A historic meeting between US President Donald Trump and Chinese President Xi Jinping has been announced, sparking speculation about what this means for on and offshore investment prospects for Australians.
What happened?
The effective agreement, reached between the US and Chinese presidents over a two-and-a-half-hour dinner held yesterday, saw the White House put its promise to increase existing tariffs of 10 per cent to 25 per cent on hold.
The meeting, which was labelled as “highly successful” by the US administration, saw the $50 billion of Chinese imports already slapped with 25 per cent tariffs and the current 10 per cent tariffs on $200 billion worth of goods left firmly in place.
What does it mean?
According to BIS Oxford Economic chief Australia economist Sarah Hunter, it is important to recognise that the effects of these pre-existing tariffs still have not been felt fully by the US market.
“It takes a while for things to flow through the system. Export orders and those sorts of things are put in place months ahead of time, so it’s not like you announce a tariff one day and you see the impact the next month. It takes sort of three, six to even nine months to come through,” she said.
The agreement by the two administrations has seen a 90-day moratorium placed on US increases to tariffs, as China must work to meet a series of strict US demands concerning trade barriers, intellectual property and other trade concerns.
The outlook
Speaking prior to the presidents’ meeting, Ms Hunter said she does not see a long-term solution to be likely in the near future.
“We do think they will come through, as we don’t think they’re anywhere near agreeing and reaching some sort of compromise,” she said.
“So, we do expect those to come in.”
She did admit, however, that China had more to lose in the strengthening of tariffs than the US.
“We’re going to start to see the impact of that particularly for the Chinese. Chinese exports to the US are much, much larger than US exports to China.”
With President Xi Jinping saying to reporters after the meeting that the negotiation process could result in the resolution of “legitimate” US concerns, China may meet the demands in a move to alleviate this impact.
What if the truce is short-lived?
According to Ms Hunter, investors should be worried “a little bit, but not as much as you’d expect”.
She said the promised economic support by China’s authorities will release the pressure on the economy and could even spell good news for our commodities sector.
“The authorities in China have made it clear that they’re going to step in and support the economy,” she said.
“They have already done that to some extent. They’ve relaxed reserve requirements for the banks, which means the banks can lend more, there’s been corporate tax cuts, income tax cuts and some support in terms of infrastructure projects, such as the building of bridges and the supporting of local governments so that they can do the same.”
“This, certainly for our commodities sector here, could even be some good news.”
“So, we’re not so concerned about China and the broader Asian region that’s linked through the supply chains there, because we expect the authorities to step in.”
She said that growth in China is actually predicted to remain stable into the following two years, which means international tourism will remain strong.
“Different composition of growth for China, but broadly speaking in terms of the growth number, we don’t expect to see a material slowdown in 2019 or 2020,” she said.
“A pretty sound economic outlook for Asia, which is obviously a major tourism market, combined with the weaker Aussie dollar means that, all in all, that piece of the puzzle [Australia’s economic outlook] is still going along very nicely.”
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