Trade war thoughts: how China is playing the game

The US and China have entered into a period of strategic competition, but there may be longer term benefits argues Neptune’s Ruth Chambers.

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  1. Ruth Chambers

China has been one of the world’s best performing markets so far this year with the CSI300 Index breaking into bull market territory. Much of this outperformance has been due to trade war optimism, largely on the back of Donald Trump declaring that he will push back the March 1st deadline for tariff increases to allow more time for negotiations. 

Details of the deal are still uncertain, however it looks as though an agreement will be reached when Trump and President Xi meet in person at the end of the month. So far, it seems clear that China has offered to reduce the trade deficit by buying more US products, soybeans and energy in particular, along with assurances not to devalue the RMB to counteract the agreements. However, reducing the trade deficit only scratches the surface of the US’s issues with China, which also include SOE subsidies, cyber security, IP protection and technology transfer. 

While some concessions may be made, it is unlikely that China will pull back from its ‘Made in China’ plan to become a technology leader and to ensure increased supply security for its tech industry. President Xi has indeed put less emphasis on the strategy since the trade war began, but this does not mean there have been any policy changes. In fact, uncertainty is causing China to invest further in creating a more independent tech industry. China will likely proceed with its goals for technological advancement, but may not advertise them as it once did, i.e. a return to Deng Xiaoping’s advice to ‘hide your strength and bide your time’. 

In reality, the deal made at the end of March will likely be a short-term truce amidst a longer war. Trump may agree to a deal in order to declare a victory going into his 2020 campaign, but these issues will undoubtedly simmer in the background and will only become more acute as China continues to develop. The US and China have entered into a period of strategic competition that will define their relationship going forward. China is sure to be on the agenda for the next US president and it will be interesting to see how staunchly the new candidates emphasise this in their campaigns. Fortunately for China, and for global markets, it seems that Trump is currently more concerned with the stockmarket impact and shorter-term wins.

Furthermore, the concessions that China makes may in fact be in its interests and could propel its ascent. A stable currency would attract foreign investment flows and stop capital flight; increased IP protection would stimulate innovation; opening up of more industries will increase competition, boost productivity and encourage advancement of domestic companies; curbing subsidies would ease pressure on public funding and curtail excess production. All of the above would provide long-term benefits to China and would be a rather ironic outcome of the trade war. 

Ruth Chambers is fund manager of the Neptune China Fund.

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