California Wildfires
Our letter is slightly abbreviated this week, as several of Guild’s staff have been affected by the southern California wildfires. We are all safe, although many friends and family members have lost their homes; thank you for your concern and calls. Our thoughts and prayers go out to everyone who has lost loved ones, and our gratitude to all the first responders – firefighters, medical, and police — who risk their own lives to protect the lives and property of the communities affected.
China’s Exports and the Trade War
Much of the volatility in U.S. and global stock markets in 2018 has been blamed on the ongoing trade conflict between the U.S. and China, and specifically, that conflict has been blamed for the parlous state of the Chinese economy. In turn, uncertainty surrounding Chinese economic resilience is causing investor optimism about global economic resilience to decline. The euphoria of January has thus given way to an investment environment marked by much more uncertainty. Trade warfare is not the only worry — market participants are also uneasily scrutinizing the Fed’s path of rate increases. Still, a Chinese slowdown has been front and center as a news driver for shaky markets.
We note, however, that there are some basic misperceptions here. The trade conflict is not responsible for the slowdown in Chinese exports. In other words, the Chinese economy’s troubles thus far, are not are result of trade measures that are in force or are contemplated for the near future. What follows is from the work of Jonathan Anderson of Emerging Advisors group, who as we have often said, we find provides the most perceptive analysis of the Chinese economy among the analysts we follow.
First, officially reported Chinese trade volume growth has collapsed. However, these statistics are volatile and unreliable; Anderson uses partner-country data instead. Those data show a slowdown from 2017’s highs, but not at all a collapse.
Second, that slowdown is coming on the heels of a burst in export growth in late 2016 and 2017 that itself followed an outright contraction in exports in 2015 and early 2016. In other words, we are now seeing a moderation of export growth following a snapback that was expected to be unsustainable even before trade-war risk was on the horizon.
And third, it’s not just Chinese exports to the U.S. that are moderating — it’s Chinese exports to all their trading partners.
Source: Emerging Advisors Group
So clearly, the slowdown of the Chinese export machine is (1) not related to U.S. tariffs and (2) is moderate and not catastrophic.
We still note China’s long-term troubles — primarily, an over-leveraged financial system that will likely one day experience a true financial crisis. There are also simmering leadership issues between President Xi Jinping and his allies on the one hand, and the allies of former presidents Jiang Zemin and Hu Jintao on the other, who are resentful of Xi’s elevation to Mao-like status. These internal conflicts may be hindering the forging of a new trade deal with the Trump administration.
But is China currently experiencing a trade collapse due to U.S. actions? The answer is simply, “No.”
Investment implications: There are reasons to worry about China, but a collapse in Chinese exports driven by U.S. trade sanctions is not one of them. The true moment of truth for China’s over-leveraged financial system remains in the future. However, we are still cautious on Chinese equities, which we would remind readers do not trade on fundamentals in the same way that other global markets do, but almost exclusively on the sentiment of local retail investors. Poor psychology among that population means that a tradeable bottom in China has not yet arrived.
