The Daily Update - Sino-US collaboration

Away from the pre-banquet US airstrike attack on Syria, according to Chinese newswires the meeting between Chinese President Xi Jinping and US President Donal Trump was ‘a great success’. It went so well that Xi said the two ‘got deeply acquainted, established a kind of trust and built an initial working relationship and friendship’. In a memo after the ‘outstanding’ ‘relationship’ had been ‘developed’, Trump gushed at how he believes ‘lots of very potentially bad problems will be going away.’ This probably hushed a number of reporters, who were angling for all manner of disruptive and ‘very difficult’ talks.

The only issue the two leaders could not fully agree on was where to take the North Korean situation. In fact, overnight the Chinese People’s Liberation Army (PLA) marched 150,000 troops to protect the border with North Korea in preparation ‘for unforeseen circumstances’. It is not clear what ‘circumstances’ these could be, but after the missile strike on Syrian soil last week expectations are that Trump could move to strike Kim Jong-un; having last week uttered the words ‘if China is not going to solve North Korea, we will.’ Something we will be watching very closely.

The issues surrounding trade however were discussed and both parties appear keen to work on the 100-day plan to address trade imbalances between the world's two largest economies. Basically Trump’s overriding goal is to reduce the USD 347bn trade deficit between the nations. There are two main ways of achieving this: first by forcing punitive tariffs on Chinese goods into the US, which has been mentioned time and time again by the Trump administration; read trade war. The second and most desirable solution is for China to import more US goods, and particularly services which Xi appears to be open to in the short term especially as he continues to encourage tertiary industry growth, where the US have a comparative advantage; win-win scenario we think. In terms of goods, with China’s exponential demand for hi-tech imports the US could also look to relax its hi-tech export restrictions to China as a way of pushing goods into the country. China’s potential abolishment of the 2003 ban on US beef imports could also play a part.

As we have previously mentioned, it seems Trump-euphoria is looking pretty fragile at the moment, not only due to the failed health care reform attempt, but there are questions over whether the arduous tax overhaul and plans for USD 1tn worth of infrastructure projects (over the next ten years) will be approved. The fiscal injection in terms of infrastructure spending is an interesting one, in fact the positive sentiment surrounding the idea has been responsible for part of the Q1’16 rally in stock markets. However, the already massive USD 20tn debt ceiling (106% of GDP) may not allow for such fiscal deployment. Also according to the American Society of Civil Engineers (ASCE) the US is facing ‘yuge’ short- and long -term funding gaps; reportedly USD 3tn between 2006 and 2025 and as much as USD 10tn between last year and 2040. This includes some of the most fundamental infrastructure needs such as surface transportation, water, electricity etc.. In fact the report goes on to highlight that if infrastructure remains untouched, US GDP could lose as much as USD 4tn by 2025! So a rock and a hard place. This is where China can come in to help by way of funding projects; as it has done worldwide.

Having been previously snubbed by Obama, the China-led Asian Infrastructure Investment Bank (AIIB), along with other Chinese policy banks, could help Mr Trump achieve his infrastructure campaign promises. AIIB could also help revitalise the US’ manufacturing sector; another of Trump’s pledges. Known to favour member nation projects, the US could look to sign up to the AIIB; especially as the president of international development bank has continually left its doors open to America. Maybe Trump will be more open to the idea, as a matter of fact last year one of his senior advisors (James Woolsey) actually branded Obama’s choice to reject membership as a ‘strategic error’.

No doubt markets will focus on the ever growing relationship and collaboration between the two nations, who are effectively bound to support one another in order to achieve huge transformation targets.

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