President XI and President Trump’s recently agreed truce is not necessarily a significant step to consoling the current problems between the two super powers.
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There are still major points of contention that need to be resolved.
The onus is currently on China to resolve the situation quickly. The trade war is a threat to China’s already slowing economy. In 2018 China’s growth missed economist’s forecasts by 0.1% in Q3 coming in at 6.5%. This is the weakest quarterly growth since the Lehman Brothers collapse in 2008.
President XI Jinping would no doubt like this trade war sewn up sooner rather than later with a disproportionate effect on the Chinese economy when compared with the US.
China’s exports to America amounts to a larger section of the Chinese economy than the amount to which China–bound US exports represent to the US economy. Last year China exported $500bln worth of goods to the States out of the $12trn total, compared to the US who exported $130bln worth of products to China out of it’s $19trn GDP.
This is not good news for XI as he has made promises to deliver economic stability in exchange for monopolising the country’s political power and governing authority.
One of the sticking points for the US is China’s current economic model of intellectual property theft and forced technology transfer. This is something I don’t think the Chinese will change. It may be the case that the Chinese will try to make as few concessions as possible in the hope of waiting out the trade war. The Chinese aare wishing for an end to Trump’s Presidency or a US recession.
There is currently a 90 day pause in tariffs in place which commenced on 1st December. The Trump administration has agreed to hold off on a 25% increase on Chinese goods if China agree to negotiate making structural changes to its current economic model.
A 25% increase is huge and would no doubt hit both economies hard. This could provide some respite for the pound as I do not believe China will make significant changes to their current economic plan.
It is widely anticipated there will be a further rate hike from the Federal Reserve on Wednesday by 0.25% bringing interest rates in the US to 2.5%. I am not of the opinion this will cause too much US dollar strength however as the market moves on rumour as well as fact and I think the rate hike in largely factored into current levels.
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