When Donald Trump was elected a year ago markets were worried that his anti-China rhetoric would lead to a new US policy of putting in place new barriers and restrictions on world trade. The President alleged that China was a currency manipulator, seeking a low exchange rate to make its exports super competitive. China was at the top of Trump’s list of unfair traders that had too large a balance of trade surplus with the USA. China was much tweeted against during the election campaign.
This week things look very different. The President, it is true, repeated that he thought the US deficit with China is too large. He called for a fairer trading system. This time, however, he was friendly and positive about President Xi. He went out of his way to say he did not blame China for its success in selling so much more to the USA than the US sells to China. There is no follow through to past allegations of currency manipulation to try to impose more tariffs on Chinese goods. Trump instead settled for $250bn of commercial deals, where contracts or non binding heads of terms were signed as part of the orchestrated mood music of the summit.
Trump is famous for his belief that he is a good dealmaker. As a businessman late coming to government, he promised to bring a can-do approach to sorting out trade imbalances and lack of investment at home to raise the growth rate of the US economy. Many thought that would mean tough talks with China to get much more access to the Chinese market for US corporations. There are problems with many companies needing to enter joint ventures with Chinese partners to be allowed in. The strong Chinese policing of the internet impedes the business models of the great US digital companies that operate worldwide as the drivers of modern internet trading and social media. This time there was no deal on any of that. Instead Trump settled for the eye catching headline of $250bn of future business and investment.
If we look inside this package we see it is the usual mixture of old and new orders, intentions and investments. One of the biggest components is a planned 20 year investment by the recently formed China Energy. They may invest $84bn in shale oil and gas and chemical production in West Virginia. That is Trump territory and more development there will create welcome extra jobs. Boeing announced a substantial order book with China. Qualcomm also figured in the business news with proposals to sell mobile phone components. GE signed aviation and engine contracts.
Meanwhile there was little progress on the substantial political issues where China and the USA disagree. The USA wishes to keep open its right to send naval ships through the China Seas, where China wishes to keep the US naval presence away from the islands it is developing as extensions of its territorial reach. China does not welcome aggressive actions by North Korea, but nor does it want to see the current North Korean regime replaced by a government sympathetic to South Korea. Both China and the USA would prefer a Korean peninsula without nuclear weapons. China wants to avoid more arming of the South by the USA, and does want to keep a friendly buffer state between it and the US protected South Korea. The USA wants better access for its tech companies to the Chinese market. China wants to be able to buy or invest in the cutting edge US technologies which the US government protects for strategic and military reasons.
All these important disagreements were smoothed over in a way which markets will probably welcome. Trump has not pushed his agenda too hard on currency, access or standing up to the North Korean dictator. President Xi has decided to humour the USA and to make general statements about how China will continue to liberate its markets and offer more access in a gradual way. The risk of a trade war, which never seemed very likely to us, has just receded further. The Korean conflict is no nearer resolution, but this time Trump decided trade was far more important than making threatening statements to try to get Kim Jon Un to back down. Markets as a result are likely to continue to assume the North Korean problem will not erupt into war. This is all a favourable background for equity investment.
John Redwood is chief global strategist at Charles Stanley