US President Donald Trump has again postponed a further increase in tariffs levied on China, with the aim of agreeing a more lasting truce at a summit in March. Precise details of the circumstances that led to the postponement are as yet unclear, but reports suggest that China has promised to import more agricultural goods from the US, and to eschew competitive devaluations.
In response to this, we took a reading of Fathom’s China Exposure Index (CEI), which tracks the equity performance of US companies with high exposure to China. It is constructed using a selection of 25 US-listed corporations that derive more than 15% of their revenues from China. We found that movements in the CEI have been muted, suggesting that investors are not expecting substantially easier access for US firms to Chinese markets. Nonetheless, the CEI has increased quite a lot since the end of last year, when Sino–US trade tensions were at their fiercest.
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The Shanghai A Share Index rose 5.6% on Monday following the news, compared with a 0.1% gain for the S&P 500, suggesting that, from the perspective of investors, the postponement means more to China than it does to the US. That view aligns with our own analysis that shows the Chinese economy would suffer more from an increase in trade tension with the US.
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We believe that a deal is likely to be signed, but we caution against the idea that we will see a material improvement in Sino–US relations. China’s economic clout has increased markedly over the past 20 years, and it will probably overtake the US as the world’s largest economy (at market exchange rates) at some point in the future. As a result, the US and China seem to be embarking on a long period of strategic rivalry. Trade tensions are just a symptom of that. The battle for future technological supremacy is another. Taken together, it will mean a new normal of higher uncertainty for global investors. We will be exploring this theme in detail in an upcoming research note.
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