*By Christophe Barraud, Chief Economist & Strategist at Market Securities
According to TrackInsight data, investors kept withdrawing funds from “Chinese Stocks” ETFs recently with cumulative outflows reaching a new YTD high. Latest developments suggest that a trade deal with the U.S. appears unlikely in the short term, which could exacerbate downward economic pressures.
Firstly, the fact that Trump is weighting options to support the U.S. economy suggests that a short term deal with China is unlikely (in line with recent Pompeo’s comments. According to Politico, “White House officials are discussing a broader package of measures than previously disclosed, including a cut of an additional percentage point or two to the corporate tax rate. That’s on top of a potential payroll tax cut, which the Obama administration had used to shore up the economy, and a move to index the capital gains rate to inflation”.
Secondly, China can’t make concessions ahead of the 70th anniversary of the People’s Republic of China (October 1) especially in a context where the U.S. is trying to use Hong Kong and Taiwan as leverages in negotiations. As a matter of fact, the SCMP reported that “a short commentary published by Communist Party mouthpiece People’s Daily late on Monday said that events in Hong Kong were the internal affairs of China, and linking them with trade negotiations was a “dirty” aim”.
Finally, China’s tough stance against the U.S. has remained unchanged since May while officials look ready to support the economy through both new fiscal and monetary initiatives. Earlier this week, Bloomberg highlighted that “China is considering allowing provincial governments to issue more bonds for infrastructure investment, a move that would boost government stimulus as the economy continues to decelerate”.
All in all, it seems that each side is looking for alternative solutions to support growth and offset negative effects for the protracted dispute. However, ahead of the new wave of U.S. tariffs (September 1st and December 15th) and potential Chinese retaliations, investors are worrying that these measures won’t be sufficient to avoid another sharp slowdown especially in China. As a reminder, in July, Chinese industrial production decelerated significantly, with the pace of increase slumping to a 17-year low of 4.8% YoY.
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