The historical relationship between two regions and the far-reaching financial repercussions, by Tracy Zhao, our new Investment Research Analyst.
A four-course-meal to explain modern Sino-US relationship
In 1949, the Chinese Communist party led by Mao established the People’s Republic of China in Beijing after defeating the Nationalist government and forcing it to flee to Taiwan. The U.S. backed the Nationalists against a Japanese invasion during World War II and continued to support its exiled Republic of China government in Taipei.
Highlighted by the Korean War, Tibetan resistance and Chinese Nuclear test, the hostile relationship between Washington and Beijing carried on throughout the 50s and 60s until the Sino-Soviet relationship split up in 1969 due to differences over security, ideology and development model.
Shortly after Secretary of State Henry Kissinger’s secret trip to China in July 1971, the United Nations recognised the People’s Republic of China, endowing it with the permanent Security Council seat that had been held by Republic of China on Taiwan since 1945. President Richard Nixon visited China in February 1972. A sign of warming relations between Washington and Beijing exhibited.
U.S. President Jimmy Carter granted China full diplomatic recognition in 1979. The Reagan administration reaffirmed the U.S. commitment to its One China policy and even improved Beijing-Washington relations at the height of the cold war by permitting Beijing to purchase U.S. military equipment. During the 80s and 90s, the relationship between the two countries progressed, though bumpy, towards normalisation. Meanwhile, Mao’s successor, Deng Xiaoping, while preventing political liberalisation, led economic reform, opened up the Chinese market and awakened China’s appetite for economic growth.
The U.S.-China Relations Act of 2000 passed by the Clinton administration granted Beijing permanent normal trade relations with the US and paved the way for China to join WTO in 2001. In 2006, China became the United States’ second-biggest trade partner. In 2008, China surpassed Japan to become the largest holder of U.S. treasuries.
China remains as a strategic rival to U.S., especially with the growing interdependence between the U.S. and Chinese economies. The U.S. has been increasingly vocal about the currency manipulation by the Chinese government to keep Yuan artificially low as the trade deficit increases.
In January 2018, Mr Trump, a businessman turned president, announced new tariffs on solar panels and washing machines, in light of that the U.S. trade deficit to China reached its highest level at $275bn in 2017. This was followed by tariffs on imported steels and aluminium. In March, the U.S. accused China of theft of its intellectual property and proposed to levy 25% tariffs on $50bn worth of Chinese imports to U.S. China has responded in kind; a trade war looms. Trump has since raised the stakes by threatening tariffs on a further $100 billion of imports, which Beijing promptly said it would match.
Economically, both the United States and China would lose from a trade war. Punitive tariffs would push up import prices, dent exports, cost jobs, and crimp economic growth, so would both sides do best to avoid an outbreak of hostilities?
On 10 of April, President Xi pledged to a ‘new phase of opening up’ and tariff cuts on automobiles. Global investors breathed a sigh of relief after weeks in which Beijing and Washington appeared on a collision course.
Within a week, US President Donald Trump announced that Treasury Secretary Steve Mnuchin would head to China to negotiate over the trade dispute within days though both sides have yet to reveal details of the visit.
Most of the market analysts predict the tit-for-tat retaliations could lead to a constructive negotiation. The baseline is that the Trump Administration will leverage all tools to work towards a better deal for America. However, Mr Trump has ignited the trade protectionism. Can it be escalated or avoided? The outcome lies in the result of the upcoming China-U.S. trade negotiation though it may take some time.
Where is Dessert?
Investors who have holdings in the U.S., China or both regions and are seeking long term growth may sit back and watch the trade drama cool down, provided they have patience to do so.
The following are some suggested solutions from our Investment Manager Sheridan Admans:
For the investors who prefer to avoid drama at all cost and have no interest in Tweets from Mr Trump, the old fashioned shining gold could still be a reliable friend to lean on. Gold ETFS, such as ETFs Precious Metals and Source Physical Markets Gold, are a cheap way to buy and manage as physically carrying gold could be very costly.
Of course, investors may prefer to keep their holding in the U.S. market. JPM Global Macro Opportunities Fund and Old Mutual Global Equity Absolute Return Fund could be the options. Both funds expose to the U.S. market and seek absolute return even in the volatile market condition.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.