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The Investment Risks of U.S./China Relations

The Investment Risks of U.S./China Relations

March 29, 2023

The relationship between the United States and China has been one of the most important geopolitical issues of the 21st century. With the two countries being the world's two largest economies, their interactions have far-reaching implications for investors around the globe.

However, the growing tensions between the two nations, which have been exacerbated by trade disputes, spy balloons, the buying of land, the war in Ukraine and other arguments, have created significant risks for investors.

Let’s explore some of the ways that U.S.-China relations may create risk for investors.

Trade Disputes

Trade disputes between the United States and China have been ongoing for several years, with both countries imposing tariffs on each other's goods. While the tariffs have primarily affected specific industries, such as agriculture and manufacturing, they have had ripple effects throughout the global economy. Investors in affected industries have seen fluctuations in stock prices and profitability, and there is a risk that the disputes could escalate further, potentially leading to more significant economic consequences.

Geopolitical Tensions

Beyond trade disputes, the United States and China have been engaged in geopolitical tensions, including issues related to human rights, technology, and military expansion. For example, the United States has accused China of human rights violations in its treatment of Uighur Muslims and Hong Kong's democracy movement.

At the same time, China has been accused of using technology for espionage and intellectual property theft, leading to concerns about the security of U.S. companies operating in China. These issues have led to an increasingly tense relationship between the two nations, creating potential risks for investors in companies that have significant exposure to China or the United States.

Currency Fluctuations

Another area of concern for investors is currency fluctuations. As the U.S. and China continue to engage in economic and political disputes, the value of their respective currencies can fluctuate significantly (and there are accusations of the Chinese government manipulating its currency). These fluctuations can create significant risks for investors who have exposure to these currencies or invest in companies that rely heavily on exports or imports from either country. A sudden change in currency values can impact the profitability of these companies, potentially leading to significant losses for investors.

Supply Chain Disruptions

As a result of trade disputes and other tensions, there is also a risk of supply chain disruptions. Many companies rely heavily on China for manufacturing and production, and any significant disruptions to these supply chains could impact the profitability of these companies. At the same time, U.S. companies operating in China may face increased scrutiny or restrictions, potentially limiting their ability to operate effectively in the region.

Stay Informed & Diversify

As the relationship between the two nations continues to evolve, investors must be aware of these risks and take steps to manage them effectively.

This involves diversification and closely monitoring developments in U.S.-China relations to make informed investment decisions.

Your financial professional can help.

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

This article was prepared by FMeX.

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