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China causes change in world economies

Just before coronavirus spread in the West, President Trump was celebrating a first-round trade deal with China but the agreement had a break clause in it.

Bar Charts step down on the world map which close up China and text "coronavirus" on a bar chart.

by
John Redwood

in Features

22.04.2020

Just before the virus spread its way into the lives of the west, President Trump was celebrating a first-round trade deal with China. China promised to buy $200bn of extra US imports over the next two years, compared to the $106bn in total which it bought in 2019. The two-year agreement had in it a break clause in case there was a “natural disaster or other unforeseeable event” which got in the way of the accelerated purchases. Some now worry that such an event happened shortly after the Agreement was signed.

It was always a tough ask. China might have wanted to buy more US planes, but the current state of aviation demand coupled with the continuing problems Boeing has experienced with its bestselling product means delay if not reduction of possible orders. China also wanted more semiconductors and electronic products. Here US worries over technology loss coupled with new output from elsewhere in the world creates some uncertainty about rising volumes. There is still US food led by soybeans, but that in of itself cannot add up to an extra $200bn.

Mr Trump was always in two minds about China. Around the time of the breakthrough with the trade deal, he was complaining about the way China behaved over technology. The State Department was busy lobbying western allies not to allow Huawei into contracts to supply 5G. The President frequently sounded off about alleged Chinese trade and currency violations which were meant to be tackled by the wide-ranging trade agreement.

Today the mood of many western nations has changed towards free trade and global sourcing. Difficulties with procuring ventilators for patients has made western countries ask their own manufacturers of other products to adapt and to produce these medical machines to augment imports. Problems with sourcing enough face masks and medical protection has led to doubts about continuing reliance on Asian imports for so much clothing. Increasing reliance on mobile and digital technology has heightened awareness of security issues. Some are nervous about large volumes of data taking to the cloud using equipment with Chinese input.

It looks as if the virus will lead to a rethinking of supply chains, with more emphasis on resilience and local sourcing and less on price. It will also lead governments to consider more nationally sourced contracts argued on the basis of national security. This could now extend from defence into medical supplies, pharmaceuticals and beyond.

China projects an image of herself as a model of international good conduct and a backer of the international rules-based system. Her failure to make an early report of the virus, and conflicting stories circulating outside China about where the virus came from in the first place, is denting that reputation. Mr Trump is sharpening his anti-China rhetoric and urging the USA to do more for herself. Elsewhere there is a hardening of attitudes against some Chinese technology, and some wish to see more diversity of supply. The Chinese authorities claim they have kept China stable during the virus crisis and have largely got over it as they gradually get back to work. They have cut interest rates, pumped a lot of liquidity into the system and provided credit to the businesses that have suffered from shutdown and from the worldwide recession the virus has caused. The Chinese market this year has fallen less than most, as strong domestic support and encouragement sustains share prices.

The Chinese market does now have to live under the shadow of the virus. We have probably seen peak Chinese supply into the more sensitive western supply chains. More US and other western investors will apply a discount to China to allow for the worries people now have about ‘made in China’, and concerns investors have about how transparent this single party state is. China is not en route to become a liberal democracy with open and fair terms for all overseas investors. Nor does it seem likely that China will succeed in buying $200 bn of extra US goods in the two years from signing the Trade Agreement. There will be more bumps in the road of US/China trade and wider relations. The West will be on the other side of the digital curtain which is coming down between the two leading economies of the globe. Rules on state aids, government procurement and free trade will be evolved to encourage more made at home and safer supply lines.

Meanwhile, company reports are confirming the deep divide in the markets between the limited number of businesses and sectors that can do well in the current restricted environment and the majority who are suffering badly from shutdowns and demand loss. Netflix presented predictably good figures for new accounts and revenue growth in a circumspect way, wisely worried about perceptions at a time when many are suffering financially. Markets will be looking for which companies can do well out of the new mood, with more emphasis on national procurement in various areas. Share investors need to take on board these big changes in patterns of trade and sources of demand.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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