Political change in Beijing, not Washington, is what really matters for foreign companies in China
While a hot trade war may not emerge, Trump’s arrival may still herald a number of “proxy trade wars”, analysts warn
The arrival of President Trump in the White House has put geopolitics, and hence companies’ attempts to minimise the political risks to which they are exposed, firmly back on the agenda.
If the world is returning to an era of great power politics, then there is much scope for both China and the US to exert their influence to the detriment of each other’s companies, even if fears of a “hot trade war” prove unfounded.
However in China, even for foreign firms, it is the political transition in Beijing in November that will have the biggest impact on their activities, not the changes in Washington, according to political risk consultancy Control Risks.
“Trump is both an isolationist and an interventionist all in the same 140 characters,” said Richard Fenning, Control Risks’ chief executive.
“Making America Great Again has international implications certainly, but for the time being it is going to be very inward looking.”
Trump’s inaugural speech on Friday was firmly focussed on domestic issues.
China is one of the countries most exposed to those international implications to which Fenning refers, with North Korea, Taiwan and the South China Sea all areas of potential tension between the world’s largest and second largest economies. But Fenning says companies should not to get too obsessed by the politics.
“Geoplitics has a fascination all of its own, and it is very easy to get caught up in a geopolitical version of Downton Abbey,” he said. “Like with Downton, it’s hard to stop watching, but at the end of it you feel vaguely unsatisfied.
“What is really at stake [for companies doing business in China] is whether or not Xi Jinping will emerge at the end of this year as a much emboldened economic reformer of China. That is the ultimate big business question, as it will have a huge impact on the currency, down the line it will affect oil prices, and will have a big impact on where investment goes.
“That may sound all highfalutin, but it is far more important than whether Trump bullies a manufacturer into keeping 800 jobs in Flint, Michigan.”
Politburo that will attempt to see these policies through. Analysts speculate that this may offer President Xi Jinping an opportunity to consolidate power, potentially allowing him to pursue economic reforms.
HSBC’s chief China economist Qu Hongbin said that shorter term economic policies currently being pursued, such as capital controls or monetary tightening “do not address the underlying issue of a lack of confidence and therefore are temporary at best and counter-productive at worst.”
“We believe the only permanent solution is reviving confidence in the domestic economy,” she wrote in a research note. “This means sustaining the growth recovery but more importantly broadening it out to the private sector through measures such as tax and fee reductions. SOE reforms, such as shutting down ‘zombie’ companies and speeding up the pace of debt resolution are also helpful.”
Such changes would require a lot of political capital to see through, and that is why the power dynamics of China are important.
There is, however, no certainty either that Xi Jinping will emerge strengthened from the 19th party congress, or that he would carry out the reforms that many economists would want to see if he did. “The jury is still out on this,” said Andrew Gilholm, who leads Control Risks’ China analysis practice.
When it comes to the question of how political tensions between China and the US would affect both countries and companies around the world, most juries have returned.
“In our view, the biggest risk to the global economy in 2017 would be a serious escalation of US-China trade tensions,” wrote Ethan Harris, a global economist at Bank of America Merrill Lynch in a research note.
Gilholm said: “While I don’t know about Navarro [Trump’s strongly anti-China choice to lead a While House council on trade] , most people know that in all the ‘who wins a trade war between China and US’ discussions, the answer is that everyone loses.
“Instead we think there are more tactical things that we think could start to happen quite soon.”
Jessica Bartlett, a senior associate at law firm Freshfields, said: “Sanctions are one area where we could see proxy wars between China and the US.
“In Iran, say, in recent years Chinese companies have become much more interested in complying with the US sanction regime, but one good way of acting in a proxy trade war would be just to stop complying.
“China could even issue its own rules saying that it was illegal to follow US sanctions.”
US regulators, in response, could move to impose penalties on companies in breach of sanctions, in the form of fines or restricted access to US-produced goods.
“Companies, particularly banks who would be funding a lot of the trade, would then be damned if they did, and damned if they didn’t,” Bartlett added.
Chinese regulators too could get involved in a proxy trade war.
“If political tensions pick up, we could see the weaponisation of these regulations, with regulators targeting US companies, looking for wrongdoing,” said Gilholm.
“Since South Korea agreed to host the US Terminal High Altitude Defence System, there has been a clear concerted effort to investigate Korean companies. We could definitely see something like that happening in this case too.”