The Sino-US Trade War – Where will it lead to?
What
started as a showcase of cheap cost manufacturing base by China, luring the
transnational companies to set up global scale manufacturing bases in China for
mass production to suit every nation’s consumption requirements, in the decades
of 1990, 2000 and 2010, with the help of huge FDIs coming in from the world’s
largest economy, turned out to be a dragon trying to overshadow, outgrow and giving
tough competition to the largest economy of the world, i.e., the US.
If we
make an attempt to analyse and compare the two economies, i.e., the US and the
Chinese, the US has an exceptionally strong currency, which helps boost
consumption of imported goods, a strong ecosystem encouraging R&D, innovation
and attracting talent pool from across the globe, a capitalist set up, which
encourages entrepreneurship, as its key strong points amongst many others.
Contrasting
that is the Chinese economy with a formidable unparalleled manufacturing base
(not easily replicable by a competing country in a short span of time), a huge
population to boost domestic consumption and a wide client base (countries to
which China exports), a world class infrastructure which challenges that of the
US, a communist government with intent and designs of territorial expansions
(merely by claims and deployment of force), control over the natural resources
and key strategic locations of the South East Asian nations.
With the gap
between the incremental GDP of the two countries narrowing down fast; China
becoming an increasingly superior technological and cyber power and a clutch of
Chinese companies supplying future generation telecom equipment and mobile
handsets globally with espionage capabilities; China building OBOR, threatening
the sovereignty of the countries of the Indian subcontinent; having dominant
presence of its naval fleet in the Indian Ocean/ South China Sea, challenging
and threatening geopolitical stability in these regions, it becomes imperative
for the US to curb the dominance of China or the Chinese companies actively engaged
in such activities and take measures that put a check on China’s economic and
cyber prowess and also its territorial expansionary tendencies. The US thinks so.
The trade
war which was initiated by the US in Jan 2018 primarily against China has not
seen any signs of abatement, rather on the contrary has only been exacerbated
by the warring nations. The hubris of the nations to prove dominance or not to
show any signs of weakness has led the two nations to go ahead with firing the
ammunition in their respective arsenals with no signs or intentions by either one
to blink first.
The trade
war proxy seems to be the most visible sign of ego of the two nations without
leading them anywhere in achieving their visible or ulterior motives. Perhaps
this was the only form of war that could have been engaged in. The two nations
are engaged in causing self-inflicting wounds, with the intention to hurt the other.
The
latest salvo fired by the Chinese Premier is the hint of restricting/
suspending the exports of rare earth metals to USA, which find applications in US
defence industry and wide range of economic activities. China has 40% of the
world reserves and contributes to 70% of the global production. USA sources 80%
of its rare earth metals requirement from China.
It is a
widely accepted norm that China doesn’t throw a hint without a follow-up
action. This indicates that it will take some time before USA could be able to
meet its total requirements from sources other than China.
For a few dollars more
Microsoft
is now the most valuable company of the world with the distinction of entering
the trillion dollar club for just a day and giving company to Apple and Amazon.
The share price of the company kept hovering just a few dollars below the rate (approx.
US$ 130.5/ share) where it entered the trillion dollar mark market cap just for
a day but still continues to be the most valuable company since then, ahead of
Apple and Amazon.
A tribute to a karma Yogi of India
This post
would not be complete without a tribute to Yogi Deveshwar, Padma Bhushan, whom India
lost in the din and cacophony during the recently concluded elections in India.
A true karma Yogi, he took helm of the operations of ITC in 1996 and transformed
its image from being a tobacco company to that of multinational conglomerate
with a strong flavour of FMCG. Yogi was the longest serving CEO of any Indian
company till the time of his departure. Yogi also held many other coveted posts
in various other institutions.
The
company’s e-Choupal initiative finds its mention in the bestselling book,
“Fortune at the Bottom of the Pyramid,” authored by Strategy Guru, C K Prahlad.
Despite
the churn which keeps happening in the list of India’s most valuable companies,
ITC consistently appeared in the list of top 10 companies for decades under
Yogi’s able leadership.
RIP Yogi.
US Fed interest rates
In the
recently released minutes of the last held Federal Reserve policy meet, the Fed
has pledged continued patience and commitment to stable rates/ no rates hike
regime. Fed has on many occasions given reasonable indications of easing
monetary policy in future in case the US economy faces head winds.
RBI’s upcoming monetary policy announcement in
first week of June 2019
With a
stable government in place and visible signs of a global slowdown it is a
widely formed opinion that the RBI is expected to announce a rate cut in the
forthcoming policy meeting in the first week of June.
Nifty, Indices and Stocks
In light
of the formation of a stable government at the centre, by a party with an
absolute majority, many financial analysts are of the opinion that Nifty may
see and upside of 10-15% from the current levels in the immediate future. While
the long term trend of growth of the Indian economy remains intact, the
following charts indicate a near term correction in Nifty.
Also
given are the charts of a few other indices and stocks which indicate that the ensuing
correction is expected to be a global phenomenon not linked to a particular
region, country or event.
NIFTY
DOW
NASDAQ 100
APPLE
AMAZON
MICROSOFT
But the
question that I keep asking myself and which remains unaddressed in my mind is
this: “If the Sino-US trade war comes to an abrupt end, will the global indices
scale back to their previous highs and not correct further?”
For more charts
the author can be contacted at: riskadvisory@outlook.com.
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