China Update: Reflecting on the Trump-Xi Summit

posted by Nikolai Tagarov on April 06, 2017

Found in China, US, categorized in Macro

Tags: Trump xi infrastructure investment RMB global trade manufacturing trade deficit

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Since Trump attaches great importance to “striking a good deal” in general, we suspect that in time he will attempt to attain a grand bargain with China so as to reduce the US trade deficit, which has continued to grow and reached $347 billion in 2016.


- China’s economy has continued to grow at a healthy pace. The manufacturing sector has rebounded and we judge the overall health of the economy is currently solid. 
China is nevertheless in the process of effecting a smooth transition away from traditional to high tech manufacturing and a service economy. Massive domestic and international investments in green energy demonstrate that China’s engagement with the outside world is no longer primarily motivated by a perceived need to secure traditional energy and mineral resources.
- The housing sector remains a concern. Prices are still on the rise, yet the Chinese government is doing its best to alleviate pressures. Restrictions have been placed on second home purchases in major cities. “Ghost cities” are coming alive as manufacturing activity shifts inland. The planned Xiongan metro area East of Baoding is helping cool the Beijing RE market in particular.
- Due to all of the above, loan activity is gradually shifting from the traditional manufacturing sector to consumers (specifically to housing as well as other big ticket item purchases).  
- China’s “resolution” of the Impossible Trinity has involved greater controls on outbound money flows, coupled with tightly controlled and gradual RMB depreciation.
- President Xi’s anti-corruption reforms have been largely successful and have resulted in greater political legitimacy but also in (the need for) greater centralization of power. His enhanced authority and success domestically meant that he was set to meet with President Trump from a position of strength.
-President Trump’s well-timed decision to order air strikes against Syria can in part be explained by the need to 1) deflect domestic criticisms; and 2) increase the legitimacy of claims that US would handle the North Korean threat even without China’s much needed help.
- Despite pre-election rhetoric, the Trump administration will be highly motivated to seek cooperation and constructive dialogue with China due to the convergence of US and Chinese national interests in a variety of fields, incl. mutually improved market access, Chinese manufacturing and infrastructure investments, and even Chinese investments overseas, e.g. along the “New Silk Road” - which would add US dollar liquidity to global markets at a time of expected relative retrenchment from global engagements on the part of the US. 

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About Nikolai Tagarov

Nikolai Tagarov started his career at Aon Hewitt where, in global locations such as in Chicago, New York and London, he served as a business analyst and operations manager serving several Fortune 500 clients.

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