US should rethink its China policy so both countries can benefit - SCMP

• The South China Morning Post digging into the nitty-gritty of the trade war between the US and China. 
• A so-called phase one deal is in the making, AUD could be rocked on negative sentiment over a phase-two deal.

The South China Morning Post has reported that President Donald Trump and American politicians, in general, portray Beijing as a danger, but China is not an economic enemy or a threat; good ties in the past have helped both nations.

Key notes

• US President Donald Trump is a divisive figure, but his animosity towards China is shared by many Americans. No matter on which side of the political divide they stand, they perceive the Chinese rise as a threat to the United States’ economic and military dominance and seek policies that will keep it in check. A “phase one” agreement in the trade war, while much needed, will therefore not lead to an appreciable easing of tensions. Worse, unless the damage being done is better understood and appreciated, there is a risk that the hostility could spiral into all-out confrontation.
• Surveys show that about 60 per cent hold unfavourable views and there is a consensus that Beijing threatens prosperity. Trade issues, long focused on narrowing the deficit, are just one of the concerns; other efforts include curtailing China’s technological rise, intellectual property protection, market access, national security and human rights-related matters. The hardening of attitudes is leading to ever-tougher policies that are drawing the nations closer to the brink.
• American statesman and former secretary of state Henry Kissinger, the architect of rapprochement between the US and China almost half a century ago, told the recent Bloomberg New Economy Forum in Beijing that the nations were now in the “foothills of a cold war”. He contended the resulting conflict could be worse than World War I.
• Henry Paulson, the US treasury secretary under president George W. Bush, warned that decoupling of ties in goods, capital, people and technology risked isolation from the rest of the world. He called on both governments to ensure companies, workers and citizens maintained access to each others’ markets and those of the global economy to ensure opportunities and growth.
• Trump, claiming China has stolen American jobs, is doing his best to disrupt an economic relationship that has been carefully cultivated and nurtured over two decades. Republicans, once firm believers in free trade and globalisation, have been largely silent as he has put in place tariffs and barred Huawei and other Chinese technology firms from doing business with the US. 
• Harming ties in such a way will also hamper efforts by the world’s two biggest economies to tackle global threats such as climate change, pandemics and terrorism.
• American politicians portray Beijing as a danger. But it is not an economic enemy or a threat; good ties in the past helped both countries.
• Only when Trump adopts a rational and realistic approach will risks lessen and mutual benefits return.

FX implications

The yen is closely tied to risk appetite while AUD trades as a direct proxy to the US and China stand-off. However, FX markets have been stepping back from trade headlines of late considering the conflicting messages from various statements from both sides of the dispute.  The Aussie has been desensitised of late as traders favour the yield advantage in the greenback with the Federal Reserve on hold and Reserve Bank of Australia dovish. A so-called phase one deal is in the making, but markets will be quickly moving on to sentiment over a phase-two deal where more elusive themes will make for an ambitious deal and could start to rock the Aussie once again.