No results found. Please try again.

THIS MATERIAL IS A MARKETING COMMUNICATION.

US-China Trade War: Where Does It Lead?

DOWNLOAD THE FULL REPORT

On the Spectrum of Game Theory

Since the US and China agreed on a three-month truce, the global financial markets have rallied in a rapid fashion making the current sell-off much more dramatic. Over the past few weeks, there has been much debate about the reasons for the abrupt derailing of the deal – and with China making a ‘proportional response’ to the US tariffs, the markets will watch vigilantly for the short-term direction of the trade war between three directions: escalation, stalemate or agreement.

Whenever President Trump mentions his great relationship with President Xi, observers assume that it is a sign of his desire to do a deal. That may be somewhat true, but to assume that Trump has a specific goal for the final deal would be an analytical error. As it has been preceded in his past routine of other negotiations, Trump is looking for the maximum amount of concession possible from China, where the weaker China’s position becomes (relative to the US), the more he will raise his asking price. Since the negotiations began in January, the US economy is no longer under threat of an imminent recession and US equities have rallied 20% for the first four months. Therefore, the urgency of a trade deal has lessened significantly, with the US possibly raising the bar on the deal.

Fig. 1. America First

Facing Different Domestic Conditions

Politically, with the year of 2020 election looming, Trump needs to ensure that the deal with China will ultimately remain a vote-winner for his campaign. As a deal which is decided hastily could haunt Trump’s election campaign for the next 12 months, the lesson from his dealings with Kim Jong-un of North Korea can be of value to him. When Trump and Kim met in the historic summit in Singapore almost 12 months ago, Trump claimed victory by surpassing more than what previous US presidents achieved combined since the Korean War ended. Since then, Trump has come under intense criticism for being too soft on North Korea and that he got played by the young dictator. The abrupt end of the Vietnam summit was also proof of the pressure Trump was feeling to recoup the political loss of face from the Singapore agreement.

Trump personally may be tempted to hold off until an optimal vote-winning deal as demanded by the American public is visible. Increasingly, direct confrontation with China on trade and the issues regarding intellectual property are quietly gaining traction from both sides of the Congress. Giving away such vital election strategy with more than 12 months before the election may be considered premature.

From China’s perspective, it also received relief from the recent stabilization of the mainland economy and recovery of its stock markets. The micromanagement of its economic policies has stabilized the economy while investor sentiment has turned positive to the most favorable it has been in a few years. We maintain that China remains keen to strike a deal that will buy itself time, thus enabling it to stay on a structural reform track of deleveraging and rebalancing the economy towards productivity and profitability. An aggressive stimulus to shore up the mainland economy at this stage could reverse much of the efforts of the past three years and sink China into further debt problems.

Despite recent improvements of the mainland economy, China still remains the vulnerable party of the negotiations. However, with the US seeking a rigid agreement on trade with China, such deal is not easy to accept by China fundamentally and politically. From our perspective, tariffs are not the critical component of the negotiations since they are easily reversed and never permanent. Market access for US companies and permanent dismantlement of state-sponsored subsidies are issues which China is reluctant to give up as they could potentially threaten their long-term ambitions.

China’s Xi has met North Korea’s Kim several times over the past 12 months where they most likely shared notes on dealing with Trump. Until the Vietnam summit, Kim had achieved much more than any other world leaders in gaining concessions from Trump. China would be keen to emulate such feat by fostering a to a deal which can be gradually reversed in time. Just like the economic sanctions against North Korea, the hardliners from the US seems reluctant to scrap the tariffs entirely until a significant concession from China is verified.

Ironically, the failed trade negotiations between the US and China was a personal win for both Trump and Xi politically as it proved both sides’ citizens their willingness to display strength, even at the expense of investors. The markets and the economy from both sides will have to deteriorate significantly in order for Trump and Xi to make the necessary concessions. Even then, an absolutely irreversible on trade will not be possible at best an open-ended deal that leaves open for negotiations is the most likely scenario. For those reasons, we do not expect an agreement to be struck before or during the G20 summit in Osaka on 28th June.

Fig. 2. China's Corporate Debt Rising Again

Neither Resolution Nor Escalation

Surprisingly, it is not our expectation that the absence of the US-China deal will drag down equity markets much further. From a YTD perspective, the market rally was driven primarily by the coordinated dovish pivot led by the US Fed which was duly followed by stimulus from the ECB and China. The expectations of a trade war resolution was a positive, but one that was secondary to the sudden stimulus from the US Fed last November. The prolonged trade dispute (without dramatic escalation) will not cause a deeper correction as the trade war threat will ensure that a dovish stance will remain for the rest of 2019. Therefore, while we call for lack of resolution to the trade dispute, we also do not expect escalation, thus allowing markets to stabilize in the coming weeks.

Fig. 3. FOMC's Sudden Pivot is the Primary Market Driver

Fig. 4. Global Fund Flows Also Pivoting

Trade Noise Being Routinized

For the long-term, it is believed that the US-China relationship is on a long-term path of trade and political stand-off which is likely to outlast both Trump and Xi. Xi at least enjoys a major advantage over Trump with time on his side since Trump will leave office in under six years at the most. Until then, China will see leverage gradually shift to its side with a structurally stronger and self-sufficient economy with industries that rely less on imports. Ultimately, much like Brexit, investors will have to get used to a standoff between the US and China as part of their daily routine, with or without Trump in the White House. The trade-related noise and related costs associated with it will have to be a routine and unavoidable part of investment considerations for the coming decade.



Disclaimer & Information for Investors

No distribution, solicitation or advice: This document is provided for information and illustrative purposes and is intended for your use only.  It is not a solicitation, offer or recommendation to buy or sell any security or other financial instrument. The information contained in this document has been provided as a general market commentary only and does not constitute any form of regulated financial advice, legal, tax or other regulated service.

The views and information discussed or referred in this document are as of the date of publication. Certain of the statements contained in this document are statements of future expectations and other forward-looking statements.  Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance or events may differ materially from those in such statements. In addition, the opinions expressed may differ from those of other Mirae Asset Global Investments’ investment professionals.

Investment involves risk: Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the Fund will generate a return and there may be circumstances where no return is generated or the amount invested is lost. It may not be suitable for persons unfamiliar with the underlying securities or who are unwilling or unable to bear the risk of loss and ownership of such investment. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the Fund and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.

Sources: Information and opinions presented in this document have been obtained or derived from sources which in the opinion of Mirae Asset Global Investments (“MAGI”) are reliable, but we make no representation as to their accuracy or completeness. We accept no liability for a loss arising from the use of this document.

Products, services and information may not be available in your jurisdiction and may be offered by affiliates, subsidiaries and/or distributors of MAGI as stipulated by local laws and regulations. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.

Information for EU investors pursuant to Regulation (EU) 2019/1156: This document is a marketing communication and is intended for Professional Investors only. A Prospectus is available for the Mirae Asset Global Discovery Fund (the “Company”) a société d'investissement à capital variable (SICAV) domiciled in Luxembourg structured as an umbrella with a number of sub-funds. Key Investor Information Documents (“KIIDs”) are available for each share class of each of the sub-funds of the Company.

The Company’s Prospectus and the KIIDs can be obtained from www.am.miraeasset.eu/fund-literature . The Prospectus is available in English, French, German, and Danish, while the KIIDs are available in one of the official languages of each of the EU Member States into which each sub-fund has been notified for marketing under the Directive 2009/65/EC (the “UCITS Directive”). Please refer to the Prospectus and the KIID before making any final investment decisions.

A summary of investor rights is available in English from www.am.miraeasset.eu/investor-rights-summary.

The sub-funds of the Company are currently notified for marketing into a number of EU Member States under the UCITS Directive. FundRock Management Company can terminate such notifications for any share class and/or sub-fund of the Company at any time using the process contained in Article 93a of the UCITS Directive.

Hong Kong: This document is intended for Hong Kong investors. Before making any investment decision to invest in the Fund, Investors should read the Fund’s Prospectus and the information for Hong Kong investors (of applicable) of the Fund for details and the risk factors. The individual and Mirae Asset Global Investments (Hong Kong) Limited may hold the individual securities mentioned. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.

Copyright 2021. All rights reserved. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of Mirae Asset Global Investments (Hong Kong) Limited.

ADDRESS

  • Unit 1101, 11/F, Lee Garden Three, 1 Sunning Road, Hong Kong

TEL

  • 2295 1500

This website is intended for Hong Kong investors only. Your use of this website means you agree to our Terms of use. This website is strictly for information purposes only and does not constitute a representation that any investment strategy is suitable or appropriate for an investor’s individual circumstances. Further, this website should not be regarded by investors as a substitute for independent professional advice or the exercise of their own judgement. The contents of this website is prepared and maintained by Mirae Asset Global Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.