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GBP Could Be Hit if US-China Trade War Makes London Pick a Side

GBP Could Be Hit if US-China Trade War Makes London Pick a Side

2019-06-18 06:30:00
David Cottle, Analyst
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UK, US-China Trade War Talking Points:

  • London has just opened a stock trading link with Shanghai
  • This is emblematic of Britain’s relationship with China
  • However ties to the US are older than stronger and would probably win out if a choice were forced on the UK

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This week the UK has launched what it calls a groundbreaking stock market link: the London-Shanghai Stock Connect.

Four years in the making, the system will allow companies to list in both cities via depository receipts. These are aimed at smoothing out current risks such as currency moves and differing account rules.

Here then is another sign that China is plugging itself into global financial capitalism. But more broadly it’s also another step for the UK along a tightrope all countries must walk between China and the United States.

The UK has managed the balancing act rather well so far even if the walk hasn’t always been wobble-free.

London has Played Both Sides With Some Aplomb

It joined China’s Asian Infrastructure Development Bank in 2015, adding notably to the project’s credibility over strong objections from Washington. London supports Chinese President’s Xi Jinping’s Belt and Road initiative more covertly, but Chinese companies have been encouraged to bid for UK projects at the highest level, including the provision of nuclear power.

The British government is still mulling the wisdom of allowing controversial telecom giant Huawei to be involved in the provision of fifth generation mobile services in the country. And it’s here perhaps that its third-country difficulties can be most plainly seen. The US and other allies have made it clear that to keep Huawei on board might threaten intelligence sharing with the UK and it seems very probable that the company will after all be barred even if Beijing might retaliate.

On the other side, the UK remains a very strong political and military ally of the US of course. It participates in vast projects such as the F35 combat aircraft program at a level achieved by no other nation. The bilateral investment field between the two is among the strongest economic relationships on Earth. The UK is the largest foreign investor in the US, and vice versa.

It Must Choose the US If Forced, Mustn’t it?

That’s one big reason why the UK has at least as much interest as anyone in not being forced to choose between the two world giants. That prospect is not yet certain but, with no end in sight of the trade dispute between China and the US, it is hardly unthinkable.

If the UK ever leaves the European Union, it is going to need major trading allies. So far, its attempt to cultivate both the global hegemon and its premier challenger have been reasonably successful. If Washington were to force the issue the UK would probably have come down on its side, assuming that the profoundly anti-American opposition Labour Party under Jeremy Corbyn never sees power.

Escalating trade conflict between China and the US will pose massive risks for the UK and for a Pound Sterling already battered by the storms of Brexit.

Brexit Blues. British Pound Vs US Dollar, Daily Chart

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--- Written by David Cottle, DailyFX Research

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