Priceless – Chinese Chequers

Ros Price, Investment Committee Member.

It is over a year since President Xi became President for life at the People’s Congress and at this spring’s meeting his power base was if anything consolidated even further. But there were some points of interest regarding the direction of the economy which are easy to have missed in all the blether from the US regarding the ongoing trade dispute between China and the US and its possible resolution. Furthermore, what started out in the market’s perception as an obvious and relatively quick win for the US is rapidly changing in nature, from ‘just’ a trade war to a real new cold war as the US tried to make sure it will not be dislodged from its place as the world’s top economic and political dog. Of course this makes for real problems for the global economy as a whole and not merely the two protagonists.

Of course since the last People’s Congress most of what we have heard in the press about China has been pretty negative – sliding growth patterns, climbing consumer and other types of debt, disengagement of some nations with China’s pet foreign projects, especially its Belt and Road development, all aided and abetted by the flow of Tweets from the US President of course. Admittedly some of the underlying data on the Chinese economy has not helped this perception either although its recent successes in space technology should have reminded us all this is a rather special developing economy still. Now as we await the ultimate outcome of the various talks between the US and China on trade between the two, recent data points are showing improving points in growth in China. It does pay to remember though that just as one swallow does not make a Spring, then one surprise rise in GDP does not (quite) make a recovery! The long term plans to make the Chinese economy less reliant on exports and cater more for an economy based on domestic consumption are bearing fruit.

So while one might think it is perhaps a good time now to try and assess if we are indeed at a positive turning point for the Chinese economy and just what the extension of power granted to President Xi last year has given rise to so far and means for the long term, the rapidly changing trade scene makes this pretty difficult to do. Once again the outlook now – and not just for the Chinese economy – seems to be mainly driven by the political whim of the US President and we cannot rely on the expertise of his advisers to limit any damage to the domestic economy if the latest events with the threatened imposition of tariffs on Mexico as an incentive to clamp down on migration from Latin America to the US demonstrates. The threat disappeared just as quickly when Mexico appeared to back down and grant the US president what he desired. It is difficult tell if there was cause and effect here – talks on Mexican border action had after all been in train for some time before the latest blow up. There were dark hints that this was all for electioneering purposes in the US perhaps. Some in Washington also suggest that as the election moves closer more demonstrations of economic weapons to ‘make America great again’ will be in evidence. President Trump of course has placed a great deal of faith in his ability to solve these trade differences on his supposed excellent personal relationship with President Xi but after the recent treatment of Huawei that seems less and less likely. Indeed the leading newspaper in China has just been publishing exhortations to the Chinese people to adopt a new Long March attitude to these trade relations. China is digging in for the long run, which given Xi’s presidency for life, he can do without having to face elections. In the US, it is gradually becoming apparent that much of the burden of any tariffs that could be imposed by the Trump administration are being borne the people and businesses of the US itself.

But the new trade war is now not just about how much China sells to the US and supposedly takes away American jobs. It is an expression of the fear in Washington that the US might possibly lose its technological lead over the rest of the world – for which read China. China’s technological advances cross many fields – including the military one where it has been building weapons systems for deployment in the South China Sea. It was hard to miss the advances made when China has recently landed a spacecraft on the dark side of the moon – the first nation to do so. It is also the acknowledged leader in the next generation of computer science – quantum computing and it is also at the forefront of 5G technology which the US is not (the other two leaders are Scandinavian). It is of course the real reason for the US to be so against Chinese Huawei being given any place in 5G infrastructure building in the West. As it makes so much noise about the Chinese authorities being able to listen in via 5g, no-one seems to remember the terrible scandal only a few years ago when amongst other infringements by the US authorities, it was found that they listened into the German Chancellor Angela Merkel’s cell phone calls amongst many others from so-called allied governments! What short memories we all have.

At present the potential outcome of all these disputes is particularly unclear but world trade now seems to be the weapon of choice in many politicians’ minds, which is obviously better than good old fashioned shooting wars. Yet there will still be serious casualties in terms of lost jobs, failing businesses and rising living costs where tariffs directly impact consumers.

Indeed there are now some commentators who, taking perhaps an all-round view of the current deterioration of relations between the two nations are talking of a new cold war between China and the US which could last for many decades. Those of us who remember the long cold war between the USSR and the West post 1945 will be hoping these predictions are entirely wrong. Yet the current trend of thinking in the Trump White House most likely means there is more than a little truth in the forecasts as there is virtually no support whatsoever there for free trade. Indeed the current White House administration is completely opposed to global trading and indeed many global businesses based in the US feel that they are looked upon by the administration as unpatriotic trade traitors and feel that they are also viewed as the enemy within. With this being the prevalent policy aim in the White House, one must ask whether the occasional talks between Tump and Xi may be meaningless when considered in the cold light of day, for why should a rising nation such as China be expected to reshape its entire economic system and legal basis to that of the US?

If this trend continues and spreads across the world then we can all probably look forward to a less open world and indeed a poorer one as the trade hawks in the US administration continue their de-globalisation policy.