Morningstar authors also expect the China-U.S. trade war will morph into something more complex, ushering in “a new era of power conflict, one in which the U.S. seeks to use all available economic means to curb China’s rise,” they say, including cutting off all trade in a worst-case scenario.
China and the U.S. have locked horns ever since Trump’s election. There are tariffs on nearly $300 billion worth of Chinese imports, some with tariffs as high as 25%. Presidents Trump and Xi Jinping are expected to meet next month, with the market hoping both leaders can come up with a more permanent pause to the ongoing trade dispute.
However, as Morningstar points out, trade is not the only issue separating Beijing and Washington. China’s industrial policy has led to the creation of new tech companies that rival U.S. and European companies not only in China, where many of them are not allowed to participate, but throughout Asia. Companies like Huawei, which Washington has made Public Enemy No. 1 is developing 5G telecommunications technologies and is building an operating system for smartphones that threatens the U.S. dominance of the Apple’s iOS and Google’s Android operating systems.
China has also taken a cue from the U.S. post-World War II to use its banking muscle and soft power to expand its political and economic reach abroad. China’s Belt & Road Initiative continues to win support among U.S. allies like Italy and India.
The South China Sea, meanwhile, remains a reliable flashpoint for the Pentagon when wishing to gain leverage over China in Asia.
Besides the geopolitical noise, however, some China disbelievers are already convinced that the economy is growing below 3.5%.
Chris Gaffney, president of world markets for TIAA Bank, thinks that if China really is growing at just 3% today, it doesn’t seem like it’s hurting the Chinese.
“You can believe half of what you see out of China–I get it,” Gaffney says in a nod to the China perma-bears. “But the EU is growing a little over 1%. The U.S. trying to stay over 2.5%. Everyone who said that a China GDP of less than six would lead to civil unrest has a lot of explaining to do then, because if China is growing as little as they think, no one in China seems to have a problem with it.”
The latest economic data out of China has manufacturing PMI up over 50, though that is a fast-moving target. The range in China over the last five years has been 47 to 51. Services PMI remains over 51.
China is rearranging its supply chain due to the trade war, with many Chinese companies heading into other Asian countries. It is unclear if any of this disruption has led to actual job losses in China. Unemployment is officially listed at less than 5.5%. Despite opening up over the last decade, China is still the largest closed economy in the world and government transparency outside of the central bank is rather thin.
Morningstar says that the odds of a Cold War with China are low, at just 16%. But if the worst case unfolds, then look for China’s GDP growth to be even lower than 3.25%. Morningstar thinks a trade war, where all goods coming out of China are tariffed, strips another 1% off of GDP.
The iShares China Large-Cap ETF (FXI) was unchanged in after-hours trading Friday. Year-to-date, FXI has declined -3.40%, versus a 10.39% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Forbes.