Tag: trade war

Stock Markets Failed To Rally On China Trade Deal, Here’s Why

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.

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Sergei Klebnikov

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

Source: Stock Markets Failed To Rally On China Trade Deal, Here’s Why

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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

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With Currency Manipulator Label, China Trade War Moves Into Unchartered Waters

Last week’s announcement by Trump of more tariffs coming for everything shipped to the U.S. from China and Monday’s move by Beijing to allow for a weaker yuan begins Act III in the trade war.

Here’s the plot twist:

Treasury just hit China with currency manipulator status after market hours on Monday. It came at a time when nothing was trading. Investors were stuck in the Twilight Zone. Tuesday morning is going to be a madhouse rush for “sell China” orders by the algos. Wait for it.

As one hedge fund manager told me, “we’ve just thrown gasoline on the fire.”

Currency manipulator status gives Beijing less wiggle room because if they weaken the yuan to make up for tariffs, tariffs will likely go up to compensate.

We are in unchartered waters. At risk is what amounts to sanctions on key U.S. commodities like soybeans and pork by the Chinese government, and political risk involving Hong Kong as civil unrest continues there, putting its special trade status in the crosshairs of a China-bashing American Congress.

President Trump told reporters last week that he figured China would depreciate the yuan in response to his plan to hike tariffs to 10% on the remaining balance of China imports by Sept 1.

In isolation, a 10% tariff on $300 billion in combination with a 10% yuan depreciation would be functionally equivalent to Chinese households writing a check for $30 billion to the U.S. Treasury. “Trump may not have gotten Mexico to pay for its border wall, but he is getting China to pay (the government) for its tariff wall,” says China bear Brian McCarthy, chief strategist for Macrolens, a big picture investment research firm.

Currency manipulator status makes the trade war worse for China.

Meaningful and enduring negative feedback about China will lead to extreme financial market volatility in Asia, especially in China’s mainland equity market where a gambler’s approach to trading by the dominant retailer investor class there might cash out. And why not? China’s mainland stock indexes are up over 20% this year and this may be seen as the time to take money off the table.

Short sellers shouldn’t discount the possibility of the People’s Bank of China pumping money into the A-shares this week.

It’s too early to start expecting widespread defaults on China’s corporate dollar-denominated debt (which some firms estimate to be around $800 billion). A default would deal a harsh blow to foreign investors who have been big buyers of Chinese bonds as that market opens up and joins the major indexes.

The transmission mechanism from yuan devaluation to global securities is expressed more obviously through Europe and other emerging markets, especially those heavily linked to China — such as South Korea and Brazil. Both currencies had an ugly looking chart on Monday.

Meanwhile, the Fed can potentially isolate the U.S. economy from any economic fallout by cutting rates. Though this opens up a whole other can of worms, namely rates sinking to zero in the event of a recession.

The yuan settled at 7.05 to the dollar today after the central bank set the daily rate at just over 6.9 to the dollar. The currency is allowed to trade within 4% of that daily fixed rate. The yuan is now at its weakest level in over 10 years.

“These moves represent a significant escalation in the trade war,” says Joseph Brusuelas, chief economist for RSM, a global financial advisory firm.

“There is a specific logic and order of operations with respect to the tit-for tat retaliation likely to play out that will not result in longer-term inflation, but will instead create conditions for deflation and negative nominal interest rates along the U.S. maturity spectrum if a longer-term trade compromise cannot be reached,” he says.

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Kenneth Rapoza

I’ve 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.

Source: With Currency Manipulator Label, China Trade War Moves Into Unchartered Waters

Trade War Is Hiding China’s Big Problems

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Getty

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

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

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.

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Panos Mourdoukoutas

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.

Source: Trade War Is Hiding China’s Big Problems

US Stocks Rise on Positive Trade Talks with China; Bitcoin Cautious

The US stocks opened Wednesday on a higher note as President Donald Trump signaled positive outcomes of their trade talks with China. The Dow Jones Industrial Average jumped 0.5 percent to 23902 points after adding 115 points while the S&P 500 gained 0.3 percent. The Nasdaq Composite Index surged by 43.2 – or 0.6 percent – to 6941. The jump marked the market’s fourth consecutive upside session – the first time since Sep 14 – correcting 9% from its Dec 24 lows. However, the market remained 11% down from its 2017 peak.

Source: US Stocks Rise on Positive Trade Talks with China; Bitcoin Cautious

How Chinese Products Went From Cheap & Cheerful To Weapons In US Trade War

Tensions are escalating between China and the US over trade. The Chinese government has announced retaliatory measures on a range of American products including cars and some American agriculture products after the US listed 1,333 Chinese products to be hit by punitive tariffs of 25%.

Yet a trade war does not make economic sense for either side. Bilateral trade between the US and China was worth about US$711 billion in 2017 and Boeing’s single deal with China signed during Donald Trump’s visit to Beijing in 2016 was worth about US$37 billion alone.

The jobs and livelihoods at risk are huge. So why is there no particular desire, especially from Trump, to ease the tension and find a new solution?

There has been much talk about the US trade deficit with China and allegations that China steals US intellectual property. But the answer could lie in US fears of the Chinese government’s “Made in China 2025” initiative and how it signals the growing threat of China as an economic rival. That the official US Trade Representative’s recent investigation into Chinese trade practices mentioned the Made in China 2025 initiative more than 100 times, suggests this is the case.

Image problems

Made in China 2025 was launched by the Chinese government in 2015 to upgrade the country’s manufacturing capabilities. It is a plan to transform what China produces from a low-cost, labour-intensive model to advanced and smart manufacturing. Certain key industries such as aerospace, robotics and high-tech medical equipment have been prioritised. The hope is that China will gradually match developed countries’ manufacturing capabilities and become industry leaders.

A lot of the products from these key industries, such as industrial robots, aviation and aerospace equipment, new energy and power supplies and advanced rail machinery were all included in the tariff target list published by the US Trade Representative. So it would seem that the current situation is not simply a trade issue aimed to reduce America’s trade deficit with China. Instead, it is likely targeted at the future competition China will pose.

Made in China 2.0. shutterstock.com

China’s Made in China 2025 strategy makes perfect sense in my field of research, which concerns where products are manufactured and how this effects their popularity in the global market place. A strong and positive image of a country can generate what economists call “halo effects” on its products. So, Germans have built good reputations for their cars and engineering, France and Italy for their wine and fashion, and the US for their innovative products.

This worldwide reputation brings with it prestige and higher price premiums. Although there is still debate around whether brand origin could be more important than where the product is produced (Apple, for example designs its products in the US but manufactures them in China), there is no doubt that “Made in China” suffers from an image problem.

Chinese products have long been associated with a cheap and cheerful perception that they are not good in terms of quality or ingenuity. The Chinese government has long been aware of this view and keen to change it.

At the turn of the 21st century, it set up a policy called “Going Out” to encourage leading Chinese firms to expand internationally, acquire new technology and the tools to innovate. The two big examples were IT firm Lenovo’s takeover of IBM’s personal computer division in 2005 and Geely automotive’s purchase of Volvo in 2010. Made in China 2025 serves the same purpose – to boost China’s technology and innovation capabilities and to improve the image of Chinese products.

Impressive growth

There is no doubt that China has come a long way since the 1990s. It has built 22,000km of advanced high speed rail network within the last decade, which is more than the rest of the world combined. It is also considered as the global leader in renewable energy and technology, patent filings, commercial drones, industrial robotics and e-commerce and mobile payments.

China is already a leader in some tech. shutterstock.com

Chinese telecommunications company Huawei typifies the transformation of Chinese products in recent years. Within the last decade, Huawei has surpassed Ericsson and Nokia to become the world’s biggest telecom equipment supplier and has just overtaken Apple as the world’s second largest smartphone maker, behind Samsung.

What’s more remarkable about these statistics is that Huawei has transformed itself from a cheap phone maker to an accepted premium brand that can compete with Apple and Samsung. Its latest releases the top of the range Huawei P20 Pro will retail for US$1,100 and its top end model Huawei Porsche Design Mate RS will sell for US$2,109 – even more than the iPhone X.

There is no doubt that some in the US are uncomfortable with China’s impressive growth and feel threatened by it. It suggests the current trade dispute is not just about imports and exports, but also an incumbent superpower feeling the threat of a growing challenger.

  • Senior Lecturer in Marketing, University of Huddersfield

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