A new cold war between the US and China may already be here but it is set to be different from the first cold war between the western world and the Soviet Bloc.
We expect a further decoupling between the US and China in terms of technology, investments and human-to-human exchanges. However, we are unlikely to see two separate blocs like during the first cold war, as many countries in Europe and Asia will keep a leg in both camps, leaning towards the US when it comes to security and advocacy of democracy and liberty, while at the same time cooperating with China on the economic front, climate and other global issues.
We believe the US and China will each strive for increasing independence of each other in fields of technology, finance and commodity resources. Fears that the cold war could tip into a hot war eventually have been on the rise and the South China Sea and Taiwan are primary concerns for a possible military confrontation.
A new cold is set to lead to two technological systems developing side by side (bifurcation) and many companies may have to develop two sets of products – one for the Chinese market and one for the rest.
The new technology race as well as more government support for technology and R&D in the West could lead to more innovation and higher productivity. On the other hand, a need to develop two different technological systems will come at a cost and reduce productivity gains. The net result is not obvious.
For financial markets, the new cold war may not have a big impact unless we see serious disruptions in terms of trade wars or material escalation in the conflicts around the South China Sea and Taiwan. The survival of the phase one trade deal will be the most important factor in the short term. We see a 50-50 chance that Trump sticks to the deal.
This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.