As this article goes to press, the United States is preparing to sign a “phase one” trade deal with China.
This is a big victory — for China.
That makes it a victory for Chinese stocks, emerging market assets, and international stocks in general. Which also makes it bearish for the U.S. dollar.
There are multiple reasons why China is the big winner in this Phase One signing. Two of the biggest “tells” are, first, the willingness of the White House to drop the “currency manipulator” label they had tagged China with a few months ago; and second, the fact that China is not tackling hard issues to get this deal.
The U.S. Treasury had slapped the “currency manipulator” label on China in August of 2019, during an escalating period of trade tensions. The labeling exercise was more symbol than substance — akin to calling someone a nasty name — but it was also a signal the White House was playing hardball.
Many expected the currency manipulator label to stick, with the U.S. requiring a period of currency market monitoring and compliance on China’s part before lifting it.
So, the fact that the label is being lifted early, as a part of the Phase One agreement, is a sign that China has a strong hand in these negotiations.
The other sign of China’s strength — and clear evidence of a China victory in trade negotiations thus far — is the fact that China hasn’t had to tackle hard issues in order to get this deal.
The phase one agreement requires China to buy $200 billion worth of U.S. goods, notably farm goods, and it has some good behavior pledge requirements around currency management and intellectual property issues.
But there isn’t anything in the deal that is truly groundbreaking, in terms of getting China to make hard choices on issues of U.S. concern, or structurally change its ways for the long-term, or otherwise show real respect for American labor and IP.
And so, in terms of the long-term issues that really matter, the phase one signing means China is getting off easy in the eyes of many observers.
In big picture terms, the U.S.-China trade fight is far from over, and the deal is flimsy enough that escalation and a return to trade hostilities could surface at any time. But overall, the picture today is one of Xi Jinping, China’s president, getting what he wants, with the White House making the real concessions.
Again, the U.S.-China trade outcome that favors China is bullish for Chinese stocks and emerging market assets and international stocks — and on the flip side, it is bearish for the USD.
That is partly because, if China is allowed to go about its business, Beijing can add more stimulus to the local economy and do more to push the stock market up. At the same time, if China is doing okay, investors become more willing to buy international stocks, and they already perceived emerging market assets as cheap relative to high U.S. valuations.
When the world looks ugly and dangerous, capital tends to flee into the safety of U.S. treasury bonds, which are priced in U.S. dollars.
When the world starts looking rosy and optimistic again, however, that capital flows out of bonds and back into the world — which also means an exodus out of dollars.
(As investors sell treasury bonds to free up capital to buy international stocks, they sell dollars by default, which increases selling pressure on the USD in general.)
In the long-term, there are still plenty of unknowns around U.S.-China trade relations. From a big picture perspective, it could even be said we are in the early stages of a “‘new Cold War” between the U.S. and China.
But in the short-term, the U.S. backing down — and more or less giving China what it wants — is good for risk appetite, particularly in terms of international stocks, and bearish for the USD.
TradeSmith Research Team