Monetary Policy & Inflation | Politics & Geopolitics | US
Black swan events are the unknown unknowns that no one can even envisage, let alone predict. But their close cousin – grey swans – can enter our imaginations. These are low probability, high impact events that few expect. They aren’t even our base cases. But by imagining these risk scenarios, we can at least prepare for them should they erupt.
While everyone has been talking about trade wars, the next battle may be fought over capital flows. Under President Trump, the US has battled very publicly to advantage US goods in international trade, especially with China. We’ve now got new tariffs being introduced that have the effect of throwing sand into the gears of global trade. But why stop there?
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Black swan events are the unknown unknowns that no one can even envisage, let alone predict. But their close cousin – grey swans – can enter our imaginations. These are low probability, high impact events that few expect. They aren’t even our base cases. But by imagining these risk scenarios, we can at least prepare for them should they erupt.
While everyone has been talking about trade wars, the next battle may be fought over capital flows. Under President Trump, the US has battled very publicly to advantage US goods in international trade, especially with China. We’ve now got new tariffs being introduced that have the effect of throwing sand into the gears of global trade. But why stop there?
The US’s real strength is its intellectual property and corporate prowess. Foreign companies have forever been trying to acquire US companies to leapfrog an internal development process. Notably, in recent years, China has been an active investor in Silicon Valley and an acquirer of US companies. But we are seeing signs that the US may try to put a stop to that.
The Foreign Investment Risk Review Modernization Act (FIRRMA) was signed into law by President Trump in 2018. It gives the Committee on Foreign Investment in the United States (CFIUS) – the body that approves foreign takeovers of US companies – sweeping new powers. For example, the body can now stop certain real estate transactions and even acquisitions of minority stakes in companies.
Recent deals being blocked include Singapore-based Broadcom acquiring US Qualcomm. And Chinese gaming company Beijing Kunlun Tech had to reverse its purchase of dating app Grindr. All were blocked on national security grounds.
But this could just be the beginning. A lack of progress by the Chinese to open up its markets, a failure to protect US intellectual property in China and any CNY weakness could see the US ratchet up the pressure in 2020. On top of using CFIUS, the US could also delist Chinese companies from US exchanges – currently over 150 companies are listed including Alibaba and PetroChina, and the US could stop US investors buying Chinese securities. Both Peter Navarro, trade advisor to Trump, and Senator Marco Rubio have advocated such moves.
Together these measures would amount to capital controls. So why not go all the way and introduce formal capital controls against all countries? Remember that from after the Second World War until the early 1970s the US had formal capital controls under the Bretton Woods system. You heard it here first.
Market implication: Chinese stocks underperform, US VC markets come under pressure.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)