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Dr Chan: Emboldened Trump To Turn Full Throttle On China

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On 24 September 2018, US President Trump and his South Korean counterpart Moon Jae-in signed a revised version of the US-Korea Free Trade Agreement. This was another breakthrough for Trump, following a revised bilateral agreement with Mexico. Following which on 1 October 2018, the US finally reached a pact with Canada to achieve a significantly revised North American trade deal. The trilateral agreement will be renamed the US-Mexico-Canada Agreement (USMCA) which will replace the North Atlantic Free Trade Agreement (NAFTA).

The slew of revised agreements was a major victory for Trump and would embolden him as he turns all his efforts towards forcing China to yield. Correspondingly, Chinese investors are showing growing signs of anxiety as reflected by the weakness in China A-shares and Hong Kong stocks.

Previously on 24 September 2018, the US and China each slapped one another with the second round of tariffs. As I elaborated previously, Trump had only imposed a 10 percent tariff on an additional US$200 billion worth of Chinese goods, instead of the 25 percent he originally threatened. The moderation came off as a sign that Trump could be worried about the repercussions and hence why he softened his stance.

On the same day, the Chinese government rolled out a white paper, condemning the US “trade bullyism practices”. Accordingly, the white paper showed that the Chinese economy is no longer as dependent on exports, since domestic consumption has already risen to 58.8 percent of its GDP. On the other hand, exports only accounted for 9.1 percent of the country’s economy. Adding on, the Chinese government also reiterated that it is ready for a protracted trade war and hinted to an infrastructure stimulus to cushion impacts if the tensions escalate.

In a press conference discussing the China white paper, only deputy ministers were present. It seems the Chinese government is portraying that the trade war is just a secondary issue and hence take no precedence. It also suggests that China would not bow to US pressures.

At this stage, the Chinese government has shown little intention about resolving trade disputes on the negotiation table with the US. After all, Trump has overturned the previous agreement his administration has reached with China, a reason why the Chinese government do not trust Trump to keep his promises. Facing the possibility that Trump could keep raising demands in an endless circle, China has chosen the strategy to stand on its own feet.

Speaking out about the current US-China relations, former president of People’s Bank of China Zhou Xiaochuan said that China can simply reroute goods to other countries if the US market becomes untenable. In the worst case scenario where Trump erects tariffs on all US$500 billion worth of Chinese goods, the market is expecting the Chinese government to boost its spending on China’s infrastructure. As a result, speculators have driven Chinese infrastructure stocks higher, despite weakness in the broader market.

Apart from infrastructure, another target to spur the Chinese economy would be none other than Chinese consumers. For one, though China’s consumption has risen to 58.8 percent of its GDP, the figure is still much lower than that of developed western countries. With much room to grow, the Chinese government has also announced that it would reduce import tariffs from November onwards. The move would help bring down prices and hence stimulate consumer spending in China.

As the world’s manufacturing hub, exports now only account for 9.1 percent of China’s GDP. On the other hand, the US market only makes up 20 percent of China’s export value, translating to just 1.8 percent of China’s GDP. Hypothetically, all China has to do is raise consumption by 1.8 percent and China could do without the US.

With the worst case of 1.8 percent being shaved off its GDP, the Chinese government does not have much to lose. This is why China would rather confront the US head-on. On the hand, it is literally impossible for the US to completely stop importing from China. It might take some time before the US realises these profound implications.

Of course, it would also be naïve to think that it is completely smooth-sailing for China to transform into a consumption-based and service-oriented economy. With US breathing down its neck, investors should acknowledge that China’s challenges have become even more complex.

Apart from tariffs, Trump has yet to play the “quota” card, limiting the access of Chinese goods into the US. I believe that if the Trump fails to force China to make some concessions, Trump would likely impose quotas on Chinese imports.

Typically in past trade wars, tariffs and quotas often come hand-in-hand. During the negotiation of USMCA, US trade officials brought up quota plan to replace national security tariffs that were in place on import tariffs of steel and aluminium. Possibly, the same policy could come in place to restrict access of Chinese imports.

Currently, Singapore and Hong Kong stock markets are being influenced by different elements. Respectively in each market, performance across each sector also varies considerably.

Across the two markets, some counters continue to make record highs. Interestingly, some of these stocks, I observed, are not weighed down when trade tensions escalated during the first half of 2018. Going forward, such stocks should continue to outperform the broader market. Amongst them, a number of these stocks are blue chip counters, with upstream oil majors and other producers logging the best performances.

Not exhaustively, these stocks include Hong Kong-listed PetroChina, Sinopec, China National Offshore Oil Corporation (CNOOC), and Singapore-listed Keppel Corp and Sembcorp Marine. Chinese infrastructure companies such as China Railway Group and China Railway Construction Corporation are also seeing their stocks being lifted, as investors speculate on an infrastructure stimulus package from the Chinese government.

It seems that oil stocks are also seeing a sustained rally as oil prices continue to recover unabated. With US officially enacting its sanctions on Iranian oil, oil prices would still be on its upward trajectory.

On 26 September 2018, the US Federal Reserve hiked interest rates again, by the market expectation of 25 basis points. Initially, the news made little impact in the stock market but on the following day, stocks opened significantly higher only to slip back and to register mild gains at the close. This suggests that while the Fed’s interest rate policy would still affect the stock market, other elements influencing investors’ sentiments are also in play.

Previously, Trump had expressed his discontent that the Fed is causing the US Dollar to appreciate with its rate hike path. This makes US goods less competitive and hence undermines Trump’s capacity on the trade negotiation table. Fortunately, the market reacted well to the Fed’s latest interest rate hike while the US Dollar also remained stable.

This led me to believe the current environment is still healthy for property developers and mortgage companies. In the local market, Ho Bee Land’s stock surged when Chairman Chua Thian Poh reportedly announced his intention to step down as the President of Singapore Federation of Chinese Clan Associations. This seems to mean that Chua would have more time and energy to focus on Ho Bee Land’s businesses.

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