On trade, China’s private-equity king is ‘hopeful for the best, prepared for the worst’
The stock market rallied this week on headlines that suggested progress was being made toward solving the long-running U.S.-China trade spat: One report indicated the Trump administration was considering pre-emptively reducing tariffs as a gesture of goodwill, another that the Chinese had a plan to get the U. S-China trade deficit down to zero by 2024.
But Weijian Shan, chairman and chief executive of PAG, China’s largest private-equity firm with $30 billion under management, thinks that a resolution to the standoff won’t be achieved easily. “I’m hopeful for the best, but I am prepared for the worst,” he told MarketWatch.
Shan argued that the Trump administration’s insistence on a swift reduction of China’s $323 billion trade surplus could be a demand to great for even the powerful Chinese government to meet.
“The government in China can’t force private consumers to buy American goods, and they can’t force American companies to sell to Chinese consumers,” he said. “We really have to see the specific measures they have in mind, not just their goals” before investors can be sure that progress will be made in negotiations to reduce trade barriers.
Though markets may suffer in the short term as difficult negotiations play out, he is optimistic in the long run for both the Chinese and U.S. economies. While he worries that Chinese reforms aimed at transitioning the economy away from dependence on exports and investment toward one based on consumer spending isn’t proceeding quickly enough, he notes that the private sector in China now accounts for 60% of gross domestic product, and said that the growing power of the private sector will compel reforms that promote market-driven innovation.
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Shan, who’s newly published memoir Out of the Gobidescribes his journey from teenage victim of the 1960s Cultural Revolution to the highest echelons of global finance, has a long-term view on China’s evolution from a command economy to a center of capitalist innovation.
It’s this perspective on the historic wealth creation China has seen since embracing private markets 40 years ago that makes him believe that the logic of furthering reform will win out in the end.
Investors will be focused on the question of Chinese economic reforms in the week ahead, following the release fourth-quarter GDP numbers on Monday Jan. 21, when U.S. markets will be closed for the Martin Luther King Jr. Day holiday. Beijing will also be releasing numbers reflecting growth in industrial production, retail sales and fixed investment. Economists are expecting annualized growth in the fourth quarter to come in at 6.4%, a slight decrease from the 6.5% in the third, but well below the 7.5% growth averaged between 2011 and 2017.
“China is to be watched carefully,” Bob Doll, senior equity strategist and portfolio manager at Nuveen told MarketWatch. “Given their size, it’s incredibly important to the global scene—the vast majority of global, incremental GDP comes from China.”
The data is particularly important for U.S. multinationals, which increasingly derive much of their revenue abroad.
Unfortunately, there isn’t much reason to be optimistic about the Chinese economy in the near term, according to Marc Ostwald, global strategist and chief economist at ADM. He predicts the data will show retail sales growth at a seventeen-year low, throwing cold water on the idea that Chinese officials are having success transitioning their economy to one based on consumer spending.
“Markets will be rather more interested and sensitive to any further specifics on stimulus measures, and above all progress on trade talks with the U.S.,” he wrote in a Friday note to clients.
It’s this forward-looking news that could either help U.S. markets extend their four-week winning streak, or dent investor hopes that the Chinese economy will avoid a trade-war induced hard landing.
On Friday, the Dow Jones Industrial Average DJIA, +1.38%rose 336.25 points, or 1.4%, to end at 24,706.35 for a weekly gain of 3%. The S&P 500 index SPX, +1.32% advanced 34.75 points, or 1.3%, to 2,670.71, gaining 2.9% for the week. The Nasdaq Composite COMP, +1.03% added 72.76 points, or 1%, to 7,157.23, finishing out the week 2.7% higher.
After the long weekend, investors will be served up a fresh batch of fourth-quarter corporate earnings beginning Tuesday, including results from Johnson & JohnsonJNJ, +1.24% Haliburton Co. HAL, +4.37% International Business Machines Corp. IBM, +1.33% and Capital One Financial Corp. COF, +1.58%
Wednesday will feature reports from the Procter & Gamble Co. PG, +0.86% Comcast CorpCMCSA, +0.84% and United Technologies Corp. UTX, +1.00% among others.
Thursday earnings include Intel Corp. INTC, +1.49% Union Pacific Corp. UNP, +2.39% Starbucks Corp. SBUX, +0.65% and Bristol-Myers Squibb Co. BMY, +1.05% while Friday will feature reports from AbbVie Inc. ABBV, +2.64% and Colgate-Palmolive Co. CL, +1.02%
Data on the U.S. economy will be light next week, especially if the government shutdown continues and forces the delay of durable goods orders numbers, core capital equipment orders and new home sales, all due Friday.
On Tuesday, investors will get a reading of existing home sales, while Thursday will feature weekly jobless claims numbers, Markit’s purchasing manger’s index for both the manufacturing and services sector, as well as the Conference Board’s leading economic indicators.
There will be no speeches from Federal Reserve officials next week, as they prepare for their Jan 29-30 meeting.
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