China’s Resurgence - By Matthew Miceli Donnelly

America and China have been at each other’s throats for quite some time now. It clearly shows that it is not just about trade. Both parties are contesting every domain literally from semiconductors to submarines to films. In my previous article about the trade war, I mentioned three scenarios that could possibly happen, unfortunately the scenario where Trump has a change of heart and continues to be stubborn and hinder a negotiation occurred.

Due to the prolonged negotiations it is evident that in order for both parties to agree on a trade deal one party must accept defeat. In a nutshell, America is protesting against a fraudulent China that according to them, is using every trick in the book to seal a global economic top spot. The country is being accused of stealing technology and forcing its way into the South China Sea.  America also believes that China is bullying democracies like Canada and Sweden. With this argument, one can say that it is evident that China is caught into two minds. On one hand it is doing its utmost to regain its rightful place in Asia while on the other hand, and at the same time, keeping an eye out on the envious United States that might have a major hand in blocking its rise as the U.S cannot accept being second best.

Eric Swalwell who is a member of the House Permanent Select Committee on Intelligence and the Judiciary Subcommittee on Courts, Intellectual Property and Internet expressed his views on this matter with CNBC;...it is vital that we continue to have a multinational approach to addressing these issues....we must involve allies — and other victims of China’s practices — such as Japan, South Korea, Australia and New Zealand. A statement issued by Richard Neal, a Democrat stated that “...this administration … must hold out for a good deal – a structural deal. The future of America’s economic prosperity is at stake.”

The potential for catastrophe continues to loom. One major repercussion is, that even if China and America find a solution, the world will still bear the aftermath of this as growth rate slows down and problems are left to fester for others to try and resolve. 

On a positive note, the markets can afford a slight cheer as China appears to finally be addressing its US trade surplus. Reuters had previously reported that they expect China to make a surplus of around $20.5 billion in May, however this budgeted figure was surpassed as China registered an overall trade surplus of $41.65 billion.  According to reports by China’s General Administration of Customs, stated that surprisingly enough dollar denominated exports increased – a 1.1% increase year on year, while imports declined – the most in nearly three years.  This unexpected turnaround could be that Chinese exporters rushed out shipments to the United States to avoid new tariffs on $300 billion of goods that President Donald Trump is threatening to impose.

Another factor that can be in China’s corner is if it will join forces with Russia and act as one defensive unit against America’s pressure strategy.  Chinese President Xi Jinping travelled to Russia to meet the Russian President Vladimir Putin and publically spoke about growing ties between the two nations. They expressed their views of solidarity at a time when “protectionism and unilateral approaches are on the rise, and a policy of force and hegemony is increasingly taking hold.”  With this trade war Russia can pounce on an opportunity to increase its investment holding in China. This growing relationship can also take its toll on the dollar. It is reported that on an annual basis China purchases around $108 billion worth of oil from Russia.  Currently these transactions are dealt in dollar, meaning that China have to exchange their currency to dollar. However, this can change. 

These two countries have been involved in a number of engagements with one another which helped to strengthen the ties between them. A hypothetical scenario can come as a shock for the American dollar as if these two countries decide to accept one or both of each other’s currency, this could leave to a weakened demand for the dollar.

However there was a glamour of hope when Xi’s remarks on the trade war eased the pressure. He addressed the media by stating that “it would be hard to imagine a complete break of the U.S from China or of China from the U.S.” He continued by emphasising that China is not interested in that sort of deal and according to him, neither is his friend, President Trump.  With this statement, it shows that China has decided that a balanced trade relationship with the U.S is in the best interest of its economy and global economy.  If this is true, then markets can consider that the big China trade issue is mostly out of the way.

China and America face a vast rival of egos to be number one. Out of this continuous scenario, it is evident that China and America desperately need to create a set of rules to help mitigate the overpowering competition between them. Unfortunately, at this moment in time, both see rules as things to break rather than to follow.

So where should an investor place his money? An investor can opt to either ride the trade war roller coaster or invest in cautious products that have a minimal or no impact by the trade war. Overall, the main concept to invest is to diversify your capital.  If you have an aggressive appetite and have a diverse portfolio, you can opt to purchase equities of companies that have a direct impact from this trade war and which have become undervalued. Recent research by UBS showed that the technology and the industrial industries will be mostly affected, followed by the consumer discretionary and materials sectors.  Therefore another option can be reducing direct exposure in single entities in favour of investing in ETFs that track one of these sectors and which might have become undervalued. . However before investing in any type of security, it is vital that you consult your investment advisor.

 

This article was prepared by Matthew Miceli Donnelly,ICIWM, B.Com Banking & Finance & Management (Melit.), B.Com (Hons.) Management, MBA (Melit.), Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]

http://www.jesmondmizzi.com








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