A ceasefire in the trade war may only be that – a temporary cessation of hostilities. President Trump’s reprieve for Huawei has been criticised heavily in the US Congress.
However, it will give markets time to reflect on other potential risks to the Chinese economy. Protectionism is by no means the only, or even most important, issue for the Xi Administration. Falling share prices for many of the new publicly listed start-ups is not the fault of President Trump. It is the inevitable consequence of ‘too much capital’ chasing market share. For sure, many of the new services are expanding quickly. E-commerce is still a very strong growth story in China.
Quite simply, China is at the forefront of an investment revolution that is putting intense pressure on margins for many tech companies. On one level, that should not be a problem: the flipside, lower inflation, is good for consumers. The y/y for the core CPI has dropped to 1.6%, led by disinflation in services. It is the same story as in the US. The PBoC can respond, but timely rate cuts will be necessary if China is to avert a similar reversal as experienced in the US in 2000/01.
Margin compression requires careful handling by any central bank. It set the stage for a tumultuous reversal in the Nasdaq composite in the US from the spring of 2000 onwards. The Fed was forced to respond with multiple rate cuts to ensure the US did not slip into recession (the data initially suggested the US had officially contracted over two consecutive quarters. Subsequent revisions to the data showed that the US had – just – averted recession).
