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Optimism for an initial trade deal between the U.S. and China took a hit on reports that China is wary of committing to a certain number of agricultural purchases and still requires some relief from tariffs, even for a limited agreement.
Investors, though, might want to turn their attention to more troubling signs that have emerged in the latest China economic data, which came in weaker than expected. Growth in fixed asset investments outside of rural areas slipped to 5.2% so far this year from the year-ago period, and industrial production growth tumbled to 4.7% in October, down from 5.8% in September.
More weakness is ahead in industrial production, and Beijing is likely to drip-feed more stimulus into the economy, including modest rate cuts by the People’s Bank of China, Pantheon Macroeconomics Chief Asia economist Freya Beamish wrote in a note.
Then there’s increasing competition U.S. companies are facing from Chinese upstarts. DataTrek co-founder Nicholas Colas wrote in a note to clients this week that China ride-sharing company Didi Chuxing’s push into Latin America will challenge Uber Technologies (UBER).
The popularity of Chinese internet technology company, ByteDance, and its TikTok video app has turned up the heat on Facebook (FB). Domestic upstart Luckin Coffee (LK) has just as many locations as Starbucks (SBUX) in China, according to Colas, who cited data from Thinknum.
As for a U.S. and China trade deal—coming close to a deal doesn’t mean much until it is signed and delivered, a message that investors have heard frequently.
While BBH global strategist Win Thin still expects a limited deal this year, he expects there will be more posturing and friction in final negotiations. TS Lombard strategists also expect a limited deal, but they caution against chasing the momentum, especially since the markets have priced in positive trade news and a last minute derailment still looms.
The iShares MSCI China (MCHI) exchanged-trade fund is up 12.7% so far this year while the S&P 500 has been logging records, up 23% in the same period.
The risk is that tariffs set for Dec. 15 aren’t suspended. Those tariffs would hit consumer-oriented goods, like laptops and mobile phones and other goods found at retailers like Walmart (WMT).
An estimated 95% of the computer and electronic products slated for the December tariffs are from multinational companies, mostly with components from the U.S. and its allies, and assembled in non-Chinese-owned factories, according to Mary Lovely, a senior fellow at the Peterson Institute for International Economics, and San Diego State University professor and economist Yang Liang.
“Rather than placing pressure on the Chinese beneficiaries of misappropriated American technology, the tariffs burden U.S. consumers and the companies where they work,” they wrote in a blog post.
There’s also been a growing recognition in China that the Trump administration is unlikely to impose the December tariffs as the election season ramps up.
A paper published this month by Peterson Institute’s Chad Bown and Tuck School of Business at Dartmouth College professors Emily Blanchard and Davin Chor found that Republican candidates lost support in the 2018 congressional election in areas in the cross hairs of trade retaliation, and there was little in the way of an electoral boost from tariff protection.
Trade is just one challenge longer term, with the bigger focus on the battle for technology leadership between the two economic powerhouses. That fight, TS Lombard strategists wrote, will create a continuing source of volatility and possibly cap equity valuations. A possible marker in this conflict could come later this month from a much-anticipated report from the Bureau of Industry and Security in the U.S. on which technologies could be subject to export controls—and how tightly written those restrictions will be.
The impact of the fractious U.S.-China relationship has already popped up in earnings from Cisco Systems (CSCO), with Chief Financial Officer Kelly Kramer telling Barron’s that weakness in technology spending was “a little worse” in the first quarter from the previous quarter and that it was more broad-based. China orders fell 31%, hit by trade tensions sapping demand as some customers chose domestic products over those from the U.S.
Write to Reshma Kapadia at reshma.kapadia@barrons.com