Trade truce a big short-term win for GBA

Hong Kong’s stock market is closed today for July 1 anniversary celebrations, which are being overshadowed by violent protests outside the legislature. But it is sure to open with a rip tomorrow, despite political tensions ratcheting up in the city, thanks to the trade-war truce declared over the weekend by the American and Chinese presidents.

Perhaps most important for the region is the agreement by U.S. President Donald Trump to lift the ban (mostly) on companies supplying Huawei Technologies. The company is not listed, but it is a bellwether for the health of the GBA’s tech industry clustered in Shenzhen’s Yuehai district. Unsurprisingly, the Shenzhen Composite Index rose 3.5% today.

The agreement comes at an opportune moment for the GBA. Caixin’s closely watched survey of the country’s manufacturing sector showed a contraction in June, the first since January. Investors in the GBA need not be overly alarmed, as it is a national index and the dip is marginal. As covered in our Friday newsletter, economic data from Guangzhou and Shenzhen, the GBA’s two powerhouse economies, suggests industrial production is growing at a decent pace. Nevertheless, there is little doubt that the region’s manufacturing engine was likely to start coughing a spluttering more seriously the longer US-China trade uncertainty prevailed.

Most noteworthy is that the rhetoric seems to have been dialed back. In our view, if the U.S. side drops its most extreme demands relating to inspection teams, it is possible to believe Treasury Secretary Stephen Mnuchin’s claim that the two sides are 90% towards getting a deal. And, as the next item below shows, the Chinese side is moving quickly to open up further to foreign investment with specific actions.

Have we bottomed out? Longer-term tensions are not likely to subside soon. However, we are on the optimistic side that a short-term deal will likely be reached within the coming weeks. Even though the US election cycle is sure to make Trump’s job of managing the U.S.-China relationship more difficult in the coming year, any breathing space afforded to China’s hi-tech drive and the rise of the private sector in the economy is sure to be welcomed most in this part of the country.

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