Year of the Pig outlook: Will the US-China trade war intensify?
At the beginning of every Chinese New Year, AsianInvestor makes 10 predictions about economic, political and financial developments that are likely to have an impact on the way institutional investors assign their money.
Today the big question focuses on the high-profile spat evolving between China and the United States.
Will the US-China trade war intensify or reach an armistice?
Answer: Intensify - into a tech war
The trade dispute with China started by US president Donald Trump last March is threatening to turn into something much more damaging: a full-blown technology war. And there appears little chance of an armistice any time soon, in light of the charges now laid against Huawei.
Following the December arrest of Meng Wangzhou, chief financial officer of the Chinese tech giant, the US filed indictments against her and the telecoms giant late last month for stealing trade secrets and defrauding banks to evade sanctions on Iran.
The move came days before scheduled talks aimed at making progress on the trade tensions before March 1, after which further tariffs are slated to be imposed if a deal isn’t struck.
What’s more, Huawei founder Ren Zhengfei told the BBC on Monday (February 18) that Meng’s arrest was politically motivated. The US Justice Department has denied this, but that’s effectively a moot point. The situation is certainly a political one now, whether it started out that way or not.
Still, talks resumed yesterday in Washington and the markets are hoping some form of agreement will be reached – perhaps with China buying more farm products.
A BRIDGE TOO FAR?
On the face of it, Trump wants to reduce the US’s huge trade deficit with China, which stood at $382 billion for 2018 (as of November).
Yet there is the wider issue of China’s protection of intellectual property rights (or lack of it). Piracy and copying of goods from tech to trainers is rife on the mainland, although Beijing argues it has done much to strengthen its laws in this respect. It certainly won’t do more on this front as a result of pressure from Trump.
Ultimately, therefore, China will not implement the reforms that Washington wants, even if it does make trade concessions.
Logic suggests that some compromise will be reached, as both countries have a lot to lose from a trade or tech war. But they also have leaders with potentially much to gain by standing up to their main global rival.
Trump is playing to his core voter base, while the Chinese people would not want President Xi Jinping to bow to American demands.
It’s a tricky balance of course, as both nations’ economies and stock markets are likely to suffer from such tensions – and both are undergoing a period of softness.
Another factor that might help resolve the trade war would be for the renminbi to strengthen to a level that suits both the US and China, argued Andy Seaman, chief investment officer at London-based fund manager Stratton Street.
A stronger currency would suit Beijing, as long as it were a gradual appreciation, explained Seaman, because that would fit with its plan for China to be a more consumer-driven economy and for its companies to invest overseas.
It would also suit Washington, he added, because the dollar is overvalued, making the US economy less competitive. Indeed, Trump prefers a weak dollar as it makes American exporters more competitive.
There are downsides to this policy, of course, one being that foreign investors will be less inclined to buy US debt if the currency’s stability is degraded.
All that being said, a major appreciation of the renminbi against the greenback seems unlikely in the short term – especially as Trump could paint it as a win.
PROTRACTED VOLATILITY
On balance, any sustained relaxation of the current tensions looks unlikely during the Year of the Pig.
The two sides’ targets look too far apart for an agreement to happen in the current round of talks. And even if a deal were to be struck, it would take little for Trump – perhaps encouraged by US trade representative Robert Lighthizer, who is hawkish on China – to unpick it.
Hence investors should brace for more months of equity market volatility in the US, China and other countries already hard hit by the trade dispute (such as South Korea, Taiwan, Malaysia and Thailand – see graph below).
One wonders whether Trump may have privately come to the conclusion that trade wars are not easy to win, despite his assertion to the contrary last year – if indeed they are winnable at all.
Previous Year of the Pig predictions:
Will China ease its inbound investment rules?
Can Brexit shock global markets?
Will asset owners take ESG seriously?
Have asset owners set realistic investment returns targets for the year?
Will the ETF Connect finally open?
How much will Asian asset owners increase alternative asset allocations?
Will the US economy suffer a major downturn?