The year of the rooster could be a big one for China to increase its influence in the Asia-Pacific region, as Donald Trump’s policies create gaps to exploit.
In his first full day on the job, Trump signed an executive order to withdraw from the Trans-Pacific Partnership (TPP) – former president Barack Obama’s flagship trade deal with 11 other countries – creating a vacuum which China would be eager to fill.
‘US president Donald Trump’s decision to withdraw from the TPP in favour of one-on-one trade agreements could open up a significant avenue of influence for China in the years ahead as the remaining members turn to the world’s second largest economy in a bid to salvage the pact,’ said Rob Simpson, emerging market debt portfolio manager at Insight Investment.
With the remaining nations’ leaders still eager to push on with the initiative, there is potentially an opening for China to begin building a new regional trade agreement for Asia-focused around itself.
‘South East Asian economies are already shifting toward the Beijing-backed Regional Comprehensive Economic Partnership (RCEP), a step closer towards Asian regional integration,’ pointed out Simpson.
Meanwhile, Ashmore’s head of research Jan Dehn believes this shift towards China has been on the cards since 2008.
‘China has been preparing for it for years with aggressive reforms, even at the expense of slower growth. The United States and other developed economies have been drifting inexorably towards it on a wave of myopia, neglect of reforms, debt issuance and lately a lurch towards economic nationalism.
‘And so we have finally arrived at the inevitable turning point when China formally took over the mantle from America as the world’s undisputed leader on economic issues.’
This point was reached, for Dehn, when Trump revealed ‘a shocking degree of economic illiteracy’ after claiming that protectionism would lead to great strength and prosperity in his inaugural speech.
‘Chinese president Xi Jinping’s message at Davos spelled out a positive and ambitious agenda of openness and support for globalisation with the words “protection is like locking yourself in a dark room”,’ Dehn said.
Although China is well placed to benefit from Trump’s protectionism by expanding its sphere of influence, the possible tension between the countries will prove to be a headwind.
According to Jade Fu, an investment manager at Heartwood Investment Management, the uncertainty of what will happen in any trade negotiations combined with moderating growth in China will lead to some volatility for equities in the near term.
‘China has a much larger share of exports destined to the US than the US has exports destined to China. While this implies that the economic impact of US protectionism is more significant for China, it is less than clear cut,’ she said.
The new year for China will also bring about leadership changes with the national congress of the Communist Party due to be held in the autumn.
Fu expects the Chinese economy to moderate in the first half of the year but believes that government will continue to support it and work to maintain a ‘sustainable growth trend’ during an important political year.
She added: ‘With leadership changes taking place at the highest level of the Communist Party in the autumn, any reforms will need to be carefully pushed forward. At December’s annual Central Economic Work Conference, which sets the policy priorities over the coming year, the key word in the subsequent communiqué was “stability”. Of course, achieving this stability is not without risk.’
Dehn pointed out that over the last few years China’s leadership has displayed important characteristics, in order to push through reforms ‘even at the expense of a slowdown in growth’. Looking back at fourth quarter GDP growth in 2016, it came in at 6.7%, the same pace as the previous three-quarters.
Although these reforms have come at the price of an alarming amount of debt, Rathbones’ asset allocation strategist Ed Smith stressed that it is concentrated largely in the state-owned sectors and issued by state-owned banks, which offers policymakers far more scope to avert any disruptive impact on monetary institutions.
Dehn argued that the paths of the world’s two largest economies are already set, with China going through relentless reform while the US focuses on relentless stimulus.
‘China is opening up as America is closing. Investors and the rest of the world should take notice of these contrasting developments. From the very highest level of executive power, the pathways for these two nations have now been laid bare for all to see.
‘China is going to win and is inviting the rest of the world to ride along.’