Matthews Asia Investment Strategist Andy Rothman believes there will be a trade deal between President Trump and President Xi by the end of 2019. In our interview, he discusses the impact of the U.S.-China trade dispute on the economic and political environment in China. If there is no trade deal between the U.S. and China in the foreseeable future, does that put a stop to the liberalization of Chinese financial markets?

Andy Rothman: First of all, I do think there will be a deal between President Trump and President Xi by the end of the year. Even if there is not, I think that puts more pressure on China to move ahead more rapidly with reforms – not only in the financial sector but also in the rest of the economy. While exports are important to China, they are by far not the most important part of its economy. In order to make sure that the domestic-demand side of its economy continues to thrive, China is going to have to push ahead with reforms even more quickly. We have seen steps toward that already. China has cut tariffs and improved market access for companies from countries other than the U.S If there is an extended U.S.-China trade war, what would be long-term effects on China’s economy?

Andy Rothman: Chinese policymakers and economists in Beijing tell me that they have a backup plan: if the tariff dispute blows up into a full-blown trade war with the U.S., they’re prepared to undertake a fiscal stimulus to try and compensate for it. I think they can be successful – we’ve seen this before – in dealing with these consequences of a full-blown trade war with the U.S. And that will include efforts to soak up unemployment from anybody who loses their job and to rebuild confidence and get investment back up.

So I think with our focus on Chinese companies selling goods and services to Chinese consumers, that from an investor’s perspective, this is going to be pretty well-insulated from the impact of a full-blown trade war, just like I think the Chinese economy itself will be reasonably insulated. Is there going to be a long-term effect on China of U.S. businesses moving manufacturing out of China? Do you think it will be a big effect?

Andy Rothman: This process has been underway for a number of years now, as wages have been rising, largely because the Chinese government’s been pushing them up with steadily increasing minimum wages, lower value-added assembly and production has been leaving China. But the uncertainty that is caused by the trade dispute has definitely increased the number of companies that are thinking about moving. But I don’t think there’s been that many changes, because it’s really difficult to relocate. And where do you go? Vietnam is going to be a big beneficiary. But Vietnam is the size of one Chinese province.

Maybe Trump needs to put tariffs on Vietnam?

Andy Rothman: So I think that yes and no. I don’t think you’re going to see an abandonment of China because of the large domestic market. And remember that the majority of foreign companies producing in China are producing to sell to the Chinese market or the Asian market, not to export back here. And then the other issue is the uncertainty is going to remain for an extended period of time, and it is going to make the people question not only do they go to China, but where do they go? President Trump has already indicated that now the U.S. is importing more from Vietnam as a result of the tariffs on China, maybe he needs to put tariffs on Vietnam. So where do you go? Do you see any potential strengthening of the Chinese currency?

Andy Rothman: Over the past several years and I think this continues today, the direction that the Chinese renminbi (RMB) moves against the U.S. dollar is being set over the course of a full calendar year, entirely by the strength or weakness of the U.S. dollar. So if we continue to expect a strong dollar, then we should continue to expect a weak RMB during the calendar year.

The Chinese have been intervening in recent years and will continue to do so to prevent the RMB from moving in either direction by I think more than 5% or 6% in any one calendar year. That is the amount that they think is reasonably tolerable for their companies. But beyond that, and there is some short-term movement for political signaling, like we saw recently, but otherwise I think they are going to stick with that pattern. What about the long-term effect on Asian markets, Asian economies or currencies? 

Andy Rothman: There is no serious implication to Asian sectors that wouldn’t also hit the relevant sectors in the U.S. The biggest potential for disruption here is in the technology sector, where you have the design of the product, the design of the components happening in the West, then getting manufactured in some parts of Asia, getting assembled in China, and then shipped back to the Western world. If you were to have an escalation of the trade war, that’s surely the area where you get the biggest impact. But that hits the U.S. consumer pretty directly, and in a very visible way. So it’s hard to see a massive escalation that doesn’t cause pain on both sides. What countries could be the winners of the U.S.-China trade dispute

Andy Rothman: The major beneficiaries are likely to be the manufacturing economies of Southeast Asia that up to this point have not built the same kind of strength as you’ve seen in Taiwan, South Korea and China, but where you’re starting to see a lot of foreign direct investment from North Asia into building up the capabilities in Vietnam, Indonesia, Malaysia, Thailand, to produce these kind of goods. And so the big beneficiaries are probably Southeast Asia. The global economy has been slowing. The U.S. economy is slowing. China’s economy is in slight long-term decline. How might China respond if the global economy continues to slow?

Andy Rothman: China’s GDP growth rate and the growth rates of other things like retail sales peaked a number of years ago on a year-on-year basis. Part of this is to be expected because the growth rates were in the double digits. Part of it is also the base effect. So that we know that at 6% growth in retail sales now, you’re still looking at a much bigger incremental expansion in consumer spending than you were ten years ago at double-digit growth rate. So this is actually a pretty sweet spot for Chinese companies and for investors into that.

The second point I’d make is that I don’t encounter anybody in the Chinese government who believes that they should be making an effort to try and reaccelerate growth. I think they are all aware of and comfortable with the fact that every year, on average, every part of the Chinese economy on a year-on-year basis is going to continue to decelerate. And within a couple of decades, they’ll be comfortable with 2%, 3% growth like we are in OECD-level countries.

Now, one thing that they’re not going to tolerate is an abrupt, sharp deceleration. And we saw this during the global financial crisis, where they came in with a pretty large fiscal stimulus. So I think if the global economy slows sharply, and that has a sharp impact on the Chinese economy, they will be back with fiscal stimulus appropriate to the size. And I think they have both the political will and the resources to make that work. Thank you very much for the interview.


U.S.-China trade dispute: “There will be a deal by the end of 2019”
Andy Rothman, Matthews Asia

Andy Rothman
Investment Strategist
Matthews Asia

Andy Rothman lived and worked in China for more than 20 years, analysing the country’s economic and political environment, before joining Matthews Asia in 2014. As Investment Strategist, he has a leading role in shaping and presenting the firm’s thoughts on how China should be viewed at the country, regional and global level.