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Binary vs Incremental Risk Perspectives
- The risk approach to China varies between financial investors and real economy actors like MNCs, with the latter facing more binary risks tied to supply chain location.
- Supply chain decisions are costly and binary, contrasting with portfolio adjustments by investors that can be incremental and faster.
Trade Data Masks Supply Chain Risks
- Bilateral US-China trade data rising in dollar terms can mask underlying flat or declining volumes due to inflation and inventory stockpiling.
- Firms are hoarding inventory to hedge against supply chain disruptions, inflating trade statistics but reflecting risk concerns.
Market Response Hinges on Escalation
- Market participants initially react cautiously to incidents like fighter jet collisions, assessing whether escalation will occur before trading aggressively.
- Fear of missing out (FOMO) causes traders to avoid premature moves unless high conviction of escalation exists.