Page 14 - ISQ UK July 2020

INVESTMENT STRATEGY QUARTERLY

By the Numbers

5 4 3 2 1

Actions and US government US government Major bills in US
regulations by actions to actions to Congress to Election
federal agencies to increase pressure scrutinize assign damages
limit China’s access on China’s China’s access to to China for the
to US technology/ human rights US capital spread of
software record markets COVID-19

China in areas such as technology, capital markets, human action has been stifled by the spread of the virus, candidates will
rights, and supply chain security. The increased pace of these lean more on their China policy as a demonstration of actions
actions matches the war of words between the two nations they’ve taken during their time in office while making their
which has escalated over China’s role in the global spread of reelection pitch. This is likely to entrench an overall negative
COVID-19. view of China for a significant period.

In our view, the most impactful of these efforts will be limiting It is also worth noting that an expanded scope of frictions
access to US technology and software to China’s leading between the two nations, particularly in an election year where
technology companies and increasing scrutiny on China’s access rhetoric will be consistently elevated against China, limits
to US capital markets. The tech war dramatically escalated this opportunities to find off-ramps to de-escalate. This increases the
spring, and the conditions for a longer-term ‘Tech Cold War’ are overall risk of miscalculation on critical matters. Although the
solidifying, causing the US and China to compete over primacy in two sides are appearing to separate out the recent disputes in
the space of next-gen networks and technologies. Pressure is order to maintain general economic cooperation, the risks are
also building on capital market ties between the US and China. rising of a spiraling confrontation. Alternatively, the economic
The Trump administration successfully pushed back on the relationship may prove to be an important area of cooperation
government retirement savings fund transitioning part of its for the two sides to continue a dialogue and maintain general
portfolio to Chinese equities, and there is a high likelihood of global economic stability at a fragile time. Should Biden win the
Congress enacting a law that would force Chinese equities to presidency in November, we could see some de-escalation, but
delist from US stock exchanges if they do not meet certain far from a complete thaw. We believe a Biden presidency would
auditing standards. In all, these two pressure points are likely to seek to reestablish traditional post-World War II global alliances
be long-term trends, regardless of the administration in power that have been impacted by the Trump presidency. Should that
following the 2020 elections. occur, walking back on China would likely not be a top priority.
However, we could see some relaxation of tariffs as a way to
IMPACT OF THE 2020 CAMPAIGN relieve economic pressures and support recovery.
We are often asked why this bipartisan push against China
exists and whether a potential Biden administration would KEY TAKEAWAYS:
walk back some of the hardline approach of the Trump
administration. I always go back to one of the first lessons I • The spread of COVID-19 and the associated economic
learned as a young Capitol Hill staffer – “In politics, when you disruption shifted the dynamics of the relationship
are explaining, you are losing.” For members of Congress, they between the US and China in a major way.
have a choice of which team they want to be on: Team China or • The Trump administration’s China ‘hawks’ are now
Team USA. This is not a difficult political choice and we see this clearly driving the agenda, as evidenced in the recent
playing out on Capitol Hill where members only challenge uptick in administration policies challenging China in
President Trump with proposals to go even further than he has an increasingly broad manner.
in confronting China. • A variety of notable actions have come from the White
This dynamic will limit the extent to which there can be an House, Congress, and federal agencies increasing
alternative view with regard to the US relationship with China, pressure on China in areas such as technology,
particularly given the spread of COVID-19. This election is likely to capital markets, human rights, and supply chain
be one where both Republicans and Democrats will have to take security.
a tough line on China and explain how they plan to hold China • The economic relationship may prove to be an
accountable for the narrative forming around China’s lack of important area of cooperation for the two sides
effective information sharing and containment on COVID-19. to continue dialogue and maintain general global
Further, given that a significant portion of this year’s legislative economic stability at a fragile time.

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