Trump’s China rhetoric more posture than policy

Thought of the day

by Chief Investment Office 18 May 2018

US President Donald Trump has accused China of being “very spoiled” and having “ripped off” America ahead of another round of trade talks between the two nations. On the surface, Trump's hostile rhetoric once again raises the threat of an escalating trade conflict.

But we believe the president's remarks are more likely a negotiating tactic and we note several reasons for optimism over the final outcome of talks in recent days:

  • Trump, having often charged China with the “theft” of US jobs, this week promised sanctions relief for ZTE, a Chinese telecom firm, after noting “too many jobs lost in China.” This apparent reversal is in line with Trump's history of aggressive rhetoric followed by policy compromise, such as exempting US allies from steel and aluminum tariffs.
  • China seems willing to offer concessions too, with media reports suggesting China will offer to reduce the trade deficit by around USD 200bn by 2020 by increasing US imports. Though China’s foreign ministry later denied the report, Beijing offered some goodwill by suspending an anti-subsidy probe targeting some USD 1.1bn worth of US sorghum imports.
  • With mid-term elections coming up, Trump may be satisfied with a more modest win on trade rather than risking a fight in which China could target goods produced in politically sensitive states. The sidelining of White House China hawk Peter Navarro, which may or may not have been reversed, suggests a tilt in the US negotiating team towards a less adversarial stance.

So while we continue to monitor trade-related risks, including Tuesday’s deadline for an investigation into alleged Chinese intellectual property abuses, our base case remains for negotiated trade settlements. We maintain our overweight in global equities, and our preference for Chinese equities within our Asia portfolios.

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