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U.S.-China Tension Escalates: Headwind For Markets And Economy?

Anthony Okolie recaps the news of the day including the latest COVID-19 updates, followed by Kim Parlee’s conversation with Haining Zha, Vice President, TD Asset Management, about the mounting U.S.-China tensions and what that could mean for trade and the economy.

Hello, and welcome to the MoneyTalk COVID-19 Daily Bulletin for Monday, June 1st. I’m Anthony Okolie. In a few minutes, Kim Parlee will be speaking with Haining Zha, Vice President of TD Asset Management, about the trade tensions between the US and China and what it all means for the world economy and markets. But first, a quick wrap of today’s headlines.

Mass protests hit across America this weekend. What started as peaceful protests against police brutality end with looting and arrests. Some big retailers, including Target (NYSE:TGT), Apple (NASDAQ:AAPL), and Walmart (NYSE:WMT) temporarily closed or limited hours across the US as a result.

China told major state-run agricultural companies to halt purchases of some US farm goods, including soybeans, escalating trade tensions between the world’s two largest economies. Could alternative meat products take advantage of the meat shortage in China? Yum China Holdings (NYSE:YUMC) plans to roll out Beyond Meat’s plant-based burgers at its fast food restaurants in mainland China starting June 3rd.

And finally, Elon Musk’s SpaceX successfully launched two NASA astronauts to the International Space Station on Saturday. It marked the first time in history a privately built and owned spacecraft carried astronauts to the space station in its more than 20 years of existence.

And that’s a wrap of today’s headlines. Next, Kim Parlee’s conversation with Haining Zha.

– Haining, can we start with the back-and-forth going on between the United States and China? We’re seeing that China is now telling its state-owned companies to limit its buying of American soybeans. Can you put this in context for this, and just how important it is?

– Yeah, I think that’s important part of the phase one trade deal. And I think, on both sides, US and China is trying to execute this phase one deal. But I think, in terms of execution, there is always rhythm, right? So I wouldn’t interpret it as a signal that, on Beijing’s side, they will terminate the trade deal. But given all of those actions happening in the US, for example, Trump just announcing that they will eliminate Hong Kong’s preferential treatment under some US law, so there might be some reactions, temporary reactions, from Beijing.

– Could you also, though, just give us a little more detail on what happened with Hong Kong? People may not be as familiar with what he said, what it means, and also Hong Kong’s economic importance to the United States.

– Sure. And in May, in the National People’s Congress, Chinese government just passed a resolution to enact Hong Kong security law, which will be added to the Hong Kong basic law Annex number three. So in retaliation, US announced they probably will eliminate Hong Kong’s preferential treatment. That preferential treatment was established under the US-Hong Kong Policy Act of 1992. And under that specific law, there are a couple of special items. Number one is Hong Kong has the most favored nation status. But this is by virtue of Hong Kong’s membership in the WTO. So it’s an international treaty. US cannot unilaterally terminate it.

Number two is Hong Kong was treated as a special customs territory. So if you look at the Hong Kong and the US trade statistics, the US actually might hurt by its own action because US generate about 30 billion trade surplus from Hong Kong. And the third item is Hong Kong is allowed special access to sensitive technology. But as we know, those access has already been tightened up well before this action. So the incremental impact will be minimal.

And the last thing is Hong Kong dollar, US dollar is allowed to freely exchange with the Hong Kong dollar. But on that front, we don’t think the US government is going to do anything because basically every major US financial institution have a presence in Hong Kong, and they have a huge Hong Kong dollar balance. And if that free exchange of money is terminated, that will be a major blow to the financial stability and the financial firms in the US.

– Hm. I guess if I could stick with that thread in terms of understanding what some of these tensions could mean for stability of financial institutions, we also have the US Senate coming out with some very specific limitations they want to put in place on, I know, investments in firms with Chinese military backing, but also firms which are public listings in the United States. Can you just unpack that a bit for us, and tell us what that could mean?

– That’s right, so there is a bill already passed the Senate that basically is called companies accountable, Hold Foreign Companies Accountable Act. So basically, the Chinese company right now, the Chinese regulator doesn’t allow access to the original auditing records to the US regulator. And if that continues, those companies listed on US exchange might be forced to be delisted based on this law. And that’s very imminent. And we believe that, eventually, it will pass House, too. And the solution of that is those company that is forced to be delisted from the US, either they are seeking listing in Hong Kong or they have to seek listing in mainland China.

– All of this is layered on top of the fact, of course, for the reason we are all at home, of course, of COVID-19 and the recovery. And I want to ask you, much of what we’re doing right now is– China is ahead of us chronologically, in terms of when the virus hit and their state of recovery. We’re further behind. What are you seeing in China in terms of recovery, and how concerned are you that all those things you just talked about are going to hamper that as we move ahead?

– Yeah, actually the recovery was pretty much in full force. Right now, in terms of if you look at various statistics, in terms of manufacturing and the production side of economy, the capacity recovery is probably more than 90%, if you look at daily cost consumption look at the traffic throughput. I think what is lagging a little bit is the service side of economy. And another issue is Chinese manufacturing is based on a lot of external demand in the US and Europe. As those economies also suffer the hit from coronavirus shock, the external demand is also an issue. But as we are seeing, the US is also on the reopening of the economy. So that becomes less of concern.

– Haining, tell me, I mean, the last time we spoke, a while ago, the world was a very different place, and I think you were feeling more bullish on opportunities in China. Given everything right now, if you could tell me just what you’re feeling right now in terms of China and the world economy, just what you’re going to be watching as we move ahead.

– That is still the case, I would say. And the assumption is that the US and Chinese government can manage their difference and potential conflict, and hopefully the cooler heads in the government will prevail and further improve the world economy. Based on that assumption, I think the broader long-term picture for Chinese economy and Chinese stock market is still good because, right now, the government, among all of the governments, the Chinese government actually have the most policy room to react.

From the National People’s Congress, this year they will probably increase deficit to GDP, in a broader sense, about 3%, 4%. And that compared to Europe and the US, it’s not a lot, but they really have a lot of dry powder to use in the future. And in terms of monetary policy, probably you will see this year, in the second half of this year is the M2 as well as total social financing growth will be higher than the nominal GDP growth, and the reserve requirement ratio and interest rate both have room to cut.

– Haining, always a pleasure. Thanks for your insight.

– Thank you for having me.

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