Is The U.S. Trade War With China Over Before It Began?

From Brad Hoppmann: The big news last week was all the big news last week. Yet despite Syrian bombings and the bomb that was a bad March jobs report, stocks managed to fight through the developments virtually unscathed.

Now, because of the more-salacious headline news on airstrikes and jobs disappointments, there was less attention paid to what will likely be a far greater influence on markets and the economy in the months and years to come.

That was, the first official meeting between President Trump and Chinese President Xi Jinping. It took place over the weekend at Mr. Trump’s estate in Palm Beach, Fla.

Why was that meeting so important?

Well, because the leaders took steps to, as the Financial Times described it, “avert an all-out trade war between the world’s two largest economies.”

Recall that during the campaign, candidate Trump used China as a virtual punching bag. He accused the country and its leaders of currency manipulation, unfair trade practices and other trade-war behavior that takes advantage of the U.S.

That message resonated with enough people to turn candidate Trump into President Trump. But now the president has taken a more-conciliatory — shall we say, “mainstream” — tack on the hot-button issue of trade.

The details are yet to be issued. But here’s the big picture …

The U.S. and China will enter into a 100-day plan that’s likely to include Chinese concessions on agricultural imports and foreign investment in its financial sector.

U.S. Secretary of Commerce Wilbur Ross went to the financial media over the weekend to discuss what he expects from China.

In an interview with the grande dame of financial TV journalism, Maria Bartiromo, Ross said:

“If we don’t get some tangible results within the first 100 days, I think we’ll have to examine whether it’s worthwhile continuing them.”

That sounds like a not-so-thinly veiled threat to me.

But Ross did indicate that the two sides made actual progress on the trade issue.

“The Chinese … came very well-prepared and there were people at the right levels. So it was not just a for-show meeting. It was a serious meeting — both in terms of who attended and the content,” said Ross.

Ross, along with Treasury Secretary Steven Mnuchin, said Friday that Chinese officials were in agreement about the need for a more-balanced trade relationship.

Yet that agreement isn’t just based on what the U.S. wants.

The Chinese also are concerned for themselves and their own economic situation. They are rightfully concerned about financial imbalances that can lead to too much investment in certain sectors (e.g., real estate).

Too many dollars artificially building up the price of a segment is a recipe for a busted bubble. The Chinese know that, and they don’t want it.

Per the FT:

“They [China] expressed an interest in reducing their net trade balance because of the impact it’s having on money supply and inflation,” Mr. Ross said. “That’s the first time I’ve heard them say that in a bilateral context.”

I think the bottom-line takeaway here from last week’s Trump/Xi talks is that the two sides want to try (at least publicly) to play nice. And to reach some common ground on a sore subject that’s vexed the two nations for some time.

This 100-day deal is the first start to what needs to be a longer, more-detailed conversation. Still, we can probably remain optimistic for at least the next several months.

I think we owe the two sides at least that.

Then if they disappoint, well, they will have had their chance.

The iShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI) rose $0.21 (+0.55%) in premarket trading Wednesday. Year-to-date, FXI has gained 10.40%, versus a 5.16% rise in the benchmark S&P 500 index during the same period.

FXI currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 32 ETFs in the China Equities ETFs category.


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