China economy

Lingering US-China tensions, economic slowdown could set stage for rough first half for investors, analysts say

  • World Bank has warned that outlook for the global economy has ‘darkened’ in 2019
  • KKR’s Henry McVey turns to Macbeth as he advises investors to be cautious, but stay in the markets
PUBLISHED : Monday, 14 January, 2019, 7:02am
UPDATED : Monday, 14 January, 2019, 9:33am

Optimism is rising that the United States and China can reach an agreement to end their months-long trade war, but tensions between the world’s two largest economies will continue to linger in what could be a very choppy start to the year for investors, say analysts and economists.

Trade tensions and softening investment are weighing on growth globally and rising fears that China’s economy may be slowing faster than previously thought.

In advising investors to stay in the market, but warning that it is “not business as usual”, Henry McVey, the head of global macro and asset allocation at private equity firm KKR, quoted Macbeth in his outlook for the year: “I am in blood. Stepped in so far that, should I wade no more, Returning were as tedious as go o’er”.

Against that backdrop, investors should expect rough seas in the first half of the year, even if the US and China cease their hostilities over trade, according to market observers.

“We expect China’s economic slowdown to intensify in the coming months,” said Jerry Peng, China strategist at Citigroup. “Consumption is weak, especially discretionary spending for automobiles, smartphones, home appliances. Without any kind of stimulus from the government, we expect it to remain subdued.”

The US and China reached a 90-day truce to continue trade talks. If both sides are not able to reach an accord by March 1, tariffs will increase on some US$200 billion of Chinese-made products from 10 per cent to 25 per cent.

Since meeting with his Chinese counterpart Xi Jinping last month, Trump also has spoken positively about the discussions with China, saying on Twitter last week, “Talks with China are going very well!”

Following three days of discussions in Beijing last week, China’s Ministry of Commerce said that the talks “laid a foundation for resolving issues of mutual concern”.

Even if a deal was reached, the rising tensions between the US and China could persist “for a few decades”, Hao Zhou, Commerzbank’s senior emerging markets economist for Asia, said.

“For China, the most important thing is to catch up,” he said. “For the US, the most important thing is containing China’s rise. ”

Mark Haefele, UBS’s chief investment officer for global wealth management, and Min Lan Tan, head of the chief investment office for APAC, said China-US relations were likely to become “more complex and challenging, but a full-on cold war was unlikely”.

“Rather, we could see a long cycle of fight and talk over a broad range of issues and a gradual decoupling of the two economies,” they said in a research note.

The squabble has cut into the bottom line of American manufacturers and other US companies who rely on Chinese suppliers.

It has also caused some overseas companies to rethink whether to invest in new plants and equipment in China, with foreign direct investment inflows falling in the first 11 months of 2018, according to Chinese government data.

US trade war forces firms to rethink private investment

The World Bank said growth in emerging markets and developed economies was expected to remain flat this year and simmering trade disputes could further escalate in 2019. The bank expects the global economy to grow at 2.9 per cent this year, its lowest level since 2016.

“At the beginning of 2018 the global economy was firing on all cylinders, but it lost speed during the year and the ride could get even bumpier in the year ahead,” World Bank Chief Executive Kristalina Georgieva said.

The credit rating agency said gross domestic product growth in China may slow to 6 per cent, its lowest level since 1990 as the lingering trade tensions cast a pall over exports and manufacturing activity.

“Since mid-2018, China’s authorities have eased policy through targeted liquidity measures, taxation changes and infrastructure spending, which will shore up growth,” Moody’s analysts Christian Fang and Allister Lim said in a research report. “However, designing and implementing policy that simultaneously buffers the shock of the US trade tariffs and potential further restrictions, while continuing deleveraging and de-risking without triggering too sharp a slowdown in growth, poses complex trade-offs. ”

The Caixin China General Manufacturing Purchasing Managers Index – which tracks China’s manufacturing of small- and medium-sized enterprises – in December fell to its lowest level since May 2017.

Risk of ‘worse to come’ from trade war impact, legal experts warn

Heng Koon How, executive director and head of markets strategy at Singapore’s United Overseas Bank, said that the year for investors could potentially be divided into two parts, with greater clarity coming after March.

“After March, there should be some progress on trade talks between the US and China,” he said. “We will have one whole quarter of macro data from China, the US and the world, and we should be able to form an opinion in a much more certain way on how the world’s economy is going. ”

Andy Wong, senior investment manager at Switzerland’s Pictet Asset Management, said he expected China’s economy to show improvement in the second half of the year as government stimulus measures kick in.

“After a swift recovery in exports from a cyclical dip in 2015, shipments have started to lose steam again in mid-2018,” Neumann said in a research note. “Here, trade tensions aren't entirely to blame – in fact, they may have provided extra support to exports for a while due to 'front-loading', the acceleration of shipments to beat the imposition of tariffs. ”

A cooling global demand, signalled by a deceleration of growth across all major markets in the second half of 2018, could cause the pace of export growth to pull back further, Neumann said.

“Though most leading indicators suggest the cycle is slowing, they don't signal an outright collapse,” Neumann said. “Therefore, assuming that the trade dispute between the US and China doesn't sharply escalate further, to the extent that it materially harms growth in both economies, export growth looks set to slow in 2019, rather than plummet.”

Additional reporting by Yujing Liu