Australian Market Strategist, Saxo Bank Group
Summary: The China-US trade war extends well beyond trade as the 20th century's superpower and the would-be hegemon of the 21st jostle for supremacy across industries and sectors.
China is currently a high middle-income economy according to World Bank classifications, but it hopes to transform into a high-income country via a focus on productivity growth. China has delineated its plans to become a world superpower within the next 30 years, with the aim of restoring China to a dominant position in the world order from its 19th century decline. These imperial ambitions and targets are demarcated in the industrial strategies laid out by China’s State Council, the first of which is “Made in China 2025”, which seeks to shift from export-led manufacturing to modernise the Chinese economy by boosting total factor productivity while maintaining innovation as a primary driver of economic growth, shifting up the value-chain in order to avoid the “middle-income trap”.
These ambitions span far and wide across industries where the US is typically the dominant innovator and controller of technological advances. China’s ultimate aim is not to be on a level playing field with the US, but to outpace the US and become the global leader in high-tech manufacturing, thus threatening the US’ hegemonic status.
The White House has granted US companies an extra 90 days before they must comply with the blacklisting of Huawei and other Chinese companies. This extended deadline, along with President Trump’s comments on Friday that Huawei may be part of a trade deal, has left investors with a slightly more optimistic outlook. There is speculation that pending a face-to-face discussion with Chinese president Xi Jinping at the G20 summit in Osaka (June 28), President Trump could delay this deadline once again. But with the trade negotiations stalling at this current impasse and likely to remain in limbo until the G20 summit a further escalation in tensions is not in the price.
The situation could still get worse before it gets better. The US is currently preparing for a public hearing on another round of 25% tariffs and a June 1 deadline for China to raise the rate of additional tariffs to 25% on 2,493 US products is looming.
Another question that continues to confound investors is whether Trump’s latest moves are part of a negotiation strategy or something more serious? Is a 5% fall in the president’s beloved equity market, which we know he views as a live barometer of his success, enough to exercise the Trump put? Or do the losses have to become larger before either side becomes motivated to reach some sort of agreement? At this stage it seems like the latter is more pertinent; looking at the trajectory of the rhetoric on both sides, a G20 deal would be miraculous.
As geopolitical tensions escalate, incoming data continue to raise concerns that any growth rebound remains fragile, and the rise in trade tensions risks stamping out any remaining green shoots. The uncertainty paralyses decision making for multinational companies, burdens capex intentions and forces supply chains to be unraveled in order to remove risk.
“The slowdown has been led by manufacturing but shows increasing signs of spreading to services... trade wars remained at the top of the list of concerns among manufacturers, alongside signs of slower sales and weaker economic growth both at home and in key export markets,” said Markit chief business economist Chris Williamson.
We await confirmation on Friday as manufacturing PMIs for May are released.
All this comes as the USD remains resilient, pressuring operating margins and profits for US firms and providing a headwind for corporate earnings.
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