The Big Winner from U.S.-Iran Tensions Could be China

By TradeSmith Research Team

There are many potential losers from escalating U.S.-Iran tensions. But a big likely winner is China.

The drama unfolding with Iran does at least three big things for China. First, it increases the likelihood a U.S.-China trade deal goes China’s way. Second, it shifts the spotlight away from Hong Kong. And third, it increases the strength of China’s geostrategic position — by weakening the position of the United States.

The sudden progress on the “Phase One” version of the U.S.-China trade deal had already come as a surprise. Many had expected the United States to maintain a hard line on tariffs. Instead, a pivot toward resolution came seemingly out of the blue.

The question is why the United States changed tack so suddenly, going from tough tariff talk to friendly resolution talk. It’s possible that China forced this move by losing patience and taking its own hard line, threatening to walk away completely if the U.S. didn’t come to the table.

In the U.S.-China trade battle, China’s ability to withstand economic pain is one of its biggest strengths. For President Xi Jinping, it also helps to be leader for life.

Conversely, a low tolerance for pain is one of America’s biggest vulnerabilities, and the fact that 2020 is a U.S. presidential election year heightens that vulnerability. This is where Iran comes into the picture.

Heightened tensions with Iran are a frightening prospect for the stock market. They are also a significant negative for the global economy. Open conflict between the U.S. and Iran would likely spike the price of crude oil, and any significant oil price shock would be painful, tipping multiple countries from low growth over to recession.

This gives the White House all the more reason to be friendly with China, and to lean towards giving China what it wants, with the Iran confrontation now in the mix. In a presidential election year, it would be dangerous to press two high-uncertainty battles at the same time.

At the same time, Iran has taken the spotlight off Hong Kong.

China’s leadership had a no-win situation with the escalating protests in Hong Kong: They couldn’t meet the protesters’ demands for fear of seeming weak, but nor could they crush protester dissent, because the whole world was watching.

Now the whole world is watching the Middle East — the media has a finite “big story” attention span — and the Hong Kong protesters know they’ve lost the spotlight. This means China will have an easier time strong-arming a Hong Kong resolution in the shadows,.

Last but not least, the escalation of U.S.-Iran tensions strengthens China’s geostrategic hand by weakening the hand of its chief opponent, the United States.

Generally, the more distracted and divided your opponent’s forces are, the better. And no matter how things play out, the U.S. is going to be caught up with Iran dealings for a good while.

This will give China more of a free hand in all sorts of ways, as the U.S. will have a smaller allotment of attention and resources to allocate to China if and when they stir up trouble. This shift also gives China more go-to options if it needs a bargaining chip — like using North Korea to distract the U.S. even further.

The bullish result of this turn of events could be an upside run in emerging market equities.

On the one hand, U.S.-Iran tensions are negative for emerging markets (and the global economy at large) due to the risk of a shooting war or an oil price shock.

On the other hand, if investors become increasingly confident that China is going to get what it wants in Phase Two of the trade deal and beyond — no big structural changes demanded, multinationals persuaded they can keep their supply chains in China — that could create a significant bullish tailwind. In that manner, China’s positional gain could spill over to other emerging markets, too.

TradeSmith Research Team