Tail Risk: China-US Relations

Wishing everyone a belated Thanksgiving. If you have some time today or over the weekend, I recommend watching this video of VP Mike Pence talking about the administration’s approach to China

Then follow it by watching this video by Hank Paulson who proposes a different approach but seem clearly pessimistic about where this is headed.

The deterioration of US-China relations is a massive tail risk. The recent sell-off in the stock market may be a partial reflection of that but doesn’t even begin to capture the potential downside. As an important reminder, China is the largest holder of US sovereign debt, which they could use strategically by selling treasuries. That could drive up US borrowing rates just at a time that the Trump administration tax cut is resulting in massive deficits, making borrowing more expensive.

I have talked to a number of American and Chinese entrepreneurs over the last few months about this. What was most surprising to me was how few seemed to have the possibility of a US-China cold war on their radar as a real risk.

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#international relations#risk#china