Investors pushed up stock markets worldwide over the past 24 hours on renewed hopesfor a high-level breakthrough in US-China relations. This followed news that Presidents Trump and Xi had a phone call yesterday, initiated by the White House, and that they plan to meet at the G20 meeting in Japan at the end of the month.
Smart people who obviously don’t invest very well, such as ourselves and other China analysts we know, are unlikely to be moved by the news. The US-China relationship is deteriorating inexorably due to a wide range of factors and influences, many of which are undoubtedly “civilizational” – to use the word the way the late Samuel P. Huntington would have wanted it used – and which are highly unlikely to be resolved by the two leaders when they meet in Japan.
Nevertheless, the markets may be right to assume that Trump will call off the attack dogs on Huawei, or ease some of the tariffs that are hurting both countries, regardless of what Xi says to him at the G20. We will just have to wait and see.
What is becoming clearer, however, from where we sit, is that it is starting to matter less to China whether Trump announces a deal or doesn’t, because China is far better placed to handle the fallout of the trade war than vice versa. It is not just due to Ren Zhengfei’s confidence. It can be seen by the rapidly expanding line of companies outside the Oval Office’s door, asking for relief from the tariffs; the volatility and the relative importance to the economy of the US stock market versus China’s; and research showing that American consumers will likely have to scrape together another US$2,000 each annually as prices start to rise at Walmart and Amazon – in a country where 40% of citizens say they cannot afford a US$400 medical emergency bill.
By contrast, Chinese consumers are showing no signs of lagging, a year after the trade war began, while a new investment splurge is well under way – especially in 5G and high-speed trains – that will stimulate the economy well enough for the next decade to manage the shock loss of foreign demand for China’s traditional export-oriented manufacturers. China’s debt worries? Being dealt with, and something to worry about later, in any case, not right now, which is where we are focused.
This is not about picking sides in a fight; it is about seeing how the fight is shaping up. To us, it seems to be shaping up relatively well for China, and it seems like there is real cause for optimism about the country as an investment destination, as it continues to open its markets further to foreign participation. We still haven’t seen the worst impact of the most recent US tariffs show up in China’s trade statistics, for sure. But if we were betting people, we would be betting now that getting a deal done in Japan is far less important to President Xi than it is to his comrade in the White House.