Tags: china | deal | invest | us | trump

China Trade Deal Changes Little, So Stay Invested in US

China Trade Deal Changes Little, So Stay Invested in US

By    |   Friday, 17 January 2020 10:58 AM

Now that the phase 1 trade deal between the U.S. and China has been signed, attention has focused a little bit more than usual to the state of the Chinese economy.

Chinese GDP came in for the fourth quarter.

Markets are rarely surprised by the official Chinese GDP numbers and the data is not perhaps central to investors’ assessment to the Chinese economy.

As a more general rule however, the “trend” rate of growth of the Chinese economy has been falling in recent years. This is inevitable as the working age population of China falls. Trend growth is simply a combination of how many people could work and how hard do they work.

Headlines highlighting that, at 6.1 percent, the official rate of growth in 2019, was the lowest in 29 years, are not particularly helpful.

Chinese population growth is also the lowest in almost six decades.

Because of all that, GDP growth is supposed to be lower.

Chinese December retail sales growth was steady at 8 percent on the year, but there was some good news for the Europeans, no, not specifically for the Americans, berried in the data releases, at least potentially.

Chinese “investment” spending improved in December although it’s growing more slowly than the “official” GDP number. Most German exports to China are investment goods. About half the Euro Area’s exports to Chine are investment goods.

China’s investment spending growth is thus a far more important statistic to Europe than it is for the United States, than is the official Chinese GDP growth or the Chinese retail sales growth.   

Now, “who” Europe sells to is making headlines in other areas.

This week, the European Union trade representative Phil Hogan has suggested that President Donald Trump’s policy by taxing (tariffs) American consumers of goods partially made overseas might be “misguided” and causes very important economic damage.

Hogan has stated after this week’s meetings with senior U.S. officials marked a “good start” to “resetting” trade ties with Washington, but there was more work to do, Reuters explained.

Most economists would agree that the trade tariffs/taxes have hurt both the United States and the global economies over the past couple of years, although a lot of that is actually the “uncertainty” about the trade policies, which have choked off investment.

Let’s also not overlook the fact that diplomacy is relevant because financial markets are worried that Trump might focus on EU trade in the coming months on the grounds that the President has to be seen as he could be doing something extra during this election year now that phase 1 of the U.S. – China trade deal has been signed.

Investors could do well keeping in mind that all U.S. presidents have real control over trade and the military.

Besides that and talking about the Fed, Trump can of course nominate some appointees to office, including members to the Federal Reserve’s Board of Governors.

Two people were nominated yesterday. Christopher Waller, the director of research at the Federal Reserve Bank of St. Louis, and Judy Shelton, an economic adviser to his campaign who recently served as the U.S. executive director for the European Bank of Reconstruction and Development and who is also known as a former “Gold Standard” advocate.

Interestingly, she appeared to criticize the existence of the Federal Reserve and in this context the Mises Institute wrote last year that she had stated “I favor sound money, and plenty of it.”

For the financial markets there are two questions about Fed nominees, which might perhaps be characterized as the “cyclical” and the “structural” question.

  • Cyclically, do the nominees think the current economic situation merits lower or higher interest rates? Inevitably, these two appointees would probably be considered as “dovish”, but, of course, the cyclical position can change as the economy changes. So, that’s only a short term position.
  • Structurally, do the nominees favor the independent setting of monetary policy or not?

Almost the only reason that we are today in a low and stable inflation environment is because of the independence of Central Banks. Globalization, technology, the labor market changes, all take, at least in my view, a far lesser role. Central banks run by independent individuals, preferably economists of course, is extremely important to the world view of investors.

That said, as an investor, I still would prefer, for the time being and for obvious reasons of course, to be invested in the U.S. dollar and the U.S. markets.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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As an investor, I still would prefer, for the time being and for obvious reasons of course, to be invested in the U.S. dollar and the U.S. markets.
china, deal, invest, us, trump
Friday, 17 January 2020 10:58 AM
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