(Bloomberg) -- Investors need to think big and long-term on ramifications of a potentially protracted U.S.-China trade war, according to Bank of America Merrill Lynch (NYSE:BAC).
That recommendation comes as analysts are extending expectations for how long it will take the U.S. and China to patch up a trade deal. The Trump White House has turned to tariffs as a policy tool, members of Congress from both parties are indicating support for a tough stance and China has signaled it has “tremendous room“ to act to shore up its economy on its own.
“The risk of the two countries moving apart inexorably has risen,” analysts including head of China equity strategy David Cui wrote in a research note dated June 17. They see tighter controls on China’s capital account, difficulty raising external funding and threats to Hong Kong’s role as a finance hub among possible implications of a more drawn-out conflict.
Hong Kong’s importance as a global financial center to fund Chinese companies and Taiwan’s role as a technology provider “may come under increasing pressure,” BofAML’s note said, particularly if the U.S. and Hong Kong Policy Act is revoked and the city’s financial market is no longer seen as part of the global financial system. The firm predicted that would be negative for Chinese equities broadly and particularly for the tech sector.
Given the possibility of “financial decoupling” between the U.S. and China, the Shanghai Stock Exchange’s new trading venue for high-tech companies may become more important for those that can’t seek a Nasdaq listing, BofAML said, though for large companies it may lack the depth of U.S. markets. “If they are pressed to list locally, it could be a negative for them,” the note said.
The bank expects China’s capital account controls to be tightened and its financial market “to turn more inward.” That may benefit the housing market as more domestic savings remain in China, while the local market may become less vulnerable to foreign capital flight, the note said.
Overseas direct investment may also come under scrutiny from governments, BofAML’s analysts added.
“Private companies with global ambitions may suffer the most,” the note said.