Topline: Although the U.S. and China have finally agreed on an initial deal that’s expected to defuse the 19-month-long trade war and result in a rollback of both existing and scheduled tariffs, the stock market didn’t surge on the news. Instead, markets ended the day largely flat: The S&P 500 finished the day up by less than 0.008%, while the Dow Jones Industrial Average rose 0.012%.
Here’s why stocks didn’t make headway on Friday’s trade news, according to market experts:
The market may have already priced in expectations for an agreement prior to Friday: “Stocks already ran up 7% in just the past two months alone on the belief that a deal would be signed,” notes Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
Some experts remain wary: “The devil remains in the details,” points out Bankrate senior economic analyst Mark Hamrick. “We await further word on purported aspects of the agreement including purchases of U.S. farm goods, intellectual property protections, technology transfers and access to China’s financial sector.”
“Investors are right to be skeptical,” says Joseph Brusuelas, RSM chief economist. “There’s a limited framework to the deal, since both sides just wanted to agree and avoid the looming tariff deadline on December 15th.”
“Contrary to what many believed—and were told in news stories—there is no immediate tariff relief, just an agreement to eventually rollback tariffs later as phase two negotiations progress,” Zaccarelli points out.
“I’m still suspicious of a major rollback on existing tariffs,” Nicholas Sargen, economic consultant at Fort Washington Investment Advisors, similarly argues. “Don’t rule out a selective rollback, since Trump needs to maintain bargaining power—he has to keep his powder dry.”
Crucial quote: “Is this deal enough to give the US economy an added lift? I doubt it because to get that added lift we need businesses to ramp up capital spending—and they’re going to stay on the sidelines until there’s greater clarity and less uncertainty,” Sargen says. “If trade uncertainty was behind us, we’d have gotten a bigger pop in the market.”
What to watch for: “Both sides need to figure out translation and legal framework first—and if they don’t come to an agreement on that this deal could fall apart very quickly,” Brusuelas says. “We’ll have to see if it survives the weekend and into next week.”
Key background: Officials from both sides have been working tirelessly to hammer out a deal ahead of the looming December 15 tariff deadline. Reports came in on Thursday that negotiators had agreed to terms, and President Trump signed off on them later in the day. Wall Street cheered the good news, sending the stock market to new record highs, though the market’s reaction was notably more tempered on Friday, despite further confirmations that an agreement had been reached.
I am a New York—based reporter for Forbes, covering breaking news—with a focus on financial topics. Previously, I’ve reported at Money Magazine, The Villager NYC, and The East Hampton Star. I graduated from the University of St Andrews in 2018, majoring in International Relations and Modern History. Follow me on Twitter @skleb1234 or email me at sklebnikov@forbes.com
Hodges Funds’ Eric Marshall discusses opportunities in the stock market amid the US-China trade war with L Catterton Managing Partner Michael J. Farello and Yahoo Finance’s Adam Shapiro, Scott Gamm and Julie Hyman. Subscribe to Yahoo Finance: https://yhoo.it/2fGu5Bb About Yahoo Finance: At Yahoo Finance, you get free stock quotes, up-to-date news, portfolio management resources, international market data, social interaction and mortgage rates that help you manage your financial life. Connect with Yahoo Finance: Get the latest news: https://yhoo.it/2fGu5Bb Find Yahoo Finance on Facebook: http://bit.ly/2A9u5Zq Follow Yahoo Finance on Twitter: http://bit.ly/2LMgloP Follow Yahoo Finance on Instagram: http://bit.ly/2LOpNYz
China’s third quarter growth rate has fallen to 6%, says Beijing. No it hasn’t. It’s more like 3%, says Morningstar’s China economics team led by Preston Caldwell in a report dated October 29.
While Donald Trump and his economic advisor Larry Kudlow try to convince Wall Street today that trade talks are going well and the two sides will still ink their so-called Phase 1 mini-deal this year, investors are noticing something awry in China. Companies are sourcing product elsewhere in modest, yet increasing numbers. China’s usual high fixed asset investment numbers are falling. Economic policy makers could be afraid of debt burdens and don’t want to overstimulate the economy. Growth is slowing. Industrial production is contracting.
To make matters worse, the full brunt of tariffs hasn’t quite been felt fully by China. The average incremental tariff rate increased to about 12% in the third quarter from about 9% in the second quarter. If Phase 1 talks result in no signed agreement anytime soon, Morningstar predicts it would send the average U.S. tariff rate on Chinese imports to over 20% by the first quarter of 2020.
The dollar/yuan exchange rate has helped offset some of the tariff costs. The yuan has weakened by about 5% since the end of the first quarter. For exporters, China is still cheap.
The bulk of the third quarter decline was due to the consumer durables index component of the Morningstar proxy for measuring GDP. It contracted 4.1% from 3.8% growth in the second quarter. Morningstar analysts believe there is a chance that the locals may be temporarily pulling back on spending in anticipation for new government subsidies. Still, slowing durables consumption matches the trend in place since early 2017. And stimulus has been trickling in since.
Two of the other Morningstar proxy components that brought them to the 3% figure also saw a marked decline in the third quarter. Their power proxy index is now in line with the other index components after being a positive growth outlier for about two years.
A container ship sails out to sea from Yangshan Deepwater Port in China. Photographer: Qilai … [+]
But it appears the real drag that brought Morningstar’s number down to 3% is industrial production. Industrial profits are down 5.3% year over year versus August’s contraction of 2%.
“Neither a surprise nor a market mover,” says Brendan Ahern, CIO of KraneShares in New York. “U.S. tariffs are still exacting their toll on export-focused manufacturers.”
The industrial sector slowdown might also be understated, especially if China is over-estimating inflation, Morningstar report authors warned.
Meanwhile, China’s dependence on credit to sustain economic growth has so far thwarted Xi Jinping’s attempts to convince the provincial governments to deleverage. Debt growth remains above nominal GDP growth rates.
“We’re not surprised that China’s economy has failed to recover, given that credit growth stalled after a slight rebound in the first quarter,” Morningstar analysts wrote.
China-bound investors will be watching for solid Singles Day sales on November 11. If they disappoint, emerging market funds who are mostly overweight China could finally start shifting positions.
China’s A-shares have been outperforming the MSCI Emerging Markets Index all year. Only Russia, as measured by the VanEck Russia (RSX) exchange traded fund, is beating the CSI-300, an index tracking mainland China equities listed on Shanghai and Shenzhen exchanges.
Official consumer spending showed a mixed picture in the third quarter. Nominal retail sales grew 7.8% year over year in September versus a high of 9.8% growth back in June. Real retail sales fell only 30 basis points from August.
Taylor Swift will perform at Alibaba’s Singles Day on November 11 in Shanghai. China could use the … [+]
Getty Images for RADIO.COM
China’s National Bureau of Statistics’ household survey data suggests that most of the spending went towards education, entertainment, and “miscellaneous services.”
Morningstar said that their own sampling of alternative consumer sales data such as box office revenue, telecom revenue, and air passenger volume suggests tepid consumer services growth. China’s number crunchers are more upbeat on that and Morningstar’s team is not, which brings their forecast so much lower than official figures.
E-commerce giant Alibaba – the company behind Singles Day – announced this week that Taylor Swift will be performing at the Mercedes Benz Arena in Shanghai where the shopping spree will have their telethon-like tally of sales. If Swift can hype Singles Day shoppers to spend, the China consumer bull narrative will remain in tact. If she fails, and Singles Day ends up being mediocre, all bets are on for more stimulus in the months ahead out of Beijing.
Spent 20 years as a reporter for the best in the business, including as a Brazil-based staffer for WSJ. Since 2011, I focus on business and investing in the big emerging markets exclusively for Forbes. My work has appeared in The Boston Globe, The Nation, Salon and USA Today. Occasional BBC guest. Former holder of the FINRA Series 7 and 66. Doesn’t follow the herd.
China released third-quarter GDP figures on Friday showing the economy grew 6.0% from a year ago — the lowest in at least 27-1/2 years, according to Reuters records. CNBC’s Eunice Yoon reports.
The ongoing US-China trade war is a distraction from China’s big problems: the blowing of multiple bubbles and the country’s soaring debt, which will eventually kill economic growth.
It happened in Japan in the 1980s. And it’s happening in China nowadays.
The trade war is one of China’s problem that dominates social media these days. It’s blamed for the slow-down in the country’s economic growth, since its economy continues to rely on exports. And it has crippled the ability of its technology companies to compete in global markets.
But it isn’t China’s only problem. The country’s manufacturers have come up with ways to minimize its impact, as evidenced by recent export data. And it will be solved once the US and China find a formula to save face and appease nationalist sentiment on both ends.
One of China’s other big problems , however, is the multiple bubbles that are still blowing in all directions. Like the property bubble—the soaring home prices that makes landlords rich, while it shatters young people’s dreams of starting a family, as discussed in a previous piece here.
New Home Prices 2015-19
Koyfin
Unlike the trade war, that’s a long-term problem. Low marriage rates are followed by low birth rates and a shrinking labor force, as the country strives to compete with labor-rich countries like Vietnam, Sri Lanka, the Philippines and Bangladesh—to mention but a few.
Then there’s the unfavorable “dependency rates” — too few workers, who will have to support too many retirees.
And there’s the impact on consumer spending, which could hurt the country’s bet to shift from an investment driven to a consumption driven economy.
Japan encountered these problems over three lost decades, even after it settled its trade disputes with the US back in the 1980s. China experience many more.
Meanwhile, there’s the infrastructure investment bubble at home and abroad, as discussed in a previous piece here. At home infrastructure investments have provided fuel for China’s robust growth. Abroad infrastructure investments have served its ambition to control the South China Sea and secure a waterway all the way to the Middle East oil and Africa’s riches.
City overpass in the morning
Getty
While some of these projects are well designed to serve the needs of the local community, others serve no need other than the ambitions of local bureaucrats to foster economic growth.
The trouble is that these projects aren’t economically viable. They generate incomes and jobs while they last (multiplier effect), but nothing beyond that—no accelerator effect, as economists would say.
That’s why this sort of growth isn’t sustainable. The former Soviet Union tried that in the 1950s, and it didn’t work. Nigeria tried that in the 1960s ;Japan tried that in the 1990s, and it didn’t work in either of those cases.
That’s why bubbles burst – and leave behind tons of debt.
Which is another of China’s other big problem s.
How much is China’s debt? Officially, it is a small number: 47.60%. Unofficially, it’s hard to figure it out. Because banks are owned by the government, and give loans to government-owned contractors, and the government owned mining operations and steel manufacturers. The government is both the lender and the borrower – one branch of the government lends money to another branch of government, as described in a previous piece here.
But there are some unofficial estimates. Like one from the Institute of International Finance (IIF) last year, which placed China’s debt to GDP at 300%!
Worse, the government’s role as both lender and borrower concentrates rather than disperses credit risks. And that creates the potential of a systemic collapse.
Like the Greek crisis so explicitly demonstrated.
Meanwhile, the dual role of government conflicts and contradicts with a third role — that of a regulator, setting rules for lenders and borrowers. And it complicates creditor bailouts in the case of financial crisis, as the Greek crisis has demonstrated in the current decade.
I’m Professor and Chair of the Department of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance. I’ve have also published several books, including Collective Entrepreneurship, The Ten Golden Rules, WOM and Buzz Marketing, Business Strategy in a Semiglobal Economy, China’s Challenge: Imitation or Innovation in International Business, and New Emerging Japanese Economy: Opportunity and Strategy for World Business. I’ve traveled extensively throughout the world giving lectures and seminars for private and government organizations, including Beijing Academy of Social Science, Nagoya University, Tokyo Science University, Keimung University, University of Adelaide, Saint Gallen University, Duisburg University, University of Edinburgh, and Athens University of Economics and Business. Interests: Global markets, business, investment strategy, personal success.
People walk by a globe structure showing the United States of America on display outside a bank in Beijing, Monday, May 6, 2019. U.S. Donald Trump raised pressure on China on Sunday, threatening to hike tariffs on $200 billion worth of Chinese goods in a tweet that sent financial markets swooning. Trump’s comments, delivered on Twitter, came as a Chinese delegation was scheduled to resume talks in Washington on Wednesday aimed at resolving a trade war that has shaken investors and cast gloom over the world economy. (AP Photo/Andy Wong)
Accusing Beijing of “reneging” on commitments it made in earlier talks, the nation’s top trade negotiator said Monday that the Trump administration will increase tariffs on $200 billion in Chinese goods Friday, a sharp escalation in a yearlong trade dispute.
At the same time, a Chinese trade delegation is expected to arrive in Washington to resume negotiations on Thursday, a day later than originally planned.
At a briefing with reporters, neither U.S. Trade Representative Robert Lighthizer nor Treasury Secretary Steven Mnuchin offered details of China’s alleged backsliding, and there was no immediate response from Beijing.
Mnuchin said Trump officials learned over the weekend that Chinese officials “were trying to go back on some of the language” that had been negotiated in 10 earlier rounds of talks.
The U.S. officials said that at 12:01 a.m. Eastern time Friday, the administration will raise the tariffs from 10% to 25%. President Donald Trump had announced those plans via Twitter on Sunday, expressing frustration with the pace of negotiations. The hit list includes such varied products as baseball gloves, vacuum cleaners and burglar alarms.
The reiteration Monday of the president’s threat from high-level Trump officials reinforced the administration’s determination to put Beijing on the defensive.
By threatening to raise taxes on Chinese imports, Trump is throwing down a challenge to Beijing: Agree to sweeping changes in China’s government-dominated economic model — or suffer the consequences.
The unexpected ultimatum shook up financial markets, which had expected the world’s two biggest economies to resolve a yearlong standoff over trade, perhaps by the end of the week.
“It’s a significant change in the president’s tone,” said Timothy Keeler, a partner at the law firm Mayer Brown and former chief of staff for the U.S. Trade Representative office. “It certainly increases the possibility that you’ll have no deal.”
For weeks, Trump administration officials had been suggesting that the U.S. and Chinese negotiators were making steady progress.
Suddenly on Sunday, Trump said he had lost patience: “The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!” he tweeted.
Trump also said he planned “shortly” to slap 25% tariffs on another $325 billion in Chinese products, covering everything China ships to the United States.
The two countries are engaged in high-stakes commercial combat over China’s aggressive push to establish Chinese companies as world leaders in cutting-edge fields such as robotics and electric vehicles.
The United States accuses Beijing of predatory practices, including hacking into U.S. companies’ computers to steal trade secrets, forcing foreign firms to hand over technology in exchange for access to the Chinese market and unfairly subsidizing Chinese firms at the expense of foreign competitors.
The Trump administration has imposed 10% tariffs on $200 billion in Chinese imports and 25% tariffs on another $50 billion. The Chinese have retaliated by targeting $110 billion in U.S. imports.
Global stock markets sank Monday on Trump’s tweetstorm. But shares in the United States regained some of the lost ground on news that Chinese officials were planning to go ahead with this week’s meetings in Washington. Still, the Chinese government did not provide details on exactly when talks would resume and who would be on China’s negotiating team.
U.S. officials said they expected that China’s delegation would be led again by Vice Premier Liu He, a confidante of Chinese President Xi Jinping.
Beijing is wrestling with an internal conflict: It is eager to end a trade fight that has battered Chinese exporters, but it doesn’t want to look like it’s bowing to the Trump administration’s demands for far-reaching concessions.
Trump’s threat makes going ahead with talks “very difficult politically” for Xi’s government, said Jake Parker, vice president of the U.S.-China Business Council. He said the Chinese public might “view this as a capitulation” if Beijing reached an agreement before Trump’s Friday deadline.
The conflict is testing how far Beijing is willing to go in changing a state-led economic model it sees as the path to prosperity and global influence — and how much power Washington will have to enforce any agreement.
Beijing is willing to change industrial plans that provoke foreign opposition but wants to preserve the ruling Communist Party’s dominant role in directing economic development, said Willy Lam, a politics specialist at the Chinese University of Hong Kong.
Chinese officials have said they are willing to let foreign companies participate in plans that call for government-led creation of global competitors in robotics and other technologies. But they have yet to release details, and it is unclear whether the concessions will satisfy Trump.
Xi is “adamant about party-state control over major sectors of the economy,” Lam said. “If they give this up, then China in effect ceases to be a socialist country.”
Beijing agreed early on to narrow its trade surplus with the United States — a staggering $379 billion last year — by purchasing more American soybeans, natural gas and other exports.
At the same time, Xi’s government has announced a steady drumbeat of promises to open markets — in businesses that include auto manufacturing and banking. But none of the moves directly addresses American complaints.
The negotiators are also looking for a way to hold Beijing to any commitments it makes. The Trump administration wants to keep tariffs on Chinese imports to maintain leverage over Beijing.
“Trump wants a certain amount of tariffs to remain in place just in case the Chinese don’t honor their promises,” Lam said. “The Chinese refuse to give the Americans the right to penalize them.”
The Chinese are also skittish about allowing Washington to dictate changes to industrial policy and subsidies, said Raoul Leering, a trade specialist for Dutch bank ING. They see that as “having another country decide your economic policy.”
Trump also seems to be calculating that Xi needs a deal more than he does. The Chinese economy is decelerating. “Trump believes he can bully the Chinese,” Lam said. “Trump realizes the Chinese economy is facing a rough patch, and Xi Jinping is under pressure from his own people.”
But Trump also has an incentive to reach a deal. The trade war is creating uncertainty for businesses trying to decide where to buy supplies, locate factories and make investments. And it’s been weighing on a strong U.S. stock market, which the president likes to tout as evidence that his economic policies are working.
America’s tariffs have begun to have an impact on China’s trade policies. Last Sunday, Beijing announced that it will lower tariffs on 1585 products. The policy will take effect on November 1, and it will bring overall tariffs level down to 7.5% from 9.8% last year. The goods covered include textile products, metals, minerals, machinery and electrical equipment, most of which have been the target of US tariffs. The new tariff reduction came a few months after China cut tariffs on most imported medicines, vehicles and auto parts……..
