The ongoing trade war between the US and China has provoked a great deal of market and tabloid attention alike and with tensions not looking likely to dissipate any time soon, we can expect this to continue. For China, the effects of the trade war are most notable given the weakness in data and the dramatic slide in equity prices. To combat this China has been using both its monetary and fiscal arms to wrestle with economic adversity and prevent a slowdown.
China Focusing on Infrastructure investment
A big part of this has been the use of infrastructure investment. Indeed, the housing ministry in China said on Tuesday that it plans to increase the availability of funds for rural infrastructure, the latest example of the government feeding money into the economy in an effort to keep activity grinding on in the face of the trade war.
Indeed, China’s response to the effects of the trade war suggests that far from taking short-term emergency measures, it is actually taking steps to adapt to the situation, reflecting the expectation that the trade war is here to stay.
About More Than Trade
Initially, it seems that China felt the US-induced trade war was about the trade itself and was willing to strike a deal to end the conflict. However, it has since become clear that the US is primarily seeking to stop China from outgrowing the US via dominance in the technology sector. Indeed, the US has said that it wants China to halt its “Made In China 2025” which China has flatly refused and deems unacceptable.
China Settling In
The US’s position so far has been one of strength, with Trump drawing up plans to activate a further round of tariffs worth $200 billion. However, while the tariffs will hurt China, its thinking is that the tariffs will also hurt the US economy and although the US is strong now it won’t always be so and Trump will eventually be forced to come to the negotiating table. With this in mind, China is seeking to backstop the economy long enough to get to the point where the cost to US businesses forces Trump to negotiate.
After falling just ahead of the 2016 highs, the price has subsequently run back down to retest the broken bearish trend line from those highs which for now is holding as support. While price remains above here, expect another topside run with only a move back below this level alleviating upside focus.