Talking Point  

US-China tensions still a drag on investments despite deal

US-China tensions still a drag on investments despite deal

Tensions between America and China are likely to be a drag on investment and global growth for the foreseeable future despite the two countries penning a deal recently, according to Adrian Lowcock head of personal investing at Willis Owen.

Last week the US and China signed a new agreement intended to ease the ongoing trade war that has had a heavy impact on the global economy for the past two years.

Mr Lowcock said: “Whilst trade tensions with the US might reduce in early 2020, it is clear that the scope of tensions between the two countries has gone beyond trade and into other strategic areas such as technology and capital markets. 

“Tensions between the two sides will be a drag on investment and global growth for the foreseeable future.

“China’s growth has been slowing as the economy is much larger, whilst the population growth has also begun slow. At the same time uncertainty caused by US-China trade tensions and, in turn, a global economic slowdown had in effect.

“Although the global economic outlook has improved, it remains weak. Alongside a soft domestic economy the Chinese government is likely to act through a combination of easing monetary conditions, as the central bank introduces measures to improve the availability of loans and fiscal stimulus.” 

By significantly reducing the risk of the tariff dispute escalating into a full-blown trade war, the deal is likely to boost sentiment among Chinese companies and global equity and bond investors who are thinking about increasing their China exposure, Andy Rothman, investment strategist at Matthews Asia said.

But Mr Rothman, warned that two things could derail the trade.

“First, there are as yet no signs that the Trump administration will scale back its campaign to confront Xi on a broad range of issues, especially those related to technology competition.

"By next year, it is possible that Xi may reconsider whether cooperating with Trump on trade makes sense at a time when Washington is taking a confrontational approach on most other issues.

"Of course, if there is a new American president next year, Beijing will wait to see how that administration approaches the relationship with China."

He added: “My second concern is that the deal calls for what I believe are unrealistically large increases in Chinese imports from the US.

"According to the terms of the deal, in 2020, China's overall imports from the US should increase by 50 per cent over the 2017 baseline, and then increase by another 20 per cent  year on year in 2021, for a total two-year increase of US$200bn.

"This includes increases over the 2017 baseline of 52 per cent for agricultural and 257 per cent for energy imports in 2020, and then further increases in 2021 -19 per cent year on year for agriculture and 60 per cent year on year for energy."

Echoing his thoughts Tim Drayson, head of economics at Legal & General Investment Management (LGIM), says it will be difficult for China to meet its target for purchases of US Goods.