Robert Swift and the global equity team take a quick look at the USA China Trade War while also presenting the opinion of an associate of theirs, Stewart Paterson.
In light of the aggressive and well publicised trade disputes between the USA and China, we thought it worthwhile providing commentary from an associate of ours with expert insight. Stewart Paterson worked for many years in India, Hong Kong, and then Singapore as a macro-economic strategist and hedge fund manager. He is currently writing a book on China’s admission to the WTO and the unintended and unrealised consequences of this admission. (“China, Trade and Power: why the west’s economic engagement has failed”) Essentially he thinks that President Trump is [sort of] correct when he asserts that “a trade war is easily winnable’. He debunks the fears of some in the USA who believe China has the better hand. He also believes as do we, that any pressure on China to effectively liberalise is a good thing.
Our long term perspective is that China (and much of mercantilist Asia) will have to think harder about the dangers of running economic policies which deliberately impair their domestic demand for foreign imports, and concomitantly rely on the effective subsidy of their export driven industries, by which to amass large current account surpluses and foreign exchange reserves which then have to be sterilised to avoid currency appreciation. This has been their playbook for many years exacerbated by the experience of 1997 during the Asian crisis, when the IMF response to the Asian crisis which actually occurred in the corporate sector, was to punish ALL citizens and government with austerity. This still rankles in Asia especially as the response to the GFC in the West in 2008 was met with a wall of very easy money and not much at all in the way of bank write downs and general austerity i.e. the exact opposite of what was prescribed for Asia 10 years earlier by the same institution! Accumulating vast foreign exchange reserves from mercantilism of course reduces the likelihood of the IMF ever being needed again. Think of it from their perspective as a long term plan for independence from a western biased organisation – the IMF. If you can amass enough reserves then you have a rainy day fund sufficiently large to never need the IMF again.
The dangers of doing this for too long are now clear. At some point the Western consumer buying all this stuff made in Asia or owned by Asian companies, will be ‘tapped out” with too much debt (fast approaching?); may also take the view that their wages, if they have a job, are being held down by ‘unfair’ competition from Asia, and consequently elect governments determined to remove these trade imbalances via retaliatory measures. It is quite well understood that these measures might hurt both sides, but from the Western consumers’ perspective it is at least BOTH sides this time. You might as well take one of theirs down for one of yours? “Make America Great Again” spoke directly to this emotion.
Consequently and for a multi year period, the likelihood is for Asia to have to deploy its vast fiscal reserves on encouraging ‘consumption’ at home in all its forms. As Premier Li Keqiang stated recently, “China will better utilise its fiscal and financial policies to support the expansion of domestic demand, structural adjustment and boost the development of the real economy”. We shall see, but he is saying the right things.
This increase in domestic demand includes ‘stuff you might want to own e.g. ‘luxury’ goods’, services, and heaven help them, mortgages and university and school tuition fees. With this multi year trend it is likely there will be investable opportunities. “Go Trump” we say because it is a much needed change and will benefit all participants in the global economy! As part of the necessary global rebalancing act, Asia has to spend more and the sooner we start, the better.
In anticipation of this continuing pressure for change and the investment opportunities it will create, we have launched an Asian smaller companies strategy.
This is what Stewart wrote:-
If you wish to read Stewart's book then you can pre-order here.
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