China’s Deputy Prime Minister Liu He travelled to Washington D.C. on Wednesday, the 8th of May, with the desire to continue the negotiations on the American-Chinese trade war. One could almost sense how the financial markets around the world held their breath, as no one knew if Washington was going to talk to Liu He at all, despite the scheduled meeting slots. Even though the conversations made no progress, plus the fact that United States is preparing another increase in import tariffs from 10 to 25 pct. on Chinese goods for the value of $ 200 billion, then the battle suddenly threatens to slide back to where it was a few months ago, and everyone most probably remembers how that crisis sent the stock markets in a nose-dive.
In my opinion, both parties seem to have only moved their positions in a limited manner during the negotiations, and they have pretty classically tried to draw-out the negotiation process in an attempt to demoralise their counterpart. The latest move with new tariffs fits well in Trump’s usual pattern of suddenly increasing the threats in negotiations. Though a concern is that both parties do not seem to have understood what the other side is thinking.
Surely, the US negotiating delegation is allegedly tired of the Chinese slowness in the negotiations, which is probably the reason why Washington wasn’t not particularly enthusiastic about the visit of Deputy Prime Minister Liu He.
The week certainly increased the uncertainty in the financial markets, in particular the stock markets. Despite the slightly negative outcome, my expectation remains that China and USA will find an agreement in the end. Although the peace could only last for a limited time, and the dispute will flare-up again.
In India, the focus is purely domestic, but within the next two weeks, investors will give Asia’s third largest economy increased attention. The huge democracy is in the middle of the parliamentary elections that, due to the size of the country, is divided into seven phases, where the final result shall be presented on the 23rd of May.
Back in December, the excitement about the outcome of the election suddenly jumped as Prime Minister Modi lost three state elections to the Congress Party. The conflict between India and Pakistan in February, however, probably sent the voters back to Prime Minister Narendra Modi’s camp, the BJP party.
My assessment is that the Congress Party, with Rahul Ghandi in the lead, has not been able to mobilise voters to an extent where it has become a threat to Modi. Therefore, I expect the economic policy to continue as it was during the past five years. Prime Minister Modi’s commitment is great, but the results are far from being what he promised his voters during the last election campaign. After Modi’s landslide victory in 2014, strong positive expectations about economic growth emerged among a broad part of the population, which in itself, created a momentum in the economy.
I do not expect the same effect after this election. On the contrary, it is my view that the society and investors will be challenged- as the results of the last five years’ economic policies are not impressive. An example is one of Modi’s focus areas to create more jobs in the industrial sector and to absorb all the young people who enter the job market every year. The reality is that it has been a long time since the industrial production has been extraordinarily high. Ahead of the election, the yearly increase in industrial production has even been very close to zero, like in the rest of the world.
Instead, the Indian government has taken more control of the country’s central bank, which is critical, and during the recent weeks, there has been renewed discussion about the government cheating with the country’s GDP growth calculation. I see no reason to change my long-term sceptical standing about India’s economic outlook– but what I give increased focus is whether concerns about China and India can lead to a renewed general concern about Emerging Markets countries, though it’s not that far yet.