Trade war, then tech war, and now capital war

The US is the dominant world power, and China the rising threat to it, for global hegemony. Under President Trump, the US felt it had, for long, endured a negative trade balance with China. So, it embarked on a trade war to correct it, reaching a Phase 1 agreement on January 15, 2020, under which China agreed to import more stuff, especially soyabeans and other agricultural produce (the voting constituency of Donald Trump).

Interestingly, by January 15, when the Phase 1 trade deal was signed, evidence of the international spread of Covid-19 was all around to see. A woman who had visited Wuhan tested positive in Thailand on January 13, and Japan reported its first case on January 15. The first case in the US was reported by CDC on January 21.

It is reasonable to assume that China knew of the human-to-human transmission at the time it signed Phase 1, but did not inform the world till later. This is now leading to many countries accusing it of misinformation. In China’s favour is the fact that it completely locked down Wuhan Province to contain the spread, and that it very quickly not only identified the genome of the virus but also informed the world, so that the path to treatment could be determined.

Leaders of countries such as the US and the UK initially pooh poohed the deadliness of the virus. And even if they had been informed much earlier of the dangers, would these leaders have changed their behaviour of mocking it?

After the trade war, the US started a technology war, led by a charge against telecom giant Huawei. Huawei is a world leader in telecom gear, including smart phones, and is thought of as leading the next 5G (fifth generation) stage of telecom evolution. The race for 5G, a crucial component of the Fourth Industrial Revolution, which also includes technologies such as AI, robotics, autonomous vehicles, Internet of Things and others. Covid-19 is expected to speed up the introduction of these technologies.

A country that leads in introducing these technologies and ushering in the Fourth Industrial Revolution would thus gain in economic dominance and the US wanted to reduce China’s ability to be the first. So, it denied Huawei the ability to use its popular apps such as Gmail, Google Maps, Facebook and others; it sought to deny access to its technologies, including operating systems and chips; and it put pressure by arresting in Canada the CFO of Huawei, who is the daughter of its founder. She is likely to be extradited from China to the US shortly.

China is hitting back at these accusations, with hard power, not soft power.

It is increasing its presence in the South China Sea, through which about a third of global trade passes. It has stopped buying Australian products because the latter asked for an investigation into the spread of Covid-19. It has created border tensions with India (the next Chair of WHO, the institution which might be asked to conduct the investigation). And it is passing a law that would suppress opposition to its policies, in Hong Kong.

The third US pressure point now is a capital war. The US Senate has passed a Bill last week to delist Chinese firms from US stock markets. It is estimated that about $2 trillion global money (largely pension and endowment funds) has been invested in Chinese equity and $1 trillion in its debt. Chinese companies have a significant weight in MSCI (Morgan Stanley Capital International) Index, and a lot of the institutional investors, especially ETFs, invest in a manner that mimics the index.

So, a delisting will hurt these companies, and China.

It is, therefore, surprising, that China is using this moment to pressurise Hong Kong. HK provides companies in mainland China the ability to access global capital markets, and enjoys a good reputation, because of its independent judiciary, protection of investor and property rights, and a governance system different from China. The threat to negate these advantages at a time when the US is threatening to cut access to NYSE and Nasdaq, is, thus, very surprising.

The US is also threatening to renege on repaying China for its approx. $ 2 trillion holding in US Government debt. This, though, may have negative implications for the US.

China is countering by introducing a crypto currency backed by gold, to counter the dominance of the US $. Global metals giant, Rio Tinto, has recently invoiced in Renminbi. Russia sells crude to China denominated in Renminbi.

These three wars can be expected to escalate after the Covid crisis is over, which will impact global trade, global supply chain, global capital movement and global trust. None of these bode well for stock markets.

If the three wars escalate into a military war, God help us! That would be an unimaginable failure of global leadership. Pray it does not happen.

The writer is India Head — Finance, Asia/Haymarket. The views are personal.