The threat of a trade war with the United States roiled China’s equity markets in 2018, with about a 30% peak-to-trough decline in the Shanghai Composite. Earlier in 2019, optimism about a deal between the countries led Chinese equities to recover almost all of their losses, but the most recent tensions have diminished those gains. Deal or no deal, we think it’s no time to get complacent about the long-term threat of conflict between the U.S. and China and the economic impact this could have on the latter.
We’ve lowered our long-term (10-year average) China GDP growth forecast to 3.25% from 3.5% after incorporating the likelihood of scenarios of conflict between China and the U.S. In particular, we are concerned about the onset of a new cold war between the U.S. and China, a new era of great power conflict falling short of all-out war but in which the U.S. seeks to use all available economic means to curb China’s continued rise, the most important of which is cutting off almost all its trade with China. A new cold war is not our base-case scenario, but we assess its probability at 16%. In this scenario, China’s GDP growth takes a 1-percentage-point annual hit owing chiefly to lower trade, given the link between trade and economic growth.