – that has so far done little direct financial consequences. In the midst of a weakening Chinese economy, Trump has picked the right time to hurt China by imposing tariffs on Chinese goods that enter US territory. Even when China threatened to impose tariffs on US soybeans, Trump found a way out by selling to Europe.

Trump has openly said that the stock market has risen much hence it has room to fall if the trade war were to escalate while China can only comment through President Xi that “China must retaliate to defend its dignity”.

China has much less bargaining chip. It exports US$500 billion to US while it imports only US$130 billion from its biggest customer. Of course, China can ban US acquisitions in China or even block US imports at its ports, but US can do the same.

China is fighting a losing battle. Its recent economic data, while not dismal, have not been too pretty to look at. China’s only bargaining chip is the huge reserves in the form of USD-denominated Treasury bonds, but selling it may weaken USD which China does not want.

China cut its interest rate to weaken the Renminbi in order to soften impact from the first wave of the trade war. China can continue to do so but it cannot allow its currency to continue to weaken. It will import inflation and the USD-denominated loans will balloon when converted into Renminbi.

Trump’s Desires

The trade war is just a sub-plot in the grander scheme of things. When Trump took over as President, he wanted US companies to move back to the US in order to create jobs for Americans. He also wanted to address global trade imbalance. He probably realizes that US cannot continue to consume by printing endless amounts of money while other countries make the money from Uncle Sam. In order to maintain US hegemony, he needs to knock China off its perch.

Trump may even impose the 25% tariff on the US$200 billion worth of Chinese goods, but he will probably reserve the US$500 billion as his trump card.

Trump probably wants the Renminbi to appreciate in order to address the trade deficit; he wants China to import more US goods to further reduce the trade deficit; an appreciation in the Renminbi is a must to make China a more expensive manufacturing base for US companies; and, by doing so, it will make business sense for Trump the businessman.

As for Trump the US President, a prosperous but economically weaker China may be just what is needed to clip its political wings.

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