- A trade deal could be signed as soon as this month at the Xi Jinping-Donald Trump meeting in Florida. ‘
- Clearer signs of a growth bottom are emerging.
- Chinese stocks are powering ahead, rising weight in MSCI adds support.
Trade deal could be signed in Florida as early as this month
The US and China are moving into the last innings of the trade talks and so far signals continue to be mostly positive. A ‘signing meeting’ between Xi and Trump is being planned and the latest indication is that it could come at the end of this month. SCMP wrote that Beijing has accepted Trump’s private resort at Mar-a-Lago as the venue. The Wall Street Journal mentions a date around 27 March, after Xi finishes a trip to France and Italy.
Bloomberg overnight reported that a trade deal might roll back most tariffs to the levels before the trade war started. According to the article, Chinese officials have made clear that removing levies on USD200bn (of USD250bn) quickly was necessary to finalise any deal. However, China is said to have offered to reduce tariffs below the pre-trade war levels on items such as autos (currently 15% tariff) and speed up the timetable for removing foreign-ownership limitations on auto ventures.
Trump’s economic adviser Larry Kudlow used a very optimistic tone last week, saying the US and China were on the verge of an ‘historic’ pact. US Treasury Secretary Stephen Mnuchin said on Thursday the two nations are working on a 150-page document, which would turn into a ‘very detailed agreement’.
The two sides appear to have agreed on an enforcement mechanism, which is one of the key knots to untie in the negotiations. SCMP writes that the two sides have agreed to monthly meetings at the office director level, quarterly meetings at the vice-ministerial level and semi-annual gatherings at the ministerial level.
Comment. A trade deal is now more a matter of when than if. It would be very positive if most tariffs were rolled back. The alternative scenario would be keeping higher tariff rates for a period until the US had verified that China is delivering what has been agreed. However, China is clearly against this. In our view, we are likely to end up in a situation with more open trade, a more open Chinese economy and more protection of intellectual property than before the trade war started. This should be very positive for global trade. The tech war and rivalry in other areas will continue but in the short term a major cloud from the trade war looks set to be removed. Trump is set to face internal criticism that the deal is not far reaching enough but, in our view, it is hard to see how he could put more pressure on China without weakening his own hand.
Xi is giving Trump a clear win by letting him have the signing ceremony at his private resort in Florida. For what more could Trump wish? It may suggest China would not mind another four years of Trump. After all, one thing Trump has not done is to unite the Western countries against China (on the contrary, he has also been firing at allies on the trade front).
Clearer signs of a growth bottom
PMI manufacturing for February provided the first decisive recovery signal from economic data (see charts on page 1). In particular, new orders painted a positive picture. The balance between the index for new orders and the index for inventories is now showing a clear turn, which tends to be a reliable signal of a recovery coming. The same picture has emerged from metal markets, which have rebounded recently. Credit growth has also seen a lift.
Comment. We have expected for a while that Q1 would be the bottom, as the drag on Chinese demand from the uncertainty over the trade war should be at its maximum here and economic stimulus from 2018 increasingly kicks in. We now start to see evidence accumulating of this actually happening. Another factor behind the turn is probably that Chinese companies have aimed to reduce inventories due to the higher uncertainty over future sales. To reduce inventories, companies produce below the level of sales for a period. However, once inventories have come down, production needs to rise back up to the level of sales, triggering a rebound in production. Looking forward, we still look for a moderate recovery as stimulus kicks in further and a trade deal reduces uncertainty.
Chinese stock market powering ahead
After a dismal 2018, the Chinese stock market is off to a very strong start in 2019. Stock prices are up around 25% this year reversing a large part of the steep decline seen throughout 2018. The move higher has been driven by rising optimism about an end to the trade war with the US as well as the green shoots showing up in economic data recently. Last week, MSCI announced that China’s weight in the MSCI Emerging Markets Index would increase to 3.3% by November, up from the current level of 0.71%. It could trigger inflows worth up to USD125bn, as money managers that track the index as a benchmark will have to buy into the Chinese market to keep in line with the new index (see Financial Times, 1 March).
Comment. The move higher in Chinese stocks has been very fast and the market is ‘overbought’ from a technical point of view. However, we believe fundamentals this year are turning much more positive for Chinese stocks. We look for an economic recovery and the tail risk from the trade war is sharply reduced (although the tech war is set to continue). The rise in the MSCI weight will add extra tailwind, as inflows will support the market. We thus look for Chinese stocks to see a rising trend this year, although in the short term there is a risk of a correction due to the very rapid move. Chinese authorities may also step in at some point if the increase continues too rapidly, as fears over another bubble would come up (as we saw in 2014/15). The Chinese A-share market is affected a lot by retail investors dominated by herd behaviour.
Other China news of the week
USD/CNY and EUR/CNY continue to trend lower (see chart). We look for USD/CNY to move towards 6.6 in 12 months as the Chinese economy recovers. Huawei presents new 5G foldable phone (see Reuters, 24 February). US Secretary of State Mike Pompeo continued to warn against Huawei. He said it could pose problems for American firms in places using Huawei equipment (see Reuters, 1 March).
Carlsberg buys stake in Chinese microbrewery (see Reuters, 1 March).
