Risk Assets on the Back Foot with US vs China Trade Deal Under the Spotlight

Tensions between the US and China have surfaced once more, but this time it could really turn into quite an altercation between the two powerhouses.

In essence there are two core themes at the heart of this flare up:

1) Donald Trump signing a Uighurs human rights bill to punish China

It has widely been suspected that China have been keeping Muslims in prison camps within the wester Xinjiang region, where many ethic minorities were subjected to forced labour, deprived of adequate food, lack of medical treatment and even torture. Is it estimated that more than a million people from ethnic groups that include Uighurs, Kazakhs and Kyrgyz have been kept in a vast network of detention centres.

What does the Bill do?

China have continuously denied these allegations until video evidence from whistle-blowers appeared. The bill signed by Trump, would impose sanctions on specific Chinese officials, such as the Communist Party official who oversees government policy in Xinjiang. It also requires American authorities to look into the pervasive reports of harassment and threats of Uighurs and other Chinese nationals in the United States.

Why has Trump done this?

Although Trump is likely doing this just to attack China, it certainly will help his presidential vote later this year and it serves a key message – enough is enough. Uighur activists have praised Trump as they see this as an important step, it is the first time any government has sought to punish China for a campaign of mass surveillance and detention of Uighurs and other mostly Muslim ethnic groups in the western Xinjiang region.

China has responded by expressing strong opposition to the US law regarding Uighurs, exclaiming that Xinjiang is purely China’s affairs and urged the US to revoke its decision, ‘or’ they will ‘resolutely’ respond and the US will bear the consequences.

2) China not abiding by Phase one of the US-China Trade deal

Earlier this year in January, China and the US agreed on phase 1 of a trade deal, a move set to squash the ‘tariff war’ between the two powerhouse countries.

Recap of phase one deal

In summary this deal included provisions to root out intellectual property theft and forced technology transfers and increase Chinese purchases of U.S. goods, Most noteworthy China’s agreement to purchase $200bn more worth of U.S goods over a two-year period. Trump would also cut tariff duties amounting to $120bn in products, to 7.5%.

The current issue

However, it has been revealed that China has not been sticking to this agreement. The U.S Chamber of commerce called for China to accelerate purchases of U.S goods and services agreed in Phase 1. The concern is that China may retaliate by saying they will not increase buying of U.S goods in this current environment, where consumption and buying from consumers have been affected. Could this potentially cause a tear in the trade deal?

What does this all mean for markets?

Risk FX (AUD, NZD, CAD) will not take likely to this, especially AUD (as China is Australia’s largest trading partner). Stocks are also likely to be under pressure if this escalation continues with safe heavens looking more attractive. Markets will be on edge , waiting to see how this moves going forward, is this another case of Trump attacking China then retreating, or is something far more serious? 



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