China U.S. Deal
It was inevitable that the United States and China would come to a trade agreement; both countries need each other in order for their economies to operate at full capacity. While the agreement has yet to be finalized, we expect there will be a resolution.
Some of the overhang on international trade has impacted stock prices of multinational companies. This tentative agreement will help reduce some of that negative shadow over the earnings reports and projections for companies doing business in China.
Do not underestimate the challenges of the Chinese economy as they currently face a transition from an export economy to an internal consumption model. This may reduce growth rates and coupled with problems in the real estate sector, you will likely see China continue to face economic headwinds.
If one invests in equities the result is investing in China; multinationals provide that exposure. Geopolitical problems are real, and we still think the United States provides the best risk/reward opportunity. We believe that over investing in this area is not prudent and our allocations reflect that.
A recent CNBC article highlighted the recent trade deal negotiated this week. Excerpts are provided below.
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“The U.S. and China have reached an agreement on trade, representatives from both sides said after a second day of high-level talks in London, with the deal now awaiting a nod from the leaders of the two countries.
“We have reached a framework to implement the Geneva consensus and the call between the two presidents,” U.S. Commerce Secretary Howard Lutnick told reporters.
That echoed comments to reporters from Li Chenggang, China’s international trade representative and a vice minister at China’s Commerce Ministry.
U.S. President Donald Trump and Chinese President Xi Jinping spoke by phone late last week, stabilizing what had become a fraught relationship with both countries accusing each other of violating the Geneva trade agreement. At a meeting in Switzerland in mid-May, the world’s two largest economies had agreed to a 90-day suspension of reciprocal tariffs added in April, and a rollback of certain other measures.
Lutnick said he and U.S. Trade Representative Jamieson Greer will head back to Washington, D.C., to “make sure President Trump approves” the deal outline. If Xi also agrees, then “we will implement the framework,” Lutnick said.
The fact that the two sides will now brief their leaders “is a clear sign that some disagreements or unresolved details still require internal discussion,” said Jianwei Xu, senior economist at Natixis. The framework agreement signals a commitment to de-escalate and continue the dialogue process, but whether it will lead to “concrete agreements or substantive breakthroughs” continues to be uncertain, he said.
Chinese restrictions on rare-earth exports to the U.S. are a “fundamental part” of the latest agreement and the U.S. expects the issue “will be resolved in this framework implementation,” Lutnick said.
He indicated U.S. restrictions on sales of advanced tech to China in recent weeks would be rolled back as Beijing approves rare-earth exports.
“This deal is taped together by the two sides’ leverage over each other, not common principles or shared interests,” said Scott Kennedy, senior adviser and trustee chair in Chinese Business and Economics at the Center for Strategic and International Studies in Washington, D.C. “The chances for further stops and starts is quite high.””
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