CEIBS Wealth Forum: US-China Trade War Fears Spark Thirst for Safe Investment Choices

Despite signs that China and the United States are searching for a truce to end their budding trade war, speakers at the 2018 CEIBS Private Investment Wealth Forum on 5 May said they believe there is no relief within sight.

One of the terms the United States set for waiving punitive tariffs on certain goods from China is for China to cut its trade surplus against the U.S. by $200 billion by the end of 2020, which economists and experts at the conference saw as a diktat that China would not accept.

Among them is Ha Jiming, a prominent economist with China Finance Forum 40, a nonprofit think tank.

Speaking at the forum hosted by China-Europe International Business School and the University of Virginia Darden School of Business, the former chief economist with Goldman Sachs encouraged attendees to perceive the current trade war in a bigger political context.

China maintains the largest trade surplus among all U.S. trade partners, accounting for 46 percent of the overall U.S. trade deficit. As the two nations’ economies are highly interdependent, Ha said he foresees a “lose-lose” outcome were they to fight to the bitter end.

The immediate impact of a trade war on the U.S. economy, he predicted, would be an increase in inflationary pressure. Coupled with rising oil prices, this would compel the U.S. Federal Reserve to speed up interest rate hikes.

“This could be the last straw on the longest U.S. bull run in history,” said Ha, referring to the stock market boom since 2009.

On China’s part, it stands to lose big if the scope of U.S. trade sanctions expands from the current $50 billion worth of high-tech Chinese products to the bulk of Chinese exports to the U.S., such as garments, electronics and toys.

Amid heated speculation about how the trade war will pan out, Ha said China might fall back on stimulating domestic consumption to offset the loss incurred in the export sector.

Ha said many areas are insulated from the fallout of a trade war, and thus are worth the attention of investors. They include Internet games, education, health care, tourism, sports and movies.

Nicholas Sargen, chief economist with Fort Washington Investment Advisors Inc., also issued dire warnings about the trade conflict. “Last year, everybody breathed a sigh of relief. Trump did nothing on trade,” he said. “This year, it’s a whole different story.”

The danger of waging a trade war without thoroughly weighing the consequences once played out in the era of the Ronald Reagan presidency. Sargen, the author of a forthcoming book on investing in the Trump era, observed that the stock market crash in 1987 partly resulted from public fears of the trade war with Japan and Germany.

Sargen dismissed a theory that U.S. sanctions against top-tier Chinese high-tech companies and products are an attempt to strangle “Made in China 2025” — China’s trademark initiative aimed at encouraging homegrown technological innovation.

A majority of panelists at the forum believed China’s capital market liberalization will proceed, no matter how the trade war evolves.

Concerns about fundamentals and corporate governance are often an afterthought in a market teeming with retail traders who behave like cut-and-run gamblers, but in the opinion of Professor Pedro Matos, academic director of Darden’s Richard A. Mayo Center for Asset Management, the presence of foreign institutions in China’s A-share market can only be a force for good.

He cited past research in proving that the rise of foreign institutional ownership in Chinese companies can lead to multiple benefits.

For example, since domestic institutions are more prone to be loyal to management due to “business ties” and other conflicts of interest, the increased role of foreign ownership translates into increased shareholder pressure to perform and adoption of more shareholder-centric practices.

“The participation of foreign institutions empowers small investors, allowing their voices to make a difference in corporate governance,” said Matos.

Panelists agreed that demographic change is a game changer in managing private wealth in a rapidly aging society like China. One out of six Chinese is now aged over 60. Those above 65 represent 7 percent of the entire population.

Apart from the apparent benefits of this trend for investors in sectors like health care, the effect on private wealth management remains to be seen.

As one of those experts dedicated to studying the changing patterns behind wealth management around the world, Rui “Oliver” Meng, professor of finance and accounting and Zhongkun Group Chair in Finance at CEIBS, pointed out that aging will impact asset prices.

Demand for financial products like stocks will decrease as the population keeps aging. The wealth of ordinary Chinese households is concentrated in real estate, meaning that the country may well follow the path the U.S. has taken.

Statistics show that Americans tend to become homebuyers at 30, and swap old homes for new ones at 44, but as they get old, supply outstrips demand, causing the growth of homeownership to slow and home prices to fall in tandem.

Amid demographic change, China’s middle class and its legion of high-net-worth individuals — those with $1 million to invest — continue to grow. The number of Chinese households who fit this criterion totaled 2.24 million as of last year, Meng said, something that augurs well for the wealth management market.

But development of the market, as Rui sees it, is hindered by a series of hurdles. On the demand side, product diversification is inadequate. Investors have a home bias and appear reluctant to trust professional service providers with their money.

On the supply side, market operators themselves are woefully unprepared, lacking expertise, experience and even sound ethics.

As China moves from a quantity-oriented growth model to one more focused on quality, Rui expects Chinese concepts about wealth management to change. Specifically, they will have a bigger incentive to allocate assets globally, an option that has been proven time and again by recent economic history.

American citizens’ ownership of overseas assets rose to 60 percent of their wealth portfolios when per capita GDP reached $50,000, said Rui.

“Diversification is the future,” he said.