Postcard from China: From trade war to US-China decoupling

Below are our key impressions from a week of traveling in China. While views are divided, most people expect the trade war to calm down over the next year. However, focus is moving beyond the trade war and towards US-China decoupling. In our view, this could have a big impact on corporate supply chains and it is a rising concern among the Nordic companies to which we talked.

There are still worries over the short-term picture for the economy. On the medium-term outlook, views vary a lot but, generally, we sense some concerns about China's economic path and find ourselves more optimistic than consensus.

Our impression from talking to many Chinese officials and business people is that China is quite confident it can navigate through the headwinds from the US. We hear often the view that this will prove positive for China because it strengthens the commitment to do what it needs to do to continue modernisation.

Green development, opening up and innovation were popular phrases among Chinese officials and academia. They also highlighted quality over quantity.

On a trip to Xi'an we witnessed that the Go West strategy is alive and kicking, with a heightened focus on opening up further. Lower costs, less competition and improving connections to the world market were highlighted as advantages compared with the coastal cities.

Our bi-annual fact-finding trip in China this year took us to Beijing and Xi'an and participants from Danske Bank were Chief Analyst Allan von Mehren, Chief Representative of our Beijing office Mathias Boyer and research analyst in Beijing Adie Zhang.

Trade war to be replaced by US-China decoupling

Our trip started in Beijing, where we met with a seasoned investor, analysts, academia and Nordic businesses. We also hosted a seminar with the Danish China Chamber of Commerce on the issue of future US-China decoupling.

The main talking points in China today are, not surprisingly, the US-China trade war, the outlook for US-China decoupling and the state of China's economy.

To start with, on the trade war, the mood is generally that some sort of solution to the trade war will be found over the next year but that the US-China friction will be far from over. Most people expect a phase one deal this year and some see the scope for a bigger phase two deal next year, mostly because Donald Trump is likely to need a renewed boost to the economy ahead of the US election next year. A trade deal could add that boost, as the main drag on the US has been the dark clouds of uncertainty from the risk of an all-out economic war. The path to end the trade war is expected to be bumpy, though, but ultimately some solution should be found. However, if Trump is re-elected, it is not unlikely the trade war could reignite again in 2021.

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