At the beginning of the year, there were strong
hopes for better relations between the US and
China. The world’s two largest economies had signed a
new trade deal with China promising to buy more
American goods and better respect intellectual property,
and the US cutting tariffs on some Chinese goods in
return. Although the deal was less ambitious than initial
expectations, many hoped it would prevent further
escalation in an increasingly bitter trade war.
That, however, was before the coronavirus pandemic. In
common with much of the developed world, the US has
been badly affected by Covid-19, with the Trump
Presidency seeing a rapid rise in unemployment and the
quickest stock market sell-off in history. In order to cover
for his Administration’s poor federal response, Trump has
sought to deflect attention by blaming China for the virus.
Bilateral relations have been further inflamed by protests
in Hong Kong, where the Chinese authorities have taken a
hard stance against demonstrations and recently passed a
new security bill allowing Beijing more control over Hong
Kong. As a result, the US Secretary of State, Mike
Pompeo, has followed through on threats to remove Hong
Kong’s special trading status with the US.
A quick primer on Hong Kong
While Hong Kong has witnessed protests before, recent
demonstrations have been some of the most disruptive
on record. The protests started in June 2019 over plans to
allow extradition from Hong Kong to the Chinese
mainland. While some argue that there is a need for this
law, the protestors saw this as undermining the greater
degree of freedom that Hong Kong citizens enjoy
compared to their mainland counterparts.
Over the course of eighteen months, the demonstrations
escalated with many protestors demanding universal
suffrage, a red line for China’s authoritarian regime. In
recent weeks, the Chinese authorities have acted to
impose further restrictions on Hong Kong, effectively
banning criticism of the Chinese Communist Party, and
sparking counter measures by countries such as the UK to
offer refuge to Hong Kong citizens.
The US decision to remove Hong Kong’s special status
means that exports from the city will face tariffs just as
the rest of mainland China. In recent days, Trump has also
signed legislation allowing for sanctions against
businesses and individuals seen to be restricting freedom
in Hong Kong. While both moves will ultimately make little
difference to the broader Chinese economy, hopes for an
end to trade tensions at the start of 2020 have clearly
Issues around Hong Kong’s future status have clearly had
an impact on the local stock market over the first half of
the year, with the market the worst performer across Asia
Pacific. Many investors in the region appear unconcerned,
however. The city remains an important gateway for
Chinese companies wanting to access international
finance, with the Chinese authorities likely to proceed
In addition, the city could also benefit from Chinese companies choosing to move their stock market listing back to a
domestic exchange, rather than an overseas exchange where they may not be able to access investor capital as freely.
Prominent Chinese companies such as Alibaba (effectively the Chinese equivalent of Amazon) have already listed their
shares on the Hong Kong exchange as well as listing on the US market, largely in response to US threats.
Could Hong Kong spark a renewed trade stand-off?
Unless we see a sharp escalation in tensions, however, it seems that the impact will be more muted. Trump also
appears worried about damaging the existing ‘phase one’ trade deal between the two countries, especially over issues
such human rights. In a recent interview with US news website Axios, Trump claimed that the reason he had not
responded to abuses against Uighur Muslims was because he was in the middle of a major trade deal at the time.
Ahead of the 2020 Presidential election, Trump appears to be caught between two impulses. On the one hand, he
wants to distract from his handling of the pandemic, with a lacklustre federal response and second waves of cases in
Republican dominated states such as Arizona. On the other, he needs to defend the deal he struck with the Chinese
government as recently as December last year, making it difficult for him to risk any serious escalation with the
In the short term, US-China relations will continue to be a
source of market unease. The latest incident occurred
with the US ordering China to close its Texas consulate,
‘to protect American intellectual property and Americans’
private information’ according to the US State
Department. China has threatened retaliatory measures
unless the decision is reversed.
Over the longer term, this tension and competition
between the US and China may be something that
investors simply have to get used to. ‘Made in China 2025’
is a strategic plan for China to move up the value chain in
manufacturing, for example, with the country aiming to
both make and develop more advanced technologies.
Made in China will naturally bring it into conflict with the
US, with both countries seeking to preserve and gain any
technological edge they can. This may lead to further
sanctions around companies such as Huawei, with the
American authorities restricting Huawei’s access to key
American designed products such as semiconductors.
Trade risks will likely become a risk that analysts will need
to take into account when assessing potential
Investors should not lose sight of the potential
opportunities that China offers however. Trends such as
rising domestic Chinese consumption remain intact and
can be a powerful driver of investment returns. Given the
uncertainties surrounding developed market assets, any
source of future growth should not be overlooked,
particularly given the outperformance of Chinese markets
in the second quarter of 2020.
Quilter Cheviot Limited has 12 offices across the UK, Jersey and in the Dubai International Financial Centre and a wholly-owned subsidiary in Ireland: Quilter Cheviot Europe Limited.Quilter Cheviot Limited is registered in England with number 01923571, registered office at Senator House, 85 Queen Victoria Street, London, EC4V 4AB, is a member of the London Stock Exchange and is authorised and regulated by the UK Financial Conduct Authority.