NEW YORK (S&P Global Ratings) Aug. 25, 2020--U.S.-China relations have deteriorated markedly in recent weeks across different fronts, causing the risks of an economic spillover on credit conditions in both countries to rise. With criticism of China increasingly evolving into policy in the U.S., particularly in the areas of China's access to U.S. technology and financial markets, S&P Global Ratings views the risk trend of an economic spillover as worsening.
This change indicates that we believe the strained relationship between the economic giants could place additional pressure on economic and credit conditions in these two regions, and beyond.
The Asia-Pacific Credit Conditions committee has taken the view that the multifaceted confrontation between the U.S. and China is increasing the risk of a financial market or policy reaction that results in material economic costs. Recent U.S. policies and initiatives are increasingly targeting China and the activities of Chinese entities. This could create significant business disruptions if their implementation is more severe. As such, we continue to assess the risk level that economic spillovers from U.S.-China strategic confrontation as high, but see the risk trend as worsening.
Financial market access is a particular vulnerability as any major restrictions could have extensive implications on the operations of global financial institutions and entities that rely on trade and U.S. dollar funding. Although workarounds and alternatives may be feasible, as with U.S. sanctions on other countries seen in the past, the effect could be much greater given the interconnectedness and scale of the two economies.
Likewise, another area of contention that could have substantial effect would be technology and communications, centered around the U.S.' "Clean Network" campaign (a Trump administration initiative said to guard sensitive information from untrusted parties). The direct hit on the Chinese tech sector so far is largely manageable. U.S. sanctions have only targeted a handful of entities, most notably Huawei Technologies Co. Ltd. and ZTE Corporation. However, a second-order effect up the value chain could prove to be more material for players such as semiconductor foundries and parts suppliers. Also, longer-term implications on this sector and on China's economy could get worse if restrictions reach wider and squeeze harder.
It is also noteworthy that, although any direct effect from the tension will likely be negative, some firms may find sturdier backing. China is likely to strengthen industrial policies aimed at financial, operational, and regulatory support for affected entities. This would be aligned with its "Made in China 2025" initiative, first unveiled in 2015, to make the country technologically self-sufficient in key areas. Other regions or non-Chinese firms may also stand to benefit as they capture trade and divert investment away from China.
With the unpredictability of recent and potential developments and the looming U.S. presidential elections, other areas of dispute could also flare up. Cross-border investment is undoubtedly slowing or more focused on "reshoring," which could also have a lasting effect on trade and corporate activity between the two nations and elsewhere. Retaliations from China so far have been largely limited to tariffs and diplomacy. We do not expect it to escalate or put a significant dent on U.S. businesses, unless the U.S. launches more targeted initiatives.
The North America Credit Conditions committee, too, has taken account of rising economic nationalism around the world and, specifically, the intensification of the U.S.-China dispute--and believes that the relationship between the world's two biggest economies could deteriorate in the coming months. In this light, while we continue to assess the risk that U.S.-China tension disrupts trade and supply chains and hit U.S. economic growth as high, we now see the risk trend as worsening.
With finger-pointing regarding the coronavirus pandemic and unease about China's trade and investment policies having bruised international relations broadly, the flashpoint in global trade tension remains the U.S.-China relationship. But it's important to note that the tit-for-tat tariffs the two countries have imposed on each other are just one front in a larger trade war, with the relationship strained in three areas: trade in goods and services; China's access to U.S. financial markets; and technology.
Although the "Phase One" trade deal between the U.S. and China initially alleviated some pressures, the pandemic's hit to China's economy makes it unlikely that the country will be able to meet ambitious targets for its purchases of American goods and services as the pact lays out. Moreover, the deal may not entirely appease the U.S. government's initial allegations of intellectual property and technology transfer.
This comes as the U.S. presidential campaign shifts into high gear, which will likely bring harsher criticism of China from both President Trump and Democratic presidential nominee Joe Biden. This has already played out in President Trump's executive order setting a ban on Chinese mobile apps such as TikTok and WeChat. The move could push the fragmentation of global communications networks and change the development and operating landscape of the sector in the longer term.
All told, we think the U.S.-China trade dispute, coupled with restrictions on access to U.S. advanced technologies will intensify Beijing's ongoing effort to boost self-reliance in core technologies. There's no question the technology gap between the U.S. and China is narrowing (albeit with much ground to cover), and China has made public its ambition to be a global tech leader.
While escalating tension could have a significant effect on the global tech sector, we think the likelihood of a no-holds-barred trade war is low.
From a broader credit perspective, supply-chain disruption, higher costs on Chinese goods sold in the U.S., and the possibility of non-tariff measures such as boycotts on American goods, could each potentially weigh on credit quality for certain U.S. sectors and industries. However, the effects of the recent deterioration in the U.S.-China relationship have so far been asymmetrical, with Chinese exporters to the U.S. absorbing a bigger blow than their American counterparts simply because of the different levels of trade.
- U.S. Actions Against Huawei Reverberate Across Asian Tech, July 29, 2020
- Credit Conditions Asia-Pacific: China First To Recover, June 30, 2020
- Credit Conditions North America: Rolling Out The Recovery, June 30, 2020
This report does not constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.
|Primary Credit Analysts:||Christopher Yip, Hong Kong (852) 2533-3593;|
|Gavin J Gunning, Melbourne (61) 3-9631-2092;|
|David C Tesher, New York (1) 212-438-2618;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: email@example.com.