What is the word on China’s stimulus?
- As mentioned before, from what we’ve seen so far, there have been no real stimulus, except for a slight increase in total social finance early in the year, after last year’s tightening.
- Initially as China’s economy continues to improve the need for stimulus have fallen away, in fact prior to the trade war, both government as well as central banks were both quite neutral seeing a recovering economy and planned to leave the economy alone.
- With the escalation in trade war, we suspect should the market continue to fall or the real economy slow, they will stimulate. China has large capacity to stimulate, they are currently behind their initial plan for fiscal spending and the central bank has been quite conservative. As trade wars escalate a weaker currency will both stimulate the economy and make exports more competitive, combined with fiscal stimulus should be good for the general stock market.
Talking about the trade war, what is the risks and red flags?
- Of course the biggest risk is an all out trade war, maximizing tariffs on both sides and a recession for the world biggest economies. However, this is definitely not the base case for our forecast. Both sides have much to gain as seen by the ceasefire, Donald Trump probably just need to delay the deal until end of the year or early next year to maxomise the impact on elections. I think a weaker economy and more expensive general goods in the US will not be a good election strategy, so as we approach 2020 his hand gets weaker. It is also imperical for Trump and Xi to sit, talk and resolve the issue. A deal will not be worked out among the lower level guys, it simply does not satisfy his need to be the hero.
- Our base case is back to the negotiating table after some escalation on both sides, before a compromise deal. So far we are clear what the US demands? We hope to get more clarity but it is rumoured to be changes in law’s. Funny thing, a law is already proposed to treat foreign companies equal to Chinese companies, perhaps it is the enforcement mechanisms that still need to be ironed out.
China’s overall economy?
Our model is clear, the economy recovering, housing is strong and mortgage costs is coming down. It’s a recovering economy, we will see in a few months on the economic front if this goes down further. If the data change our views, our asset allocation will change.
From our side, I think China always has these bouts of news, whether it is a debt crisis, a currency crisis, a slowdown or a trade war, in fact, there have already been 4/5 events in recent history. By looking at all the data points we have across valuation, economics and sentiments, we are quite certain that over the long term, China can add a lot of value. We will be monitoring our data very carefully and adjust our asset allocation accordingly, incorporating the latest information as they are released.