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'Sandwiched Korea to see elevated financial market volatility'
By Lee Kyung-min
The recent re-escalation of the drawn-out trade feud between the U.S. and China will continue as neither of the world's two largest economies will give up in the hegemony-oriented power struggle spilling over to technology and financial markets, experts said Monday.
Bolder, more politically charged rhetoric is expected from the U.S. until its presidential election in November, and the fight will fast lead to a "decoupling" of the two economies if Donald Trump wins. But the situation will be vastly different if his Democratic opponent Joe Biden is victorious, they added.
Export-reliant Korea, long sandwiched between the two, will need to diversify trading partners as part of a long-term drive to reduce its dependence on the two trade powerhouses.
Yet strengthening domestic manufacturing capacity remains elusive in a country long bogged down by militant unions compounded by what businesses deem "motivation-sapping" regulations.
Lingering issues
The feud showed signs of a rapid escalation after an official in the Trump administration reportedly pressured an independent board overseeing a retirement savings fund not to invest in Chinese companies.
According to multiple new media outlets, May 12 (local time), U.S. Labor Secretary Eugene Scalia, whose department oversees the Federal Retirement Thrift Investment Board (FRTIB), the administrator of the Thrift Savings Plan (TSP), sent a letter to the board chairman telling him not to invest in index funds that buy Chinese shares.
In the letter, Scalia urged the retirement savings fund not to invest in Chinese firms deemed a national security threat by the U.S. government, virtually halting billions of dollars of investments by the TSP which covers federal employees and members of the military.
The move to limit Chinese acquisitions by U.S. companies citing national security grounds was the latest step towards "decoupling," an effort to remove close economic relations and thereby seeking independence from each other.
Shortly after, U.S. President Donald Trump told FOX Business' Maria Bartiromo, May 14 (local time), that his administration was looking "very strongly" at requiring Chinese companies to follow U.S. anti-fraud accounting standards.
According to the interview, he said if the strengthened requirement materializes, the companies would consider moving to London or Hong Kong.
The comment followed an accounting fraud scandal a month earlier involving Luckin Coffee, a Chinese coffee retail chain listed on the NASDAQ in 2019.
The China-based firm is set to be delisted from the U.S. bourse following a notice given after it acknowledged falsifying $310 million in sales in 2019. Its then CEO Jenny Zhiya Qian and then COO Jian Liu were fired and the firm lost 80 percent of its stock value.
The series of attacks leaves little option for China other than currency appreciation, a source of continued conflict which could lead to the U.S designating the country a currency manipulator.
The U.S. has criticized China for allowing its currency to fall below 7 yuan against the U.S. dollar as an unfair tactic to gain a competitive advantage in global trade.
While some voices in China raise the need for the country to sell U.S. debt, this drastic measure is not much of an option, according to experts.
This is because the "nuclear option" of offloading U.S. Treasuries will destabilize global financial markets and push interest rates higher, escalating the tension between the countries even further.
"As China's trade surplus with the U.S. continues to decrease because of the trade tensions, holdings of U.S. Treasuries might also decrease," Bala Ramasamy, an economics professor and associate dean at the China Europe International Business School (CEIBS) in Shanghai said.
However, the offerings of U.S. Treasuries in general will increase to finance the massive bailout and stimulus plans of the U.S. government amid the COVD-19 pandemic. With no viable alternative to replace the greenback-denominated debt, it still is the best asset class to hold in an uncertain environment, he added.
"The impact on other economies, including Korea, continues to be the pandemic, the hibernating economy and the political rhetoric among the world's largest economies," he said.
Loyola Marymount University finance and economics professor Sohn Sung-won said the relationship between the U.S. and China will "dip to a new nadir" as a vast majority of U.S. voters following the pandemic think China is a predator hurting the U.S. geo-politically and economically.
"President Trump has joined the wave and stokes the unhappiness with China, in an election year. If it weren't for the initial trade agreement, in which China pledged to buy a large quantity of U.S. agricultural products, the rhetoric would have been worse. It is quite likely that sanctions on China will spread in the coming years," he said.
The conflict puts Korea "between a rock and a hard place," he added, an inevitable result given Korea needs friendly relations with both nations.
"This will be a diplomatic tightrope. Clearly, Korea can't abandon either the U.S. or China. I assume some sort of compromise will have to be reached. In the end, Korea must remember that the U.S. is the most important relationship economically and security-wise," he said.
Financial market volatility
Korea Development Institute (KDI) researcher Song Yeong-kwan said the conflict between the two largest economies could spill over to the financial market, triggering foreign capital outflow amid a lack of defensive measures to prevent the worst-case scenario.
"There were some signs of capital outflow in February and March amid the COVID-19 pandemic," Song said. "While no major signal has been detected, any inkling of negatives could send the highly volatile market into a rapid tailspin."
The sentiment is echoed by another China expert who views the Korean financial market ― highly exposed to foreign capital outflow ― as suffering far greater than China, which remains insulated from capital outside the country.
"Ninety percent of the Chinese stock market is held by individual investors, with little room for institutional investors hence little volatility. This coupled with large savings held by Chinese people paints a very different picture in the event of a market dislocation," Korea Institute for International Economic Policy (KIEP) senior research fellow Yang Pyeong-seob said.
