China: the end of a cycle?
“There is somebody who disliked China’s success story – and that’s the US”, says Head of Research Asia Mark Matthews. In our interview, he explains to what extent this conflict will affect China’s growth prospects and how investors should respond.
- Julius Baer’s view on China: “When we decided to switch China to ‘overweight’ in our asset allocation back in 2014, we liked all the things we were seeing: the crackdown on pollution, the crackdown on corruption, the program ‘Made in China 2025’, the Greater Bay Area which will be turned into a megacity of 75 million people etc. All those things were good. But they weren’t good for somebody, and that’s the United States. That is the reason why we switched China to neutral, as this conflict with the US will remain for the foreseeable future.”
- Trade war between China and the US: “The trade war is just a disguise for something, which is much deeper. It’s a conflict between who is going to be the next superpower of the world. If you just do the numbers on the back of an envelope, China will surpass the US in economic size in around 13 to 15 years.”
- The psychological element of the trade war: “At the beginning of this year we thought that the tariffs would just amount to 10 per cent on 200 billion USD of Chinese imports into the US. Now we are talking about 25 per cent on all of the 550 billion dollars of Chinese imports last year, which could easily reduce China’s GDP growth by 100 basis points. But if you take into account the stimulus measures, the net effect would be only about 20 to 50 basis points, which isn’t that big. It is really more of a psychological issue than a major economic slowdown.”
- The impact of the US midterm elections: “There are three possible outcomes. The first is that the Republicans retain both chambers. That would be the worst outcome for China, because it would be an indication for Trump that he is on the right path. Then you have the possibility that the Democrats get both chambers, which would be the best scenario for China, because big lobby groups that traditionally support the Democrats have a lot of interest in repairing that relationship. The scenario, however, which seems to be most likely is a Senate retained by the Republicans and a House going to the Democrats. That would imply a lot of so-called ‘horse trading’. But as I already said, the trade war is only a symptom of a much deeper problem, which is the conflict between two very large powers. The genie is out of the bottle and it’s hard to put it back in.”