What’s standing in the way of a US-China trade deal? – Expert Investment Views: Invesco Blog

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In the
last two months, I have had the pleasure of meeting with clients in a variety
of different countries in Europe and Asia, as well as the US. There is one
issue that all of these clients are interested in: the US-China trade conflict.

The last
several weeks have seen sentiment grow increasingly positive around US-China
trade relations in general and, specifically, a US-China trade deal (albeit
just “Phase 1”). The most positive news of all came on Nov. 7, with reports that
a Phase 1 deal had basically been finalized and that it would include the
rollback of some tariffs. China’s Ministry of Commerce spokesman Gao Feng announced
that day, “In the past two weeks, top negotiators had serious, constructive
discussions and agreed to remove the additional tariffs in phases as progress is
made on the agreement.”1

US President Donald Trump contradicted that assertion on Friday
morning, explaining that he has not agreed to roll back tariffs on China. However,
markets barely flinched. There has continued to be an assumption on the part of
markets that Phase 1 of the trade deal is a fait accompli. Hence, the
rise in US Treasury yields, the drop in gold, and the rise in equity prices.
Japanese stocks have been doing particularly well in recent months.

However, as
I have said before, I am not confident that even Phase 1 of the trade deal is guaranteed
to happen. That’s because I think there is a good chance that China will
condition the signing of Phase 1 on a rollback of some tariffs — something I
believe will be difficult for the US to agree to. After all, Phase 1 doesn’t
tackle the hard-core issues that are a major part of the US-China trade
conflict, such as intellectual property rights and access to markets, so it
doesn’t behoove the US to make any significant concessions in the first phase.

Agriculture remains an issue

But never
say never: The US is very desirous that China re-start its agricultural
purchases, so it might just cave in. And although China was expected to already
begin buying more agriculture from the US, it seems that those purchases have
not yet begun, likely due in part to a major drop in the number of pigs in
China, given a culling of the herd due to swine fever. (Last week’s report from
China’s General Administration of Customs showed that China imported 6.18
million tons of soybeans in October, which is the lowest level since March and
is down 24.6% from 8.20 million tons in September.)2 Having said
that, buying agriculture is one of the biggest bargaining chips that China has.
US farmers have been hurting, and the Trump administration has been eager to
alleviate their suffering, especially as the 2020 election nears. If China is
not getting tariff relief in Phase 1, then it may not find it worthwhile to
increase agriculture purchases from the US going forward.

And China
has the luxury of waiting, as its economic data appears to be stabilizing. The Caixin China Composite PMI Index
for October clocked in at 52.0, slightly up from 51.9 in September.3
And while China has continued to sustain damage from the trade war, it appears
to be moderating. China’s exports in October fell 0.9% from a year earlier,
which was less than expected — and far better than its decline of 3.2% in September. While exports
to the US dropped 11.3% from January to October, exports to the European Union rose
5.1%.4 And exports to Southeast Asian countries rose significantly,
suggesting a back door through which exports are being sent to the US.

But
perhaps the most compelling data supporting the fundamental strength of the
Chinese economy can be found in Singles Day purchases. Singles Day is the 24-hour
shopping extravaganza in Asia pioneered by Alibaba more than a decade ago. Early
reports from this year’s Singles Day (Nov. 11) indicate a strong consumer
willing and eager to spend. According to the South China Morning Post, Chinese
consumers collectively spent 268.4 billion yuan (US$38.4 billion) on Singles’
Day. This set a new record, up from approximately $30.8 billion in 2018.5

This data suggests that, while the
Chinese economy remains under pressure, it may easily tolerate the situation
and may not be forced into any concessions that it is not fully comfortable
with.

Market
implications

However, the possibility that a Phase
1 deal falls through has market implications. In my view, failure to secure
such a deal would be likely to send risk assets such as stocks downward. In
such a scenario, Treasury yields would likely go down and gold would likely go
up. While my base case remains that a Phase 1 deal comes to fruition, the risks
are increasing —
especially the risk that it could be delayed. I must stress that investors
should prepare for — but
not be frightened by — the possibility that a Phase 1 deal does not come to fruition or
is delayed significantly. I believe any kind of resulting sell-off would be
relatively muted and short-lived because of the cushion being created under
risk assets by central bank accommodation. And any resulting sell-off could
represent a buying opportunity for investors with longer time horizons.

1 Source: Bloomberg News, “U.S.
Says Phase-One China Deal Would Include Tariff Rollback,” Nov. 7, 2019

2 Source: CNBC, “China October
soybean imports fall 10.7% from year earlier- customs,” Nov. 7, 2019

3 Sources: IHS Markit, Caixin,
Nov. 5, 2019

4 Source: South China Morning
Post, Nov. 8, 2019

5 Source: South China Morning
Post, Nov. 11, 2019

Important
Information

Blog header
image: James Ross / Stocksy

All investing involves risk, including the risk of loss.

The Caixin China Composite Purchasing Managers’ Index (PMI) is
considered an indicator of economic health for the Chinese manufacturing and
services sectors. It is based on survey responses from senior purchasing
executives.

The opinions referenced above are those of Kristina Hooper as of Nov. 11, 2019. These comments should
not be construed as recommendations, but as an illustration of broader themes.
Forward-looking statements are not guarantees of future results. They involve
risks, uncertainties and assumptions; there can be no assurance that actual
results will not differ materially from expectations.

Kristina Hooper is the Chief Global Market Strategist at Invesco. She has 21 years of investment industry experience.

Prior to joining Invesco, Ms. Hooper was the US investment strategist at Allianz Global Investors. Prior to Allianz, she held positions at PIMCO Funds, UBS (formerly PaineWebber) and MetLife. She has regularly been quoted in The Wall Street Journal, The New York Times, Reuters and other financial news publications. She was featured on the cover of the January 2015 issue of Kiplinger’s magazine, and has appeared regularly on CNBC and Reuters TV.

Ms. Hooper earned a BA degree, cum laude, from Wellesley College; a J.D. from Pace University School of Law, where she was a Trustees’ Merit Scholar; an MBA in finance from New York University, Leonard N. Stern School of Business, where she was a teaching fellow in macroeconomics and organizational behavior; and a master’s degree from the Cornell University School of Industrial and Labor Relations, where she focused on labor economics.

Ms. Hooper holds the Certified Financial Planner, Chartered Alternative Investment Analyst, Certified Investment Management Analyst and Chartered Financial Consultant designations. She serves on the board of trustees of the Foundation for Financial Planning, which is the pro bono arm of the financial planning industry, and Hour Children.

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