SINGAPORE (Dec 17): A slowing economy, a deleveraging campaign and a trade standoff with the US have weighed on Greater China equities and its currency in this year. The Shanghai Composite Index and Hong Kong’s Hang Seng Index tumbled as much as 31% and 26% respectively from February to October, alongside other emerging markets, as investors’ risk appetite turned sour amid trade uncertainties and fundamental headwinds. The Chinese renminbi depreciated as much as 11% against the greenback during the April-to-November period, when trade tensions escalated. Currency devaluation was widely interpreted as an effort made by the Chinese authorities to cushion the slowdown and make its goods and services more competitive in global markets.

A temporary ceasefire in trade tariffs during the G20 summit held in Buenos Aires early this month provides a cooling period of 90 days, during which additional trade tariffs will be held back and which will set the start of a renewed round of negotiations. A welcome gesture by US President Donald Trump and Chinese President Xi Jinping at a G20 dinner, it was initially well received by market participants, leading to a strong rebound in risk assets, but markets subsequently gave up all the “G20 gain” amid rising scepticism over a trade deal.

A nuanced divergence between US and Chinese official statements on the G20 outcome led markets to believe the trade negotiation was probably not going to be smooth sailing. Looking ahead, both sides will have to recognise that some kind of compromise will have to be made. The challenge for the US and China is to work out a middle ground that will allow the two profoundly different economic systems to coexist. This means the US will need to realise that it is impossible to stop China from integrating its supply chain and moving into higher-end manufacturing clusters. And China should execute higher standards of transparency and compliance with regard to its trade practices in areas such as intellectual property protection, cyber security and technology transfer.

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