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Sipping Coffee in Beijing as Phase One Is Signed: Slow and Steady Progress For The World Economy

Key News

I arrived back in Beijing today and I am watching the news around the trade deal signing closely. Asian equities were largely off last night following Wall Street’s mixed performance yesterday. Today, President Trump and China’s Vice Premier Liu He will meet in Washington to sign the Phase One Trade Agreement. However, the signing and implementation of the deal were, for the most part, already priced into equity prices globally. Some reports questioned how much progress was actually made from the deal, noting that there is no official timeline for a full cancellation of tariffs. While they will not be fully canceled, tariffs will be lowered significantly from 15% to 7.5%, a 50% decrease, and China has made some commitments on intellectual property. While work remains to be completed, this deal is an overwhelmingly positive development and a win for the world economy.

In exchange for lowering tariffs, China has agreed to increase purchases of US exports ($32 billion more for farm products, $80 billion more of manufactured goods, $50 billion more of energy products, and $35 billion more of services), grant US businesses greater access to its financial services industry, refrain from devaluing the Yuan (which they haven’t done for years), enhanced protection for US intellectual property, and a rough dispute resolution mechanism.

One particularly positive point was the inclusion of a dispute resolution mechanism. Some were concerned that there would be no way to handle disputes should they arise. According to the Wall Street Journal, the agreement includes an enforcement section, which mandates three rounds of discussions upon the raising of a dispute, a process that is meant to take 90 days in total. We believe this more formalized dispute process may help prevent disagreements from escalating in the future.

In a statement this morning, Larry Kudlow, Director of The National Economic Council, praised the deal and noted that it was the opening of a new chapter of trade relations. Kudlow said that the Chinese are finally realizing that they need to act to improve the relationship, while providing assurances that structural issues such as industrial subsidies will likely be tackled in later rounds and remain a concern for the administration. He also said that tariffs are simply part of “tough negotiating.”

H-Share Update

The Hong Kong market followed much of Asia slightly down, but mostly unchanged last night with the Hang Seng Index declining slightly by -0.4%. The market went down further in the morning session, but managed to recoup some losses towards the end of the day. Turnover shrank by 15.7% DoD to HKD 100.4 billion. Southbound investors bought a net HKD 2 billion worth of Hong Kong stocks.

Semiconductor names rose, again signifying a potential for cyclical names to stage a comeback in 2020. Restaurant operator Jiumaojiu (9922 HK) surged on its IPO debut, raising $267 million, again signifying a strong IPO market for Hong Kong following BABA’s massive listing in the city last year. Gaming name Kingsoft rose to a 52-week high.

A-Share Update

Mainland Chinese stocks were down slightly despite the monumental trade development today with the Shanghai -0.5% and Shenzhen -0.2%, while turnover fell -13% DoD. We saw some profit-taking ahead of the spring holidays and Chinese New Year, which is a week from Saturday. Northbound investors sold a net RMB 1 billion worth of domestic stocks last night. The PBOC injected RMB 400 billion into the banking system via open-market operations despite rates holding steady. This is in-line with our prediction in our 2020 Outlook, i.e. stimulus without significant rate cuts.

Will Semiconductors lead gains in the Shanghai composite, rising +10.61%. Appliance makers Gree and Midea released extremely positive fourth-quarter results overnight. Gree’s online retail sales rose +119% in November and +115% in December. According to CICC, the fourth-quarter results suggest that the duopoly of the two names has not hampered competition in the sector.

Last Night’s Prices & Yields

  • CNY/USD 6.89 versus 6.88 yesterday
  • CNY/EUR 7.69 versus 7.65 yesterday
  • Yield on 1-Day Government Bond 1.89% versus 1.80% yesterday
  • Yield on 10-Year Government Bond 3.09% versus 3.10% yesterday
  • Yield on 10-Year CDB Bond 3.54% versus 3.55%

A trip to Beijing is never complete without a cup of Luckin Coffee, which I tend to prefer to Starbucks. Luckin Coffee is a great example of a simple store that is nonetheless plunging headfirst into the 21st Century. In addition to going cashless, as many stores in the US have already done, when visiting Luckin Coffee the only way to order is through a smartphone app.