Trump’s policies support China. This is why

Fabiana Fedeli - Victoria Mio -

The fears of a negative impact from the policies of the Trump administration on China – and, as a result, on emerging markets trade flows – have overstated the actual risk.

In particular, we believe the risk of a trade war between the US and China has significantly subsided following the Trump-Xi meetings in April, which have opened a path for constructive negotiations.

We would also argue that the US administration stance on trade has a positive impact on China. As the country aims to portray itself as the beacon of globalization taking the place of the US, this could result in greater liberalization of China’s financial systems and overall economy. We find that there already is a clear understanding by Chinese authorities that domestic financial regulations have to be enhanced to avert a financial crisis in the country. A number of steps have already been taken and, at the moment, we don’t see the danger of a financial meltdown in the country. This does not mean that there will not be any negative impact of the high debt levels on the economy, but we believe that the Chinese authorities will be able to manage the deleveraging process gradually over time.

The Belt and Road Initiative covers 69 nations. To promote it, China held the Belt and Road Forum for International Cooperation on May 14-15, 2017 in Beijing. During the Forum, China signed cooperation agreements with 68 countries and international organizations with 270 deliverables in areas including trade and finance, infrastructure construction, as well as policy coordination.

Of course, the Belt & Road initiative is not risk-free for Chinese corporates and authorities: macro, political, and operational hurdles, both domestically and abroad, could hinder the project. Project execution is a challenge in many instances, and can result in lackluster profitability of overseas business for Chinese industrial companies. Nevertheless, it remains an instrument in the hands of China’s government to increase its foreign policy weight across the globe. Following the meeting, the two sides announced a 100-day action plan. This plan covers the exchange of goods and services between the two countries and sets a direction for comprehensive trade negotiations. Both sides would have much to lose from a trade war.

The US is China’s largest export market, as exports to the US reached USD 410.8 billion, 18% of total Chinese exports, or 3.7% of China’s GDP, in 2015. The impact of a China-US trade war would likely be a demand shock for China. On the other hand, as China is the dominant supplier of many labor-intensive products, a trade war with China would represent a supply shock for the US, and could bring inflationary pressure to the US economy. That could increase the need for monetary tightening by the Fed. Also, China is the US’ fastest growing export market and large American corporates have much to lose if access to that market is made more difficult. This provides China with huge bargaining power on the global trade front.

While our meetings showed that the protectionist tone of the Trump administration has softened and a trade war with China at this point seems to have been averted, risks to the global macro backdrop remain. In particular, geopolitical tension such as those between China, the US, South and North Korea could affect the region. At this stage, however, while we continue to monitor such developments, we believe most of these risks are under control.

While the Trump administration has promised financial de-regulation, the Chinese government is focused on improving the regulation of the domestic financial markets. There is a clear awareness among Chinese officials that the rapid increase in credit as a percentage of the GDP and the exponential expansion of shadow banking has created a significant risk to the macro stability of the country. Three areas that appear to be at the forefront of the government’s focus are:

  1. Bringing back on-balance sheet the assets that banks have moved off-balance sheet to side-step regulation
  2. Regulate what the Chinese call ‘Internet Finance’ (the equivalent of ‘FinTech’ in the Western world) players
  3. Improve coordination among the country’s top regulatory bodies

Fabiana Fedeli – Senior Portfolio Manager Emerging Markets – Robeco
Victoria Mio – Portfolio Manager, Robeco Chinese Equities Fund – Robeco