Dear Investors,
News stories have been filled with geopolitical developments, including Chinese balloons, the ongoing war in Ukraine, trade disputes, and the U.S. debt ceiling standoff to name a few.
Yet, the Federal Reserve’s Geopolitical Risk Index has eased, moving back to its long-term average, as you can see in the chart below.
So, should investors be concerned about these geopolitical developments? Or is it business as usual?
Charles Schwab believes the answer is both.
Relations US & China
Last November at the G20 conference, Presidents Joe Biden and Xi Jinping pledged to stabilize the tense U.S.-China relationship.
Thus far, an easing of tensions has been elusive.
The purpose of Secretary of State Blinken’s trip that was cancelled in the wake of the incidents involving Chinese spy balloons earlier this month was to establish a floor in deteriorating U.S.-China relations.
The postponement of Blinken’s trip was not welcome news for Beijing, whose focus for 2023 is a domestic economic recovery, rather than international relations.
In contrast, the U.S. administration may seek some improvement in relations so the Blinken trip could be rescheduled.
There is a short window to do so before the start of China’s National People’s Congress in early March.
This setback will likely make it harder for them to manage potential upcoming flashpoints – events at which trouble, such as violence, flares up – in the coming weeks and months that have potential impact to financial markets.
Flashpoints that could escalate tensions
There are plans for Taiwan visits by House Foreign Affairs Committee Chairman McCaul (likely April) and House Speaker McCarthy (later this year).
China’s reaction to the McCarthy trip could provoke an even stronger reaction than former Speaker Pelosi’s visit last fall.
If Chinese companies are found to be providing significant aid to Russia’s war effort, it could spur calls for secondary sanctions on China.
It looked like China had largely refrained from providing material help, but a few recent press reports suggest there may be more military equipment sales than previously thought, in violation of Western sanctions.
How far-reaching the administration’s forthcoming executive order on U.S. investment in China will be is yet unknown.
The widely held expectation is that the order will limit investment in a narrow range of sensitive industries that have military applications (such as A.I. and certain high-tech equipment).
Yet, it’s possible that a broader ban on U.S. investment in Chinese firms emerges alongside legislate efforts to ban TikTok.
Despite these potential flashpoints, Charles Schwab feels that a continued rise in tensions with the U.S. this year is unlikely to have much impact on China’s economic recovery, which will depend mainly on domestic strength stemming from the post-COVID rebound in consumer demand.