U.S.-China Financial Breakup Scenarios Are War-Gamed at BofA

(Bloomberg) -- With U.S.-China trade tensions deepening, analysts at Bank of America Corp. have war-gamed some potential implications for financial markets.

“What if China and the U.S. were to decouple financially,” a group led by David Cui, head of China equity strategy with the American bank, asked itself in a June 4 note to clients. It’s “not our base case but an emerging risk worth monitoring,” they wrote.

Among the potential implications of any moves to establish a financial iron curtain between the world’s two largest economies, according to Bank of America:

• Chinese American Depositary Receipts delisting amid increasing scrutiny from U.S. politicians.
• American fund managers coming under pressure to exit from Chinese stocks. Biotechnology, construction, oil and gas, telecoms, media and tech companies “may face higher risk of being subject to adverse shareholder actions potentially being perceived as a national security threat,violating human rights, or breaching American laws.”
• Chinese IPOs could shift to Hong Kong and China, hurting “new economy” enterprises because the “U.S. capital market is much deeper.” In the short term, “a sharp increase of big-sized IPOs may put liquidity pressure on the rest of the markets” in China.
• China could sell some of its U.S. investments, including Treasuries and stocks.
• The two countries engage in a currency war as China promotes global use of the yuan, aiming to erode the “strategic advantage” America has with the dollar’s role in the global financial system. That dominance has given extra oomph to U.S. sanctions against Russia, Iran and Huawei Technologies Co., Bank of America noted.

The trade war has already morphed into other areas, with China warning its citizens about the dangers of travel to the U.S. and the Trump administration moving to scrutinize researchers with ties to Beijing and restricting student visas. Conflict has also hit the regulatory playing field, with China fining Ford Motor Co.’s main joint venture in the country for antitrust violations.

“There are some signs in recent days that the U.S.-China conflict may spread to the financial markets,” the Bank of America strategists wrote. “China and the U.S. may decouple financially in the long run.”

To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen

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