6 Nov

China Trade Deal: Are Markets Expecting Too Much?

WRITTEN BY Mohit Oberoi, CFA

Optimism about the US-China trade deal has lifted markets over the last month. The general perception is that a US-China trade deal would boost the global economy and help avoid a recession. The deal would also help remove trade-related uncertainty and stop the exodus of US companies from China. Markets also expect stable relations between the US and China after the deal. However, the market might be expecting too much.

US-China trade deal

There has been a sense of optimism about the possible US-China trade deal. Apparently, the Trump administration is looking for a location to sign “phase one” of the trade deal. The US-China trade war has been impacting global markets. So, even a partial US-China trade deal would help lift the sentiments and revive investors’ confidence. However, as we noted multiple times, there isn’t a magic deal.

China slowdown concerns

The US-China trade war didn’t trigger the slowdown in the global economy. However, trade uncertainty added to the slowdown. Businesses and consumers became cautious. The US economic growth was going to taper down this year as the impact of last year’s tax cuts faded. For China, it’s a natural process of slowing down due to the country’s mammoth size. China’s growth rates have fallen to multiyear lows. However, the gradual slowdown started before the trade war. So, a US-China trade deal wouldn’t address the Chinese economy’s structural issues.

In the long term, China would need to address some of the structural issues to achieve sustainably higher growth rates. For the US economy, the decade long expansion is wearing off. While the trade deal would provide some relief, it would need more fiscal and monetary measures to support the growth.

CNBC reported that Larry Summers, the former Treasury Secretary, has similar views. He said, “But I think we’ll be kidding ourselves if we thought we were one signing ceremony away from some kind of economic nirvana. There are deeper and larger issues that are holding back rapid global expansion.”

Corporate investments and US companies

Several US companies including Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN) plan to shift some of their sourcing from China. As we noted previously, the trend might continue even if the US and China reach some sort of a trade deal. We have similar examples in the steel industry. US buyers have largely shied away from Turkish steel due to uncertainty about US-Turkey relations. There have been a lot of ups and downs in the relations over the last year, which resulted in different steel tariffs on Turkey.

Even after the trade deal, we might not see normalcy in US-China relations. US companies might continue to diversify their purchases away from China. While the US-China trade deal would help buoy sentiments, it wouldn’t address all of the issues facing China and the global economy. Meanwhile, US markets have moved to record highs. Apple, Microsoft, and Amazon have risen 65%, 44%, and 20%, respectively, in 2019. Alibaba (BABA) and JD.com (JD) have risen 33% and 17% during the same period.

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