How Trade Wars with China Could Affect Your Portfolio

Over the past year trade wars have been making headlines and have been a topic from water cooler conversations to late night comedy. The conflict involving the world’s two biggest economies: the US and China understandably holds the world’s interest. What few are talking about are the underlying reasons why establishing a trade deal now is so important. And more importantly, how continued trade wars and ultimately, a deal, could impact American portfolios.

Tensions began to mount in 2001, when China joined the World Trade Organization (WTO) . Upon entry into the WTO China has grown more and more concerned with trade as their political ambitions and booming population put pressure on Chinese leadership to adapt to a global, interconnected economy or stagnate and decline.

Enter the Belt and Road Initiative. Everyone has heard of the Silk Road of ancient times, which connected Beijing to the West with trade depots from China to Venice. The new version, still largely a dream of China’s current and future President Xi Jinping, is the same concept on steroids. China recently pledged 4-8 trillion dollars to the Belt and Road Initiative (BRI) and coined it their “project of the century.”

Why do we care? Because if completed, China will have terrestrial and maritime connections from its eastern borders all the way to Rotterdam, Kenya, and practically everything in between. 70 countries would be involved in the construction of a global network of infrastructures connecting Asia, Europe and Africa through land and maritime routes. China would be at the economic heart of over half of the global population, three quarters of known energy reserves, and a large chunk of developing countries (read emerging markets) spanning several continents. China has pushed these more aggressive actions by relying largely on the growing animosity globally towards the US, the prevalence of the dollar globally, as well as the U.S.’s undeniably aggressive political foreign agenda in the Middle East specifically.

However ambitious and far reaching this plan may be, the path to completion must overcome a myriad of pitfalls.

Due to China’s lack of transparency, the economic impact and feasibility of the project is hard to quantify for anyone on the outside looking in, but the possible effects include:

China could liquidate its US treasuries to increase interest rates and simultaneously get cash to finance their projects, significantly curtailing US economic growth.
Chinese projects in Africa and Oceana will necessitate sizable debts that are likely to make countries wholly dependent upon China. This would mean that these countries would likely appease China (by buying Chinese debt products using Chinese yuan) before the US, thereby weakening the dollar. However, this dependency is a double-edged sword, and will result in international demand for an increased level of transparency, a level that the current Chinese regime is loath to comply with.
Construction delays of BRI projects have already caused some countries to accuse Chinese firms of corruption. Let’s not forget China has a terrible human rights record and an extremely poor reporting history with the one child policy and recently with climate change metrics.
Viability of China’s financial lending has put the spotlight on the debt’s longevity issues. Case in point: Pakistan’s prime minister Imran Khan recently reduced the amount borrowed to finance the China-Pakistan Economic Corridor, voicing his concerns about the financial burden of the loan. Malaysia also cancelled gas pipeline and high-speed rail projects which were both BRI projects. However African countries and other resource dense populations that desperately need more infrastructure are unlikely to deny Chinese assistance in funding projects initiated on their home soil and completed using domestic workers. China is already invested into Africa to the tune of 35 billion dollars, so a little more is unlikely to register any significant backlash. Their goal of making the BRI too big to fail clearly has the size already, but they still have to get it off the ground and either force or convince countries around the world to buy into their dream so it won’t flounder and impair over half of the world economy.

We believe that this new deal with NAFTA was really meant to lock up the entire Western Hemisphere in order to present a united front in working out deals and two-way concessions with China. These talks have larger implications beyond tariff spats between individual countries. The current trade talks with China will have long term consequences, good or bad for the United States’ positioning as a world influencer politically and economically. Making sure our economy is integrated and fused into China’s would make the completion of the BRI much less scary for the US, and that’s the goal of the current administration as far as we can tell.

So, how this could impact investors at home and abroad? Well, here are some clear connections to investments right now:

Energy prices

With China gaining control of more of the world’s energy, they’ll have more leverage and influence over fossil fuels and future sources of energy creation and transportation

Emerging markets volatility and credit ratings

Credit could be impacted if China is involving themselves with infrastructure development and domestic investments

Interest rates

If there’s a large sell off of treasuries that will have impacts on the yield curve

Strength of the dollar abroad could decrease

Right now, the dollar is the main economic currency globally, which could be subject to negative change as China pushes to become a bigger player in international trade

These potential shifts in the international market will obviously apply to international holdings within portfolios. Any change has the potential for growth but warrants significant monitoring that we’re currently doing on a daily basis. Because there are so many moving parts to these events and decisions, we invite you to have conversations with us about how the events might impact you and your investments directly.

Any opinions are those of the author and not necessarily those of RJFS or Raymond James.