US-China: a slow-burn conflict

Macro 6 minutes to read
Pauline Loong

Managing Director, Asia-analytica

Summary:  The signing of a trade agreement between Washington and Beijing will not necessarily put an end to all disputes in the longer term.


The question is not whether Washington and Beijing will announce an agreement in the coming days. The odds are in favour of some sort of arrangement being reached. 

The real issue is whether markets can look forward to the end of the tariffs fight or whether this just a lull before the start of Trade War II?

With China, as always, the devil is in the implementation. The key to sustained peace in trade and investment between the two countries is Chinese acceptance of provisions to enforce agreements – say, an appeals board comprising US and Chinese members to settle disputes or some other mechanism. This is likely the final hurdle to a deal being clinched. 

Signs from Washington are consistent with negotiations entering the home stretch: rolling back the March deadline on tariffs, talk of preparations for a summit between the US and Chinese presidents and, given the many positive tweets from the White House, a US president intent on sealing a deal. 

China for its part has always made it clear that it does not want a fight – certainly not at this critical juncture of its economic development. Its goal is to retain access to the huge US market with minimum concessions. 
    
Ironically, trade is the simpler part of the negotiations. When disputes are about dollar values, about who owes how much to whom, solutions are relatively straightforward. Washington appears to have already made headway on large-scale Chinese purchases of American goods to narrow the trade deficit. 

The real sticking points are market access and protection of intellectual property rights – but not as a matter of principle. China has been saying for decades that it will further open up its markets and work harder towards protecting intellectual property rights. 

In practice, however, foreign businesses all these years have had to deal with a protected market where the playing field is tilted in favour of domestic companies with forced technology transfers a common complaint. 

Once more, with feeling 

For China to simply repeat these pledges does not even begin to approach the solution to the problem. Without detailed provisions for enforcement, any agreement will be little more than a Band-Aid setting the scene for the next trade fight. 

Much will be made of a new law to be reviewed at China’s yearly meeting of the legislature, the National People’s Congress, which starts next week. 

The new Foreign Investment law, if adopted, will replace three existing laws on foreign ventures. The move is being trumpeted as a big step towards further opening of the Chinese market and is likely to be presented to the foreign business community as evidence of good faith of Beijing’s intention to honour its commitments. 

The draft law touches on issues such as unfair technology transfers, intellectual property rights protection and equal opportunities in public procurement. But it is couched in such broad terms and vague language that there is ample room for discretionary implementation of the law. 

And note that China continues to maintain a legal distinction between foreign-funded and domestic companies. 

What won’t change: slowing growth

In terms of economic growth, any agreement that restores the US export market for China is definitely positive. But the Chinese slowdown is essentially an inside job. The tariffs fight merely exposed those who’ve been swimming naked. 

China’s problems are not cyclical, as some have argued. They are systemic. Among them: 

A rising debt mountain that is almost three times as large as GDP compared with 140% a decade ago. 
Chinese mortgage-fuelled household debt approaching 50% of GDP compared with 30% in 2012.
NPLs rising despite the economy expanding at more than 6.6% a year in real terms.
The threats to financial stability from the $15 trillion shadow banking sector 
Falling savings rate as an ageing population pays for its retirement. 

  
Whatever agreement is concluded in the coming days, US China relations will remain strained. This is now about growing American perceptions of China as an all-round threat rather than just a rules-bending competitor in trade and commerce. 

From building military air strips in disputed areas in the South China Sea to Chinese pressure on foreign airlines to label Taiwan as a part of China, the relationship between the world’s two biggest economies has tilted from greed to fear. 

Mutual interest had kept relations manageable. American businesses have been and are still eager to break into China’s massive market of 1.4 billion people. And Chinese industries continue to be keen on obtaining American technology and to break into the US-dominated global financial system. 

But the fear of a swaggering China with the wherewithal at last to successfully push its agenda – on trade, investment, market access, on redefining freedom of navigation in the South China Sea, on naval patrols which of late have become a regular sight in waters close to Taiwan, maybe even on who has what rights in the Arctic Ocean – is definitely concentrating minds in Washington. 

The coming Ice Age in US-China relations should also start concentrating minds in the investment community with the business landscape in China headed for irreversible change. 

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.