The consensus that blew out the pandemic
The initial trade consensus between the United States and China reached in mid-January (disturbed by the effect of the global COVID-19 pandemic) was put to a very serious test these days. In our opinion, the situation is becoming so tense that a possible return to the starting point before January would not have to be the worst-case scenario for the global economy. The thing is, it is unlikely.

Elections as a turning point
From the perspective of several months, for which the turning point is the autumn presidential election in the US, further escalation of tension between Washington and Beijing seems almost inevitable. The electoral aspect is crucial here, as 70% of respondents among Republican voters report reluctance to China, and around 60% in the Democratic electorate. In addition, surveys show that up to 90% of US citizens recognize China’s growing importance and see it as a real threat – both economic and geopolitical. This allows us to assume that until the election, albeit with varying intensity, investors will experience increased risk. This risk can also be seen in those markets that are associated with new conflict fields. Therefore, these are not only markets for agri-food products (e.g. cotton, meat, cereals), but also to a large extent, and maybe mainly for certain currency pairs and securities. We would also like to draw attention to two important events announced for this month. The first will be the submission by the Washington administration for world public opinion of intelligence findings of Chinese sources of a coronavirus pandemic. The second event is the one from 22 May, when the annual meeting of the Chinese party and state authorities will take place, at which both the current socio-economic situation and the status of long-term development programs outlined by the government and the party are usually assessed.

The ‘five pairs of eyes’ report and its (potential) Australian connotations
In the case of coronavirus intelligence findings, it is worth noting that they will be the result of the cooperation of five English-speaking countries that make up the optics of the so-called “five pairs of eyes”, i.e. the intelligence services of the USA, Canada, Great Britain, Australia, and New Zealand. Australia, with the exception of the US, was the first “victim” branded. Beijing, in the voice of its diplomats, began to exert pressure and hinted at possible retaliation in the form of reduced demand for metal ores, beef, and Australian wine supplies. We can assume that the country’s currency, bonds, and stock exchange stock market in Sydney will be under pressure, which will result from expectations regarding the weakening of existing economic relations with China. Relations based not only on commercial trade, but also on direct and capital investments. The value of mutual trade between Australia and China reached AUD 214.6 billion in 2018. For Australia, China is by far the largest external market with a total export share of around 41%. From a slightly different perspective, covering the financial year 2018/2019, this share drops to around 33%. China’s particularly significant position is due to, among others from a free trade agreement between the two countries signed in 2014. Since then, Chinese capital is rapidly increasing its involvement in the Australian economy. It is largely the result of business visas granted to citizens of China. In addition, China is Australia’s largest foreign creditor due to the acquisition of its federal and state debt securities. Australia’s foreign debt has already exceeded the US $ 1 trillion two years ago. This development of events is therefore met with increasingly voiced fears and growing opposition from Australian citizens. The percentage of people who believe that “things have gone too far in this respect” increased over the years 2014-2018 from 56% to 72%. Some real alternatives in the event of weakening Australian-Chinese relations and relations seem to be for Canberry, similar to Washington, London, or Brussels – India. We will discuss the issue of increasing business “exposure” to India separately. At this point, we only want to signal the possibilities of such a short and especially medium and long-term strengthening of the Indian currency.

Do the party and government in China have anything and who to fear?
Announced for May 22, the annual party-state congress will have to confront the decline in Chinese GDP by -6.8% that occurred in Q1 this year, while meeting the issue of systematically deteriorating social sentiment. The fact that the last fall in GDP took place in 1976 ( by the way in the same one where Mao Zedong died) allows us to share the view that this regression should be seen in terms of a certain socio-economic shock. One that can’t quite be explained by the COVID -19 pandemic alone. The more so that in the entire 2020, according to quite conservative forecasts of the International Monetary Fund, the Chinese GDP is expected to shrink by -1.2%.
Public protests, which are very limited in public, are a constant problem of the Beijing authorities (except for Hong Kong). Not only the workers are dissatisfied, but the problem is also increasingly affecting the Chinese middle class. On the one hand, it has suffered from the weakening pace of economic development over the last few years, and on the other hand it is affected by cyclical mass financial losses. Conflictogenicity, and therefore growing public outrage, is largely due to specific official restrictions, which are accompanied by the government’s preferred capital allocation methods. For example, government restrictions on housing investment have led the Chinese middle class to invest in the Shanghai Stock Exchange. As a result of deep declines in share prices in 2015-2016, the state had to undertake intervention buying of shares to cool public moods. In turn, last month, the collapse of oil prices hit many retail banking customers. In China, citizens cannot directly purchase financial instruments on foreign financial markets, e.g. from forex / CFD brokers, which is why domestic banks offer them, among others various denominated in native currency – structured products. In the case of only one product called Crude Oil Treasure made available by the Bank of China, according to official data about 60,000 people lost money, for a total of approx. USD 1 billion, which translates to approx. 16 thousand USD losses per person. Information on investment pauperization of savings is quite rudimentary, but it is known that similar “oil” products were also in the portfolios of clients of other banks, such as China Construction Bank or Bank of Communications. Chinese wealth management / private banking sector – is estimated at approx. USD 3 billion, which with a middle class of approx. 250 million people give approx. 12 thousand USD per person. We believe that the actual extent of losses and victims of the asset revaluation may be one of the answers – why official government support programs for Chinese enterprises are (officially) quite limited. At the same time, we point out that the problem of potential social rebellion in China, also in the context of tensions
in Hong Kong, it is still an underestimated factor of weakness, and thus an increasingly real threat to political stability in China.

We assume an escalation of the geoeconomic conflict between the US and China, for which the turning point in the perspective of 2020 will be the presidential election in the USA.
As a result, recovering from a pandemic collapse in the world’s largest economies may not take the shape of the letter “U” but rather “L”. The phenomenon of a general reluctance to China will affect most Western countries and societies, but especially English-speaking countries. Relatively the largest resonance and outlet for these trends can be expected (outside the USA) in the case of Australia, which is the economy most closely related to China. For this reason, the effects of loosening financial policy should most clearly find their reflections in the depreciation of the AUD or the Sydney stock market and Australian bonds. In turn, among the potential beneficiaries of the Chinese-American, and de facto Anglo-Saxon antinomy, we see above all – India. We, therefore, recommend paying attention to the possibility of a pro-upward trend in the rupee exchange rate (INR), as well as the progressive potential of Indian stock market indicators.

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