Author: Tan KW | Publish date: Tue, 19 Mar 2019, 12:52 PM
US-China trade war has hit a stalemate and there are still major differences to be hammered out. US President Trump reiterated that he would either sign a “great” China trade deal or he would choose to walk away like how he did in the second nuclear summit with North Korean counterpart Kim Jong-un.
Chinese negotiators, however, have grown wary of putting China President Xi Jinping in a position where he might be embarrassed by Trump. As trade talks near end, fears of Trump walking out on Xi weigh on the stock market as investors worry about the absence of a trade deal.
Domestically, the Chinese government has already introduced some fiscal measures that will see Rmb2 trillion of cuts in taxes and fees. Such pro-growth measures should also translate to higher cost-savings for Chinese households which should bode well for China A-shares. While the stock market has climbed in the past two months, investors should continue to accumulate dividend stocks as the general economic outlook remains uncertain.
Currently, trade negotiations between China and US are mainly focused on China making structural reforms to liberalise its market. The US is demanding China to allow greater foreign access especially into China’s financial sector. Meanwhile, the US is also pushing China for stronger protection of its intellectual property, and lower or abolish tariffs to make trade reciprocal.
In reality though, even without a trade war, China has already started working on these deep structural issues. Since China’s economic reform and opening up 40 years ago, China has grown to become the world’s manufacturing hub through cheap labour costs. However, growth would eventually plateau as labour costs continue to climb and manufacturers relocate factories to cheaper locations such as Indonesia, Vietnam and Bangladesh to remain competitive.
To lift the China economy, the Chinese government has no choice but to transit to high-value production, supported by its massive consumer base. Already, China continues to churn out impressive growth rate of six percent, faster than every western country, Hong Kong and Singapore. Maintaining its economic growth would be essential to improving wages and ultimately China’s living standards.
Another example of further opening up was the high-profile China International Import Expo held in Shanghai last year. Recently, the government has also allowed American International Assurance Group (AIA) to conduct business in two Chinese cities. Furthermore, the Chinese government is also currently drafting laws to enforce intellectual property rights and is reviewing its import tariffs especially on imported cars.
In this sense, China seemed to be “conceding” to Trump’s demands to opening up its economy, but it is in China’s long-term interest as well. In addition, China is also gradually allowing greater foreign ownership of its manufacturing sector to benefit from its consumer market and hence investors should not miss the bandwagon and should look out for companies that have the potential to penetrate the Chinese market.
Back in end-2014, Xi unveiled the “Made In China 2025” blueprint. Since then, Premier Li Keqiang would repeatedly emphasize China’s “2025 dream” in his work report in every annual National People’s Congress. In the opening trade war salvos, Trump called the blueprint a threat to displace the US’ leadership in high-tech products. As a result, he imposed a 25 percent tariffs on US$60 billion worth of imported Chinese high-tech goods.
In this year’s work report, China showed more restrain when Li did not make any mention of the blueprint. However, that does not mean that China has abandoned its goals. It was merely goodwill to allow Trump to earn points amongst US voters.
Realistically, research and development (R&D) can be hard to curtail since they can be done through ventures abroad as well. Many Chinese corporations are already invested in the US and elsewhere abroad, with the aim of attracting talents to engage in R&D. ST Engineering would also be one of the most qualified local companies to partner with in Singapore, given its relatively more competitive R&D budget.
However, investors should not become irrationally exuberant. In 2015, the Chinese government has shown that it was willing to step in to clamp down on excessive leverage and speculation. As such, never discount the possibility where the Chinese government would dampen speculative activities again.
In the past 5 years, the Singapore government introduced the Pioneer Generation Package, followed by the Merdeka Generation Package. Both policies were introduced to cater more benefits to the older generation of Singaporeans. In other words, the government is expecting the costs of living to get higher, especially in areas of healthcare provision. This would translate to higher revenues for healthcare providers and hence should bode well for healthcare related stocks.
2019 would likely be the election year. The government will likely distribute more “goodies” to entice voters. In addition, Malaysian PM Mahathir has already been in power for more than half a year. The tense relationship with Malaysia in the past six months was more of a political antic and should moderate in the months ahead. As such, these all point to a positive year for our local stock market.
Not long ago, DBS Group Holdings released another set of record performance in the latest quarter. However, the stock did not surge to a new high because, in the current market, optimism is still running low as investors have yet to fully regain confidence from the global stock market rout in most of 2018. Many believed that the global stock market has entered bearish territory, and that the rebounds in the January and February are but bull traps.
At present, the most popular investment theme in Hong Kong is 5G concept stocks. Touted to be 100-times faster than the 4G network, 5G is expected to revolutionize daily lives, especially in the field of autonomous driving. With 5G accelerating the development of autonomous vehicles, there would be no need for drivers in society in the future.
Investors should also pay close attention to this development as the transport system would evolve into an interconnected network of autonomous vehicles where commuters transit in an unprecedented scale. Governments would also begin to study implementing laws for autonomous vehicles and may even ban humans from driving one day. Unlike humans, autonomous vehicles do not drive under influence, doze off or be distracted.
With China progressively launching 5G, the Singapore government has also begun to research on implementing the technology into our network. However, competition to supply 5G equipment is one of the key contentious factors between the US and China.
For now, China’s telecommunication equipment giant Huawei is leading the global 5G race. To impede China from monopolizing the market, the US Secretary of State is forcing allies to ban Huawei equipment. Singapore would be caught in between of choosing Huawei’s equipment or cave to the US demand but lag behind in 5G deployment indefinitely.
Without Huawei, the US and rest of the world cannot successfully establish 5G with current technological developments. Perhaps, one day, Trump may even need to open up the US telecom network to Huawei in order to have a 5G network.
With heightened transmission speed of 5G, consumers worldwide would increase data usage exponentially. This would particularly be beneficial for telecom stocks like China Mobile, China Telecom and local-listed Singapore Telecommunications.