The wider dispute between China and the US
The dispute with China is not only about trade – it’s much more fundamental than that.
When Donald Trump fired the opening salvoes of the trade war with China many market participants looked forward to a limited dispute with an early deal. The president would claim some improved terms for US companies entering China, with increased sale of US food to Beijing, whilst the Chinese would secure the removal of unwanted tariffs. It has not proved so easy, with deadlines coming and going and still no first-round deal, let alone an overall settlement.
Instead of a limited set of exchanges on the import/export imbalance and the asymmetric tariffs, it broadened out into a dispute about respect for intellectual property, the significance of technology trade to national security matters, the government of Hong Kong and the issue of civil rights in China.
President Trump himself may have wanted to keep it focussed on trade and on possible US commercial wins, but his Democrat opponents are now tougher than him on China. They want the US to press China to change its stance on Hong Kong and to offer a new settlement to the Muslim minorities in the west of their nation. Markets are having to adjust to a world where the Democrats are not only making it more difficult for Mr Trump to secure a trade agreement, but also where the Democrats are more hawkish than President Trump himself over many of the wider political issues that divide the trade warriors.
We need to factor this into our forecasts for future market and economic developments. The most likely outcome with or without a mini trade deal is for a longish period of wide-ranging dispute between China and the US, as the two different systems and sets of values go head-to-head. The US is increasingly telling its allies that they cannot share digital technology with China, as that would give China too much access to western systems. The US view also threatens the secure exchange of intelligence and military information over the internet. We envisage a cyber curtain being woven between a US led digital system and a Chinese led one.
The latest news from Hong Kong shows the extent of the challenge to Chinese authority which gives scope to disrupt Sino-US relations further. The protest movements began when the Chinese authorities proposed extradition of certain criminals to the mainland for trial and sentencing. This, in the view of the protesters, violates the 1984 joint Sino-British Declaration which stated that the Hong Kong Special Administrative Region in China would “be vested with executive, legislative and independent judicial power, including that of final adjudication…”
China points out that the Declaration gave sovereignty over Hong Kong to China, and calls it an “historic” document, meaning that things have moved on. The international community led by the US sees it differently. The Joint Treaty was clear that whilst Hong Kong would be Chinese, with their defence and foreign policy as their own, they would in other ways be self-governing. There was to be no judicial interference from the mainland, no central taxes, an independent customs zone and freeport and maintained western style rights and freedoms for citizens.
The people vs Beijing
In the latest local elections 60% of the votes cast went to candidates who support the democratic protests. The pro-Beijing parties only won 13% of the 452 seats on offer. China alienated more support by following up its unwanted Extradition Bill with a decision to overturn the Hong Kong courts over the use of facemasks. Any attack on the rights and powers of Hong Kong is incendiary given the current mood of many Hong Kong people.
The economy of Hong Kong suffered a sharp downturn, losing 2.9% of its output in the third quarter, thanks to the disruptive protests. The world watches as the protesters decide what to do with their new roles as Councillors. Will they start up the protests again? How will they translate their perceived mandate to change the chief executive and demand new government policies into action, given the limited powers their Councils enjoy?
China is also being assailed over its treatment of Muslims. China says it is training them to do better jobs and any other interpretation is fake news. Western media claim the Muslims are required to attend training institutions that they cannot leave without permission, designed to alter their language and attitudes towards the state.
None of this is a helpful background for investment in China. US hostility to China’s trading practices and style of government has got more intense in recent months. It means more of a discount on Chinese shares, with more investors expressing concerns about the challenges to China’s authority. This all happens against a background of slowdown in China’s economy, problems in her large industrial sector, and a muted monetary and fiscal response. The Chinese authorities think given the large amounts of credit outstanding and the bad debts in the system that they need to go carefully from here.
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John Redwood is Chief Global Strategist at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.