Geopolitical risks for the economy and investments

3 min read

The world has always been challenged by the dynamics of geopolitics. The nature and magnitude of associated conflicts may transition and manifest across varying contexts but, broadly speaking, geopolitical risk is ever present.

US-China relations

The trade war between the US and China, characterised by tit-for-tat tariffs, continues to disrupt major global supply chains while threatening to hinder global economic growth, albeit the extent to which is unknown. While the impact of the trade war has affected the financial markets, primarily through its effect on investor sentiment, more broadly there could be opportunities for some nations to benefit from a potential diversion of trade, particularly for economies who have the competitive capacity to replace US and Chinese firms1.

The open rivalry and strategic competition comes as China makes progress towards achieving its major long term goal of becoming a “moderately prosperous country” by 20202. As part of this strategy, China aims to become a “global innovation power in science and technology”3 along with other goals related to supporting the sustainability of its growth. Some of the actions China is alleged to have taken to achieve this, including allegations of the inappropriate transfer of IP and technology, have raised concerns over national security for the US4. This issue has been a driving force behind the protracted trade negotiations between the two countries.

Recently the People’s Bank of China (PBoC) let the yuan depreciate in its daily rate fixing, to be above the key USD/CNY 7 mark5. Key reasons for the renmimbi (RMB) depreciation is suggested to be in support of growth in light of the impact of US tariffs on China.

Recent measures by China to combat US tariffs through a devalued yuan has soured the outlook for a trade deal. 

China and Hong Kong

Recently proposed amendments to Hong Kong’s Fugitives Bill to allow extradition of fugitives not only to China, but to any jurisdiction in the world with which the territory has no existing formal agreement had led to protests in the streets of Hong Kong over concerns and fears that the law could be abused by China for political or commercial reasons. Though the amendments have now been suspended, the unrest continues.

What began as a peaceful protest against an amendment to Hong Kong’s Fugitive Offenders Bill has now turned into the revival of a deeper rooted issue reminiscent of the 2014 Umbrella Movement. While it is an example of China’s assertion of power within its own borders, it too is a demonstration of a clash of political ideology and symbolic of the gradual reclaim of power that has long been vested with the West.

Brexit

Changing geopolitical relationships is also clear in the pending UK exit from the European Union (EU). The outcome remains uncertain following the resignation of Theresa May and rise of Boris Johnson as Prime Minister only months before the Brexit deadline.

Currently, the EU Single Market and Customs Union provides the deepest possible economic integration of a region and deviation from this standard involves economic costs6. While this is occurring, some EU countries are still recovering from the crises of recent years. The Bank of England’s Financial Stability Report affirmed that UK Banks are deemed resilient enough to withstand a disorderly no-deal Brexit, but it is still expected that a range of UK assets will be negatively affected7.

The rise of widespread geopolitical issues comes at a time when the world economy is at risk of slowing. Consumer confidence and financial sentiment has dampened alongside the growing risks to the current economic expansion. Central banks are treading cautiously, but are mindful of the already low interest rates and the high levels of debt. As the IMF highlights, failure of nations to co-operatively address sources of dissatisfaction could further destabilise a slowing world economy8.

1. United Nations, 2019 https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=1989
2. World Bank, 2019 https://www.worldbank.org/en/country/china/overview
3. Office of the United States Trade Representative, 2019 https://ustr.gov/sites/default/files/enforcement/301Investigations/301%20Draft%20Exec%20Summary%203.22.ustrfinal.pdf
4. https://www.ip-watch.org/2019/01/24/us-complaints-technology-transfer-china-negotiating-endgame/
5. https://www.bloomberg.com/news/articles/2019-08-07/yuan-weakens-after-central-bank-sets-fixing-closer-to-7-a-dollar 
6. European Network for Economic and Fiscal Policy Research, 2017 https://www.ifo.de/DocDL/EconPol_Policy_Report_04_2017_Brexit.pdf
7. Bank of England, 2019 https://www.bankofengland.co.uk/financial-stability-report/2019/july-2019
8. International Monetary Fund, 2019 https://www.imf.org/en/Publications/WEO/Issues/2019/01/11/weo-update-january-2019

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This article was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian Credit Licence 233714 (Westpac). This information is current as at 12 September 2019. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.