Now that the US and China have agreed to begin easing trade tensions, the fog over China’s markets is starting to lift. Investors should consider Chinese equity opportunities that have been overlooked because of tariff fears.
While the trade war is far from over, the Phase One trade deal reached on December 13 represents an important truce between the US and China after 18 months of escalation. Full details haven’t been officially confirmed, but it was widely reported that under the agreement, the US won’t impose 15% tariffs on $160 billion worth of Chinese goods that were scheduled to take effect this week. China also agreed to cancel tariffs it had planned for US imports. US tariffs on another $120 billion of Chinese goods will be cut in half to 7.5%. US tariffs of 25% on another $250 billion of Chinese goods are unchanged and will be the subject of trade talks next year.
According to the deal, China will buy more American agricultural products in exchange for a reduction of tariffs. However, there is still no change to the US ban of major Chinese technology groups such as Huawei and ZTE. While agreement was reached on technology transfer protocols between the US and China, we believe tensions over the use of technology between the two economic powers are likely to persist.
The truce doesn’t resolve some of the deeper structural problems between the two countries, such as intellectual property protections. Friction over these issues is likely to persist regardless of who is in the White House after the 2020 election. Still, we think this new interim deal is an important step forward. It removes some uncertainty over trade, avoids a near-term escalation of the US-China trade dispute and could mark the start of a path towards some short-term easing of tariffs.
What Does It Mean for China?
Even after removal of some trade hurdles, China’s economy still faces major challenges. China’s GDP is expected to grow by about 6% in 2020, a slowdown from an estimated 6.2% in 2019. The deceleration in China will likely continue, especially in the context of a broader global macroeconomic slowdown.
In this environment, China’s government will probably continue to implement countercyclical policies. These include mild, ongoing monetary-policy easing as well as fiscal stimulus support, especially in areas such as local infrastructure.