Macroscope | The US is whispering about financial war against China. Investors must brace themselves

The recent news that the United States might consider restricting investment in China underscored the deep divide between the two countries and cast a dark shadow over the upcoming trade talks.

Although the news of the deliberations was subsequently dismissed by White House officials, enough damage had already been done to the markets and investors pared back expectations of a breakthrough in the coming trade negotiations. We remain sceptical of any tangible progress in this week’s gathering and expect the proposed tariffs – scheduled for mid-October and December – to be applied in due course.

While a substantial financial decoupling seems unlikely in the near term, there is a clear tendency for the US-China conflict to spread beyond trade. The trade dispute remains a mere symptom of the contest for global influence between the world’s two pre-eminent powers. Beyond the trade tussle, technology is a more important battleground, with the US already flexing its muscles by curtailing the rise of Chinese tech firms and the spread of Chinese 5G technology.

Besides technology, another area of contention could be finance. As in tech, the US has strong incumbent advantages. The US dollar is the world’s No 1 trading, investment and reserve currency. US equity and bond markets are the world’s largest, deepest and most diverse, financing not only companies and the government in the US, but also those from abroad, including China.

Finally, US investors collectively represent the largest force in cross-border capital flows, and the most widely followed investment benchmarks, such as the MSCI, are created and managed by US-based financial institutions. Hence, if the US wanted to wage financial war against China, it would have quite a deep war chest.