From the US perspective first, it is quite clear that, from now on, all of President Trump’s actions will be aimed at a single goal: his re-election on November 3, 2020. If he is to achieve this ambition, he cannot afford to lose the farming Midwestern states. A trade deal that involves a commitment by China to import substantial quantities of soya beans must thus be reached – and relatively soon (or else its impact will not be visible sufficiently ahead of the Presidential election).

Chinese leader Xi Jinping obviously faces no such electoral concerns, having all but secured an indefinite term at the country’s helm. Right now, though, he is contending with the cumulative impact of US sanctions on the Chinese economy, mounting consumer and corporate leverage – and of course the very tense situation in Hong-Kong. Up until now, he has managed to offset export difficulties by stimulating the domestic economy, as well as moving forward with the deployment of the new Silk Road initiative. But these efforts seem to be reaching their limit. Concerns about the general health of the lending system (especially smaller rural banks) were recently flagged by the Chinese central bank itself. And increasing difficulties in getting Silk Road-related loans honoured are resulting in China having to take some of the infrastructure into possession, as well as face political tensions in Africa and the Far East.

That said, is it really in China’s interest to agree to a trade deal on terms (soya bean imports) and with a timing (near-term) that will support President Trump’s chances of getting re-elected? Remember that the “anti-China” feeling in the US is very much bipartisan. In fact, it is probably currently the one issue on which Democrats and Republicans see eye to eye. As such, it does make sense for China to accept an intermediate agreement, and then wait out the Presidential election to see who will be sitting on the other side of the negotiating table from 2021 onwards. Also, we should point out that agreeing to import soya beans (and oil) is no big sacrifice for China: the country needs those commodities anyway.

The “anti-China” feeling in the US is very much bipartisan.

While the outcome of the US Presidential election may not make much difference to China, it does matter greatly with respect to the US stance globally. Were the winner of the Democratic primary race to successfully defy President Trump – and here we would flag the just-announced candidacies of Michael Bloomberg and (Obama-supported) Deval Patrick – a more multilateral attitude would no doubt prevail. It is indeed quite evocative that Democrats have sent a full delegation to the ongoing UN Climate Change Summit, while only one representative of the US government is attending.

For investors, the combination of a likely soon-to-be-signed “phase one” trade agreement and President Trump’s determination to keep the US economic engine running at good speed during the last year of his term should continue to support equity markets. Central banks will be pressured to maintain very accommodative monetary policies, allowing for elevated stock valuations. Elevated but, might we add, not unlimited: the fact that US interest rates remain in positive territory does put some cap on price-to-earnings multiples, in the US market but also other (interconnected) ones across the globe. Still, we can look forward to a positive new year… with 2021 possibly a very different story.

Signs of financial strain in China

The 2019 Financial Stability Report just released by the Chinese central bank states that 586 (13%) of the country’s 4,379 banks and financing firms can be considered at “high risk” – up from 10% last year. While the problems mainly pertain to smaller rural lenders, the central bank intends to step up supervision of financial markets, so as to contain potential contagion in the event of defaults. The report also indicates that household debt currently stands at 99.9% of disposable income, a substantial increase from the 93.4% level that prevailed a year ago. Relative to GDP, Chinese household leverage (60.4%) is now in line with the international average, posing debt risk in some regions and lower income families according to the central bank.

Concerns have indeed increased since May, when regulators took control of Baoshang Bank, a little-known small institution located in Inner Mongolia. Since then, they have had to arrange for two bailouts, that of Jinzhou Bank and of Hengfeng Bank. More generally, together with the central bank, they are taking measures to force troubled lenders to increase capital, reduce their bad loan portfolio, restrain dividends and even change managements. Mergers between smaller institutions are also being encouraged.

For the Chinese authorities, these signs of financial strain – even as economic growth is the slowest in nearly three decades – pose a dilemma. Stimulus measures to limit downside risks to the economy, for instance by forcing local governments to up their infrastructure spending and help struggling small businesses, will only serve to make the debt problem larger in the long run. The act of balancing economic interests and financial risks certainly promises to be a fine one.