• Joel

What "constructive" US/China trade phone call means for markets

Ever fickle for a good US/China headline, markets (mostly led by US and European equities) responded positively to the overnight news that the US and China had held a call on the implementation of the Phase One trade deal, which both sides said was constructive.

According to US Trade Representative (USTR) Lighthizer, the parties addressed steps that China has taken to “effectuate structural changes called for by the Agreement“ to ensure “greater protection for intellectual property rights, remove impediments to American companies in the areas of financial services and agriculture, and eliminate forced technology transfer.” Moreover, “the parties also discussed the significant increases in purchases of U.S. products by China as well as future actions needed to implement the agreement.”

The USTR statement said that officials from both sides see progress and are committed to taking next steps required to ensure success of the deal, said the US in a statement. China confirmed that the sides had a constructive conversation on trade and on strengthening macroeconomic policy coordination

So everything is apparently going well regarding the implementation of the trade deal agreed back in January. Reason for markets to cheer (and risk assets to gain and havens suffer?

Not quite…

Though there was always the risk that these talks could have gone badly (sources said that China was thinking about bringing up some other issues, including US pressure on international Chinese tech firms), hence markets are breathing a sign of relief, we haven’t really learnt anything new.

Heading into the meeting, US President Trump and other US officials had been keen to indicate that they are happy with how China has fulfilled its Phase One trade deal pledges thus far.

Therefore, it should not come as too much of a surprise that, on the issue of trade and the trade deal, talks were constructive.

What about all of the other issues currently plaguing US/China relations? No mention was made of any of the other “battle ground” issues.

For context, tensions are high between the US and China on a number of other front including (but not limited to);

1) Geopolitics

The main point of tension is Chinese claims of disputed territory in the South China Sea. China has been building artificial islands in the region and building military bases on them. Other countries in the region, such as Vietnam and the Philippines, claim that that the islands are theirs. The US claims they are international waters, belonging to no one and have thus been conducting “freedom of navigation” operations in the area (where battle ships sail into territory that China claims is theirs). Thus, risks of a military clash in the region are growing.

2) Tech cold war

The US claims (and they are almost certainly 100% correct) that international Chinese tech companies such as Huawei, Tick Tok and others are legally bound to provide the Chinese government under Chinese law and thus present a national security threat, given the risk that they may be forced by the Chinese government to spy on China’s adversaries (such as the US, EU etc.). The US is therefore clamping down on the ability of these firms to access markets in the US and is putting pressure on its allies to follow suit, much to the anger of China. The US has also taken some precedented diplomatic moves, such as the forced closure of the Chinese consulate in Houston, Texas (which was accused of espionage).

With China ramping up its espionage and intellectual property theft efforts in recent years, these tensions are likely going nowhere, trade deal or not.

3) Human rights

The US accuses China of persecution of the Uighur Muslim minority group in Xinjaing. Uighurs are routinely locked up in “re-education” camps. In essence, China is carrying out cultural genocide in the autonomous region in a bid to iron out religious extremism. This is blatantly a breach of the UN declaration of human rights, and the US has taken actions to sanction officials and business involved, much to the anger of China, who claims to be doing nothing wrong.

Elsewhere, China recently passed new Hong Kong national security laws and has since been using the laws to crack down on pro-democracy protestors and leaders. The US (and most over developed countries) claim that this is China’s way of bringing Hong Kong closer “under thumb”. The US has now ended a number of bilateral treaties that it had with Hong Kong (which treated as a separate, autonomous region from the mainland). Hong Kong will now be treated the same as the Hong Kong mainland. The US even went as far as putting sanctions on Hong Kong Chief Executive Carrie Lam, an unprecedented move in US/China relations.

As with the issues above, relations on this front look set to worsen before they get better.

So what does all of this mean for markets?

It means don’t get optimistic that US/China relations are on the right track.

US President Trump has every incentive to continue to push China on the issues outlined above (as it makes him look tough on China), while keeping the trade deal in tact (as it keeps a floor under the US stock market, which he wants to be at all-time highs going into the election).

Though it looks as though the US/China Phase One trade deal is safe, the risk that US/China tensions will continue to worsen on these other “battle ground” issues laid out above over the coming months is high – risks assets might not like it, and any worsening of relations could provide some respite for a generally bearish USD. 



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