Mizuho Chart Speak – How are markets pricing US-China risks?

“Inadequately, that’s how!”. That is the response (in the interest of brevity) to the question how markets are current pricing in US-China risks. Fact is, markets appear to have taken an appreciably more sanguine view of both policy and trade uncertainty (See Chart). Ostensibly, the relief is at least in part owed to perceived differences in the Biden Administration’s approach to US-China relations. Specifically, the belief that Biden will take a more considered and consultative approach to tackling differences with China; with the buy-in of allies, in sharp contrast to unilateral and ad-hoc and trigger-happy measures that are sometimes short on details, risking incoherence.

Such a marked shift in process is assumed result in a methodical and gradual, evolution of US-China relations that, by virtue of providing ample notice and wiggle room, avert inadvertent diplomatic mis-steps (and mishaps). At face value, this appears to suggest immense relief for China and the wider global trade partners compared to a tumultuous period during the 2018-2019 US-China trade conflict. In other words, diplomatic berth, transparency of objectives and coherence have diminished perceived risk premium. Maybe so. Afterall, the volatility quotient with Biden is undeniably diminished as compared to Trump’s mercurial outbursts and twitter “fire from the hip”.

But as welcome as the relief from unpredictability is, it should not be mistaken for a softer stance lacking in resolve. Quite the opposite, in fact. In particular, Biden’s cognizance of, and therefore commitment of heavy fiscal resources to, the technology as the critical frontier of US-China rivalry is the single biggest threat to the global manufacturing order; as we know, and as China hopes it will continue. In contrast, Trump’s misguided tariff/trade war threat was a muddled distraction that Beijing, most of the global supply chains and markets, essentially the world at large, could do without. But in no way does a dial-back in US-China trade war absolve China (or the rest of the world for that matter) of the structural US-China rivalry; which will constitute tectonic shifts to the global order.

Point being, underlying US-China risks are not resolved, merely relocated. That being the case, markets may not be not adequately pricing in a fracture in supply-chains, competition for the most valuable resources and a potential for a polarized global technological/geo-political order. Therefore, it appears that uncertainty gauges for global trade and policy are more subdued than they ought to be; and correspondingly, risks may be understated.