05.06.2019 – Special report. Do the USA and China still settle their customs dispute? The financial market has recently been optimistic again. But at this point we have been before – a trade war is still possible. Who wins, who loses? Let’s wait and see. What is clear is that both sides are already looking for alternatives. We are analysing the first signals in this direction for farsighted investors. And answer the asset question of who could benefit from the dispute.
The Kremlin rubs its hands
Probably the biggest winner of any conflict is Russia. The Russian Federation has maintained close economic relations with China for years. Siberia, for example, exports large quantities of wood to the People’s Republic, and oil and gas are export hits anyway. Hundreds of thousands of Chinese live in the Russian Far East. The Chinese community at the universities and in the economy in Saint Petersburg or Moscow cannot be overlooked. It may not yet be as strong as in the USA, but it is mainly those who fled the communist dictatorship who can be found there. In Russia, on the other hand, those who are loyal to the line are linked to the Chinese leadership. Business is booming.
Already, according to President Vladimir Putin, China is Russia’s number one trading partner – last year bilateral trade increased by 25 percent to 108 billion dollars, beating all expectations. Just one example of the increasingly close ties of recent years is the huge “Baltic Pearl” real estate project in St. Petersburg.
A Chinese trade official has just suggested that domestic companies relocate production from China to Russia. According to the financial blog ZeroHedge, He Zhenwei, Secretary General of the China Overseas Development Association (CODA), said many small and medium-sized export-oriented Chinese companies were now facing problems. They should go to Russia – and export their goods produced there to the USA or Europe.
So take a closer look at the Moscow Stock Exchange. If Beijing invests billions of Yuan/Renminbi in Russia, the stock market there will win. Above all, consumer goods manufacturers and food companies should benefit from the influx of skilled Chinese workers with purchasing power; the same applies to construction companies, since the Chinese are likely to be accommodated in specially built suburbs and remain among themselves. The rouble is also worth a long consideration for long-term CFD traders. This is how Moscow could proceed: Sell yuan, which China wants anyway to weaken its own currency; collect rubles to give the Russian middle class more purchasing power.
Gold ravenous hunger
Russia and China have one thing in common: they want to break the dollar and torture the USA financially. While Moscow has already sold a large part of its portfolio of US government bonds, Beijing is still sitting on a mountain of treasuries – more than 1,000 billion dollars last year. US government bonds might therefore be a short investment. China could also plunge the US economy into turbulence by selling the bonds in a trade war. Such semi-official proposals have been circulating in recent weeks. But what to do with the redeemed greenbacks? A possible profiteer would be gold. In the People’s Republic, the yellow metal is a popular reserve currency, and there are huge shops where worried families stock up with statues made of gold or bars.
Chinese concrete gold on special offer
Furthermore, long-term investors should take a closer look at the stocks of battered Chinese property developers. The People’s Republic will probably have to save them. With the dollars from the US Treasuries, the Chinese state could buy cheap real estate projects from the developers and rent them out later or sell them again when the market relaxes. China has a vacancy problem: there are huge ghost towns, new residential projects and shopping malls have been built everywhere that are empty. China wants to gain farmland and relocate around 300 million people to the cities. Unfortunately, the new buildings are too expensive for the farmers. But a real estate crash would ruin many middle-class Chinese who had invested in real estate because of inflation. This would become politically dangerous and must not happen.
Battlefield Rare Earths
The view of metals and minerals such as yttrium, tantalum, etc. remains. The 17 raw materials in this group are used, for example, in the manufacture of computer screens, rocket systems and smartphones. In the Chinese battlefield rhetoric of recent weeks, the possibility of a US boycott of rare earths has also emerged as a nuclear option.
The USA is reacting: US Secretary of Commerce Wilbur Ross has just declared that his country will do everything in its power not to be cut off from the offer. His ministry yesterday published a report that US President Donald Trump had already commissioned in December 2017 – apparently he had foreseen the Chinese reaction, but there had already been a boycott in 2010. China currently accounts for around 78 percent of American imports. Irony of history: Until the 1980s, the USA was the world’s leading manufacturer. According to the news agency Bloomberg, the Commerce Department recommended a series of steps, including the increased allocation of mining rights. In addition, mothballed mines are likely to be reactivated: According to U.S. Geological Service data, reserves are 93 times higher than domestic production.
For investors, this means the following: If the USA succeeds in boosting domestic production, then a boycott will be a dead letter – and Chinese Rare Earth stocks are likely to crash. The same applies to the fact that foreign suppliers are quickly jumping into the gap. Conversely, companies allowed to reactivate US mines would win. So keep an eye on this market!
Conclusion: Nobody knows yet whether a trade war will break out or not. Be prepared in any case. The Bernstein Bank wishes you successful investments!
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