After recently declaring the trade war was on hold, the Trump Administration unexpectedly revealed plans to push through tariffs on USD 50bn worth of Chinese imports, as well as new investment and export controls. China responded with confidence that it was ready to fight back. A return to more fractious trade rhetoric, alongside Eurozone political risk, sparked steep declines in both onshore (CSI 300 –2.1%) and offshore (Hang Seng –1.4%) Chinese equities on Wednesday.
Investors would not welcome news of deteriorating trade relations. But context offers more room for optimism:
- Trade tactics. The reversal may have been sudden, but it is not surprising. Trump’s default negotiation strategy, jumping from the conciliatory to the antagonistic, has been evident with his North Korea dealings. The White House may simply be seeking to strengthen its hand just days ahead of third-round trade talks in Beijing this weekend.
- Domestic optics. With mid-term elections fast approaching, Trump may see political benefits from holding China to the fire, or even better, in extracting meaningful concessions. But extending this into a damaging tit-for-tat war is far less compelling, with risks that China will target politically sensitive states or that US voters blame Trump for taxing the goods they buy.
- China wants a deal. Trump may be trying Beijing’s patience, but China remains incentivized to strike a deal. Improved intellectual property protections and global market openness will be key for the success of the “Made in China 2025” industrial policy, China’s next growth lever. The real question is trajectory and framework of reform.
So we view this latest tussle as part of a new normal in US-China relations, and China’s relatively agitated response today suggests it is adapting to President Trump’s playbook. Our base case is for a negotiated settlement, with only limited trade irritant. We maintain our overweight in global equities, and still prefer China within our Asia portfolios.
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