There have been a lot of stories, admittedly in this publication too, that have diminished the threat of the current trade war with China for the US economy. In a very direct sense, that may be true, but there is a lot of misunderstanding about the Chinese economy. Most people think that China is currently slowing because of the trade war with the US, but that is not really the case. The much bigger issue is that the country’s credit boom has run its course and the government is running out of options to boost growth. The credit boom was caused by the government needing to stimulate consumer spending in an effort to spur a domestic consumption economy, but credit has more or less reached it limits, and therefore, so has the economy.
FINSUM: If China has a big contraction/meltdown, it will ripple across all the countries who are part of its ecosystem, including all the EMs in the region, Africa, and then ultimately the big developed economies with which it is now inextricably linked.
Markets breathed a big sigh of relief at the G20 a few weeks ago when Trump announced that after meeting with Xi, China had agreed to return to the negotiating table with the US. This sent expectations surging that a trade deal between Washington and Beijing was within reach. However, all that hope seems to have been for nothing, as Trump and China are reportedly having trouble even making it back to the table because of being at odds over Huawei.
FINSUM: To be honest, we think the US and China are so at odds over trade that it is hard to imagine they will be able to resolve these tensions any time soon. Some are even saying this is going to be the Cold War 2.0.
After the “trade truce” at the G20 it was looking more like the US and China may get a trade deal done soon. However, news out recently says otherwise, as China has not boosted its purchases of US agricultural products. Such a move was a key tenet of the agreement Trump apparently struck with Xi at the G20, but Beijing has not followed through on the promise. Trump complained publicly about this yesterday, but China denies they ever made such an agreement.
FINSUM: This seems small and petty but it is precisely not the direction that one would like these talks to be headed in.
Donald Trump did something many might not have expected when he met Xi Jinping recently at the G20 conference: he told him he would dial down the criticism of China regarding the demonstrations in Hong Kong in order to get Beijing back to the negotiating table. The offer apparently echoed a previous one he had made to Xi in the week leading up to the conference. The plan worked and China has agreed to resume trade talks.
FINSUM: While many may disagree with the concession to China, we think this shows one thing very clearly: Trump does not want to let the trade war derail the US economy or markets and will likely do whatever is in his power to keep them afloat.
Will the US and China make a substantial trade deal? That is a trillion Dollar question for markets. Some argue that China may defer doing any deal and take the risk that Trump does not win the election, effectively letting the clock run out. However, an astute view is that China might be desperate to do deal while Trump is still in office. The reason why is that if Trump were to lose to a Democrat, who in all likelihood would be a more conventional US president that takes a much friendlier approach with international allies, then China would be in a very compromised position. A Democratic president would likely approach the Chinese trade deal with a much more united front of trade allies, which would be a worst case scenario for Beijing.
FINSUM: The irony of this is that Trump has been by far the hardest president on China in memory, but at the same time, the Chinese have the best chance at a good resolution by dealing with him.