The Shanghai Composite Index is down 20% year-to-date. Photo: AFP
The Shanghai Composite Index is down 20% year-to-date. Photo: AFP

It’s the politics, stupid, James Carville might have said. Regime crises are spreading like winter flu. The United States is stumbling into, out of, and back into a trade war with China while President Trump’s legal position grows precarious.

The British government is in shambles over Brexit. French President Macron is backtracking on reforms as fast as he can, raising the minimum wage and rescinding a promised corporate tax cut. That can’t be good for world equity prices.

Whatever Special Counsel Robert Mueller dredges up in the form of evidence that Trump’s people played footsie with Russians over the possible construction of a Trump Tower in Moscow in 2015, that isn’t the president’s biggest problem.

Collusion isn’t a crime, and the fact that Trump might have wanted to do business in Moscow while he ran for the presidency doesn’t prove that Russia stole the election, as Hillary Clinton seems to believe.

But a procession of Trump associates may face criminal charges for lying to federal investigators. Meanwhile, the US Attorney’s office in New York will pile on criminal charges over campaign financing that Trump will face as soon as he leaves office. It’s a mess, and it weighs on investor sentiment.

A deal with China seemed to be in the works as I reported from Beijing on October 23 when I revealed that China was willing to give up its “Made in China 2025” slogan, if not the content.

But the prospect of trade war resurfaced with the arrest of the daughter of Huawei founder and company CFO Meng Wanzhou and with American efforts to arm-twist its allies into banning China’s flagship tech company.

That’s working on the Anglo-Saxon world, where the “Five Eyes” intelligence-sharing arrangement gives the United States leverage. But Germany last week rebuffed American demands with a public ruling by the country’s telecommunications security commission in Bonn.

Senior government sources in Eastern Europe, moreover, say that none of the new members of NATO will accede to American demands, either. That leaves Washington with two options: retreat ignominiously or escalate. This isn’t about China stealing American technology.

Huawei spends US$14 billion a year on R&D and is ahead of the US in 5G internet technology.

Even a dovish Federal Reserve can’t buoy the market. In early November, fed funds futures projected an overnight rate of nearly 3% for the end of 2019; now it’s just 2.6%. If the Fed talks dovishly, the market is more likely to ask if the Fed knows something it doesn’t, and sell stocks.

China targets stimulus to sustain housing market

Key China infrastructure and land companies turned in double-digit returns during the past four weeks on the Hong Kong H-shares market, while the aggregate indices gave ground slightly.

Infrastructure and land – especially in second- and third-tier cities –remains the most attractive sector of the H-shares market. That’s what the government wants you to buy because that’s where Beijing is putting its own money. As China tries to adjust to lower global growth and an incipient trade war with the United States, this is the most cost-efficient stimulus.


A standout is China Tower, organized last August to provide construction and maintenance of mobile phone towers. Another is CRRC, which manufactures rolling stock.

A strong performance by land companies like China Resources Land and Guangdong Investment point to a connection between spending on telecommunications and transportation infrastructure and residential real estate prices, especially in second- and third-tier cities.

It’s noteworthy that new residential property prices in first-tier cities rose by just 1.4% year-on-year as of November, while second– and third-tier cities show double-digit gains. That reflects in part improvement in the intrinsic value of the hinterlands due to better transport and telecommunications infrastructure.


The Shanghai Composite Index is down 20% year-to-date, but that has minimal impact on Chinese households, most of whose wealth is in property. It seems clear that Beijing wants to ringfence the property market and protect the wealth of Chinese households.

It’s much too early to speak of a negative wealth effect on Chinese spending – stocks comprise barely 9% of household wealth – but it’s not too early for the government to take preemptive measures.

China retail sales rose only 8.1% year-on-year in November, the weakest reading since 2003. The most likely explanation is that precautionary savings increased in response to the threat of trade war with the United States. China has one of the world’s highest personal savings rates (35% of income), probably because the country has an inadequate social safety net and individuals must save for retirement and rainy-day emergencies.

Any increase in economic uncertainty is likely to result in an increase in precautionary savings. The stampede of retail investors out of Chinese stocks in response to the prospect of a trade war probably has a parallel in caution in the retail market.

China’s leadership has responded to the risk of economic weakness by monetary stimulus and by targeted infrastructure spending. Unlike the spending boom that followed the 2008 Global Financial Crisis, the present spending plan appears directed to transport, telecommunications and other investments that will increase the value of residential property in Chinese cities.

Falling interest rates provide visible support for the property market.


US and European stocks – watch the fireworks but don’t touch

Small-cap US stocks are within 1% of a bear market after Friday’s slaughter on US exchanges. The Russell 2000 Index of small-caps is down 19% from its peak, in a dramatic reversal of the Trump trade – a bet on domestically-based, tax-sensitive companies that would benefit most directly from the corporate tax cut that went into effect in 2018.


Historically, sharp declines in small-cap stock prices have been the best indicator of US recessions. The collapse of the Russell isn’t yet predicting a US recession, but it points to a downward trajectory for growth during 2019.


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