Teaser: The threat of a trade war between the U.S. and China has cooled down, but the battle will return with renewed power.
So far, I have not considered the threat of a trade war between the U.S. and China as a major challenge for China’s stock market and economy in general. Further has the risk of a trade war diminished according to a statement issued on 20th May by U.S. Secretary of the Treasury Minister Steven Mnuchin. I regard the agreement as weak and it recalls a letter of intent. Virtually anything can bring the battle back again and this could even be indirect developments.
Financial markets around the globe including China’s stock market have become more nervous and react increasingly distinct to bad news compared to just six month ago. China’s domestic A-share market has lost almost 10% over the past three months which has been unnoticed by many Western investors. In parallel, the Chinese companies listed on the Hong Kong stock exchange lately also fell to the lowest level for four months. This is not a good starting point if the global nervousness is rising and the rhetoric about a U.S. – China trade war could reappear once more.
I expect Trump to revert to the tough rhetoric against China if he needs to strengthen the domestic political campaign. Although there still is almost half a year until the mid-term elections in the United States, they start to play a role. Naturally, President Trump would like to maintain the republican majority in both chambers on Capital Hill in Washington D. C. Based on the polls and election models I have seen so far, the Republicans will continue to hold the majority of the Senate. But the majority in the House of Representatives is currently in the danger zone though it is close according to the forecasts.
If the voters should start to disappear from Trump’s camp, I expect him to turn up the trade rhetoric towards China to show strength and courage. One could ask if an agreement with North Korea wouldn’t provide the required electoral favour? My best bet is that an agreement with North Korea could actually open up for heavier rhetoric against China – but why?
Even President Trump has realized that he needs some friends internationally or at least he must earn some brownie points on the international scene. An agreement with North Korea about making the Korean Peninsula nuclear-free and perhaps partly open the borders would be such a great triumph that the Nobel Peace Prize goes to Trump.
In his view it would prove that he is doing well internationally and that the United States is right. Therefore, he can revert to the hard-line talk versus China. In addition, Trump’s core voters rate foreign policy less important and basically, they just want the jobs back from China.
Simply the mood among the core Republican voters I think is of great significance, thus the mid-term elections plays an important indirect role in how Trump for example acts towards China. The tax reform in the United States was designed to increase the disposal income among households in the lower part of the middle-class incomes, even very specifically this year and into 2019. It is the usual tactic of any government in most countries when important elections are approaching but President Trump is being overtaken by the oil price. The price on crude has risen so much that the tax cuts for the middle class in the U.S. are being offset by higher costs for petrol at the pump. It may sound like small margins, but they are bigger than what many believe – and in the mid-term elections, it may well be the margins that gives the last seats in the House.
Another example of what could lead to a tweet with a renewed trade war threat towards China is of course the real facts about the trade balances. When one of President Trump’s advisors takes the two graphs showing China’s import and export per country then a change must happen at some point. The significance in the two charts is more than obvious and if nothing changes then the threat of a trade war returns, which is my main scenario.
If the U.S. – China trade debate itself would have been the only variable then this would hardly affect the stock market seriously. The U.S. government would probably even get major concessions on the paper at least. But the changes in trade will have to be transformed into reality where the official China only can affect imports from the United States to some extent. But Trump in reality, wants more than that, it’s the jobs his voters want back to the U.S. But this trend can only be reversed by the right development within the American economy which is out of reach for the U.S. trade partners. I still regard it more likely that production lines move from China to Vietnam, Laos and other ASEAN member countries. This way China’s trade surplus will be reduced, and it very much reminds me back when U.S. complained about Japan’s huge trade surplus towards the United States – it was largely reduced because China took over and got the trade surplus.
The whole economic transformation linked to the trade imbalances is a slow process which is a main reason for the limited negative impact on China’s economy. In addition, exports now only count for approximately 18 pct. of China’s GDP where a trade war just over 10 years ago had been severe. At the time exports made up between 35 to 40 pct. of China’s GDP but since then the biggest driving force in China’s economy has been the domestic growth.
As mentioned initially the nervousness in the global financial markets is constantly on the rise and therefore just the risk of a renewed U.S. – China trade dispute has my attention.
The leading domestic A-share index in Shanghai now moves around, though still above, the important 3,000 territory. As Chinese investors are primarily momentum-driven in their expectations, my impression is that many still expect a further decline in the stock market. The argument is therefore not a “value” consideration, but just a belief that the immediate trend continues. Therefore, a decrease of an additional 8 to 10 pct. is a true risk, however, I argue that there needs to be a hefty trade war in order to argue for a further fall from there.
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