We highlighted on Monday that the relations between
China and the US deteriorated quickly in the past few weeks, and the market has not fully recognized the
potential damage to US and Chinese firms. One month ago we expected the Chinese government to refrain
from targeting US business interest in China. But after the speech by US Vice President Pence we see a
rising risk that the trade war may be escalated to an economic war beyond trade. US business interests in
China may be subject to retaliation if the US moves beyond tariff. Many US multinationals depend on
China's market as a major revenue source. The official visit of US Secretary of State Mike Pompeo to
Beijing on Monday reinforces our concerns. His visit only lasted for three hours, the shortest visit by a
senior US official to China in history, as far as we know. The messages from his meetings in China
indicate the two sides have "fundamental disagreements". Mr. Pompeo did not manage to meet senior leaders
such as President Xi, Premier Li, or the Vice President and Vice Premiers. The confrontation between the
two sides intensified. The US equity selloff on Wednesday shows the market may have finally started
to price in this risk. We think the selloff makes the Chinese government more likely to follow a "wait
and see" strategy. With neither side willing to compromise, the bilateral relation will likely
deteriorate further, causing more pains for firms in China and the US.
European Stability Mechanism Managing Director Klaus Regling told CNBC that it was unfair to make
comparisons between Italy amid concerns on its deficit plans and Greece at the height of its debt crisis,
as the former has always been in a much better situation due to its relatively smaller deficits, current
account surplus and high private sector savings.
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