This month, Daniel Rico, Vice President - Latin America FX Strategy, sits down with Alvin Tan, Asia FX Strategist, to discuss the US relations with China and Mexico given the upcoming US election.
1) Looking back to 2016 the US presidential campaign was in large part focused on Mexico and the re-negotiation of NAFTA and immigration. But this time around we can argue that China is in the forefront. So given the lessons learn thus far, how would the US-China relationship be affected by the election outcome?
- The US-China geopolitical rivalry will persist after the election, but both countries remain bound together by a complex web of economic and financial ties, and the relationship with all its complexities will need to be managed
- Whether Trump or Biden wins, the chief focus will be on domestic economic recovery, and neither will look to restart the trade war from the outset
- Biden has voiced protectionist policies in his campaign, but the market is encouraged by the hope that a new administration will pursue more predictable trade and investment policies.
2) The opening of the Chinese economy has led to the inclusion of China on various global financial indices. Do you expect a large appreciation of the yuan on the back of the flows?
- China has the second largest bond market in the world, but the share of foreign ownership is less than 3%
- If foreign ownership of Chinese bonds were to rise to the EM average of 23% over time, while the market continues to grow, we could have cumulative capital inflows of $4-5 trillion
- This is a fundamental long-term tailwind for the Chinese yuan
3) Connecting to the US election, do you expect that a potential further deterioration of US-China relations could taper the capital inflows and yuan appreciation?
- The US-China financial relationship has remained robust despite mounting geopolitical tensions
- There has been a significant amount of cross-border financial transactions this year, and Chinese bond yields above 3% are very alluring in a world of zero or negative rates
- We would need to see a drastic deterioration in the geopolitical relationship to force a major curtailment of the financial relationship, and is unlikely while the focus in both countries is on domestic economic recovery
4) Mexico’s president used Pemex and the refinery independence as a campaign program in response to the US 2016 elections and has started an ambitus program to refurbish and create new refineries in order to achieve energy independence from the US refinery. Do you expect that China will speed up the "dual circulation" strategy as a response to the US elections? – can you briefly explain the "dual circulation"?
- The “dual circulation” policy is still a work in progress, as it is a reaction to various recent challenges, including the pandemic and external demands
- The internal circulation part of it is about spurring domestic investment in high-tech ventures and household consumption
- The external portion relates to increasing both overseas investments, such as the Belt and Road Initiative, and incoming investments, such as the opening up of the domestic financial sector to foreign firms
