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Analyst Seminars

August 2021

Macro outlook: US-China showdown and inflation headwinds


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  • Inflation pressure is rising globally. China is now taking on a lot of such pressure, as it is very sensitive to global commodity, metal and energy prices. The situation is similar to the cycle between 2016 and 2017, causing at least an industrial margin squeeze now. China will at least export some of this inflation to the rest of the world. We believe the Fed would not wait until 2023 to raise rates.
  • The Alaska meeting was a failure, in our view. Biden’s new team is no easier to handle than Trump’s China hawks. We should expect more flashpoints in the near term, as the two powers are heading for a showdown. Even a military confrontation is not unthinkable anymore, in our view.
  • Financial decoupling is inevitable in the context of this showdown. Investors should pay attention to the risks associated with US financial sanctions on China, and how China may react. We see significant FX and monetary implications if a large amount of capital needs to be returned to US investors.
  • Against a more hostile external backdrop, China has embarked on a new “dual inward circulation” strategy, which has so far meant various moves to restrict imports and outbound spending. This helps preserve its foreign exchange and stabilise the CNY, at the expense of many trade partners.
  • Hong Kong has become a new battleground in this US-China showdown. Following the failed meeting in Alaska, the likelihood of secondary sanctions has increased. These could have direct and serious implications for banks, the dollar peg, as well as Hong Kong’s debt exposure to China. There are also serious questions as to whether Hong Kong can maintain its IFC status in the long run.