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1. Trump Has Been Right On The Trade War

I consider myself a Panda Hugger. But in the latest trade war between US and China, I found myself siding with the Americans.

How come ? 

Because the Americans are correct, China's Made in China 2025 is a huge threat to global prosperity. According to that industrial masterplan, between now and 2025, China will be investing multiple hundreds of billions in several high tech industries. 

Take semiconductor as an example : that will add huge capacity to the industry and drag down prices for memory chips and other semiconductor components. It will have huge adverse impact on Western companies.

Guess who is part of the supply chain ? Yes, Malaysia.

If Made in China 2025 materialises as planned, Intel, Nvidia, and many other companies might need to scale down their operation in Malaysia and other countries. Because the Chinese will be buying less from them.

Our Inari ? JHM ? Elsoft ? Unisem ? MPI ? They will all be in trouble.   

Now you see why I say it is a threat to global prosperity.

2. From Incredulity To Acceptance

In confronting China, the Americans demanded several changes be made to the trading relationship :-
(a) eliminates the trade deficit;
(b) opens up China's market; and
(c) stops Made in China 2025.

The first two conditions are not impossible to meet, but the third one caught the Chinese by surprise. "How outrageous ! What makes the Americans think that they have the right to tell us what we can or cannot do with our own industrial policy ? That is our sovereign right !".

The initial reaction was incredulity, anger and defiance. However, as they engaged more with the Americans, they seemed to gradually understand that their counterpart's stance is not that unreasonable afterall. If the Americans don't act now, their high tech industries will face severe setback in the coming decade. It is an existential threat. Who can blame them for complaining ?

Due to this new insight, the Chinese have become much more flexible and accomodative. For example, in this article dated 14 December 2018, China's state-linked Gobal Times acknowledged that there is a need to coordinate the country's industrial policy with other countries.

This paradigm shift is probably the reason why the two sides are able to make some progress over past few weeks. It is now possible that a deal will ultimately be struck and things will go back to normal.

Different people has different view. For me, the Trade War is the biggest threat to the global economy and equity market in 2019. With that out of the way, there is a chance that equity will perform reasonably well in 2019, especially now that so many stocks are trading at such depressed level.

2019 might surprise on the upside.


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