Manager Notes from New York October 2018

Having spent the full week in New York, many discussions were focused around the US economy and the trade war with China. Views have shifted somewhat with less confidence on a deal being done as Trump has become more hard-line in his negotiations with China. In a bid to insulate its economy from a combination of credit default risks, slowing growth and any fallout from the trade war, China has moved towards a more stimulative stance, albeit gradual. The PBOC has been injecting money into the banking system through loans to commercial banks in order to incentivise them to purchase local government bonds which will fund infrastructure projects.

The intended result is pick up in credit growth and an increase in infrastructure spending, the growth of which has slowed sharply in the first half of 2018. Tax cuts for business and investors are also going through the National People’s Congress with the aim of encouraging investors to continue lending. While the long-term goal for China remains to deleverage and focus on structural reform it is currently a balancing act between that and avoiding a collapse in growth. Meanwhile in the US, the direct impact of a trade war appears de minimis to date and there has not been any effect on confidence thus far. However the second order effects could pose a greater risk. Further rounds of tariffs could lead to tightening of financial conditions which could derail the pace of growth. It was interesting to note the differences in opinion regarding the US economy, where three different scenarios were laid out.