The US Black Swan and Risk Implications for Chinese enterprises
Another gigantic black swan is born – Donald Trump has finally won in the US president election. We should never underestimate the economic consequences. In fact, the biggest uncertainty our world is facing this year comes from political events. The Brexit, US presidential election, and also the Italian constitutional referendum, these political events all bring great impact to the economy. The economic policy uncertainties index reaches the peak this year, which reflect we are facing huge uncertainties.
Trump's main political philosophy advocates to put the interests of Americans on top priority. He promotes protectionism in trade policy, aggressive deficit spending policy, anti-immigrants policy and a great tax cut for the rich. At the same time, he suggests new tax plan in order to attract more multinational enterprises to invest back in US and boost profit and job opportunities.
With the support of Deloitte China Chief Economist, we forecast after Donald Trump has been elected, political and economic uncertainties may lead to the below market reaction:
- The US equity markets would be trashed. The slump of S&P suggests that the market is expecting economic instability.
- The bond market is expected to go down because Trump's repeated calls for tax cuts and other financial policy for stimulating local economy may result in widened federal deficit, increased risk of liquidity. The economy could also be stimulated in the short run but reversed in a longer run.
- RMB may suffer depreciation as a result of the US' trade protectionism that would hurt countries which are running trade surpluses with US (e.g., Mexico, China, etc.).
- Politically the power of the US President is hindered by the Congress and Senate, and Trump cannot appoint judges of the Supreme Court immediately. Thus the political risk is likely to lie on his foreign policies. The US-China relations may be affected. If the anti-immigrants policy and the tax reduction policy for the rich are to be executed, the labour supply within US would be largely reduced, thereby dragging down the consumption and job creation.
Implications to Chinese enterprises
How would the Chinese enterprises respond to this? There are four suggestions for reference:
- Overseas asset management: enhance management of foreign trade, liquidity of investment capital and overseas capital. Conduct in-depth research for the impact and challenges on enterprises/ industries caused by the uncertainties from political and economic environment between different countries/ regions.
- Currency risk: strengthen the control on foreign exchange risk and prevent the risk of unexpected currency fluctuations. During the planning stage for trade with foreign enterprises, consider the foreign exchange risk and relevant remediation, and ongoing quantitative risk monitoring.
- Treasury management: for international funding management, apply different financial products to hedge the exchange rate risk. Avoid unplanned international funding but make long term arrangement in the funding and investment through model testing.
- Global investment strategy & risk management: enhance the management on foreign investment lifecycle and take into account the investment risk. Strengthen the enterprise investment ability to adapt to different characteristics for different industries/ countries. Make use of the capital, human resources and system to achieve resources allocation advantages.
A final point to note is that, Hillary Clinton, who was expected to have a higher chance to win, faced the "Email Crisis" during the critical phase in the election which is highly related to the insufficient prevention of the leakage of sensitive information. This reflects the urge for enhanced information security. After the victory of Trump, information security will definitely become a hot topic in the world. Different industries will invest and strengthen their information security and this will bring a new information technology revolution.
Risk Advisory provides relevant treasury management advisory services and cyber risk services for large enterprises. If you have any questions, please feel free to contact Risk Advisory for more information.