Brief Macro: China Economics:  China’s Strategy on Trade War Has Worked and more

In this briefing:

1. China Economics:  China’s Strategy on Trade War Has Worked
2. FLASH: UK Denying No Deal Does Not Reduce Risk
3. UK Fiscal: Waiting While Brexit Burns
4. SHIBOR and Rates
5. Global Tech Breakup

1. China Economics:  China’s Strategy on Trade War Has Worked

First, during the past couple of weeks, the most important event regarding the Chinese economy is the China US trade talk.  It is reported that both sides have made a preliminary agreement on trade war truce. It is an extraordinary development.   At the beginning of this China US trade war, most analysts had underestimated the seriousness of this trade conflict. Then after a series of escalations, analysts tend to overestimate this conflict by exploring the possibility of a full-scale conflict between China and US including national security, military and economic competition etc. we agree that China and US are in direct competition in almost every field. The issue is President Trump. He has to deal with the internal issues including the Muller investigation and the Democrats. So far, he has failed to make essential progress in dealing with internal opponents. He also just failed another Kim Trump summit. In our opinion, he is keen to make a deal with China. He is in a much weaker position than President Xi. Although at the beginning President Xi was under some criticism, currently, his authority is with no significant challenge. President Xi has also pretended to be humble when dealing with Trump. In our opinion, China’s strategy, such as buying time by deliberate delays or deceptions, has worked. 

2. FLASH: UK Denying No Deal Does Not Reduce Risk

• The UK parliament voted to reject leaving with no agreement, as widely expected. Shambolic management around that looks set to force ministerial resignation.
• Parliament continues to indulgence itself in motions against leaving the EU without a deal, but that doesn’t stop it being the default defined by current laws.
• I still see the relative probabilities of a deal, no deal, and no Brexit at 45:35:20.

3. UK Fiscal: Waiting While Brexit Burns

• The Spring Statement revealed marginally more fiscal room and no significant policy changes, consistent with the Chancellor’s intent to downgrade the event.
• Fiscal policy can respond to the Brexit outcome, despite total financing rising on a heavy redemption profile. Net liabilities look weirdly skewed away from gilts.
• Recent complaints about the RPI are being considered with a response planned for April. Changes to its use are more likely than to the measure’s methodology.

4. SHIBOR and Rates

There are two important points worth noting. First, China remains an overwhelmingly short term capital market from the money markets to structured deposits to bond duration which remain heavily tilted towards durations under five years. Second, what we are seeing in the money markets accords with the PBOC unofficial policy of trying to keep the headline rate unchanged but nudge down the unofficial rates.

5. Global Tech Breakup

By Eleanor Olcott, China Policy Analyst at TS Lombard

• Washington’s political drive to block Chinese access to US high-end tech is creating uncertainty in the industry
• The immediate effect is the redirection of Chinese VC money away from the US to Asian and European rivals
• The long-term trend is of  two rival centres of technology production- one focused on Shenzhen, the other on Silicon Valley