Game over? My thoughts on the U.S. China trade truce

The White House’s bid to renegotiate trade deals worldwide continues apace. After changing the stakes with the European Union, the UK, South Korea, Japan and Canada/Mexico, the world waited anxiously to see how the chips would fall with China.

This past weekend, at the G20 summit meeting in Buenos Aires, a temporary truce was called following the first face-to-face meeting between Trump and Xi since the trade tensions began earlier this year.

For the next 90 days, U.S. tariffs will remain unchanged, leaving in place the 10 percent tariff on US$200 billion worth of Chinese imports to the U.S. In response, China agreed to "purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other products from the United States to reduce the trade imbalance between our two countries,” according to the White House. 

At first blush, the outcome appears to be a win-win. At the very least, both nations have a three-month reprieve and an open line of communication for further discussions.

In the last six months President Trump has targeted several regional power-players, starting in July with the EU and a probable new free trade agreement with a post-BREXIT UK. In late September, the U.S. announced the renegotiated U.S.-Korea Free Trade Agreement. Two days later, the U.S. and Japan announced that they would negotiate a trade agreement on both goods and services. In his most recent win, Trump announced that he will terminate the 25-year old NAFTA agreement and lawmakers now have six months to approve the new trade deal, the United States Mexico Canada Agreement (USMCA) that was signed Friday according to the Office of the United States Trade Representative. 

The outlier in all these negotiations remained China, a strong hold-out after a tit-for-tat between the two powerhouses. China has managed to stave off the impacts of the tariffs by stimulating their economy. Due to centralized control, they can keep the burden at bay. But, given the soft USD peg China maintains and higher USD interest rates, there’s potential pressure on China’s foreign reserves if their monetary policy diverges too far from the U.S. 

Certain sectors bore the immediate brunt of the ongoing tensions, especially the automotive, aluminum, iron, steel sectors and several agriculture products like soy and pork. But, those of us in the real estate industry are looking at a longer horizon. In the face of ongoing political and economic uncertainty, investors and market watchers are breathing easier with this détente in place. Overall global property markets continue to perform, and investor demand remains robust with capital still flowing into the sector.

Here in Asia Pacific, we witnessed real estate investment activity jump 20 percent to US$117 billion for the first three quarters of 2018, compared to the same period in 2017, according our Global Capital Flows report. Nearly all the region’s largest markets recorded positive investment growth so far this year, with Hong Kong, South Korea and Australia emerging as top performers. Investment into India, New Zealand and Taiwan was also well-above average so far this year.

Asian investors continue to drive inter-regional capital flows as global cross-border activity outpaced the broader market and edged up by two percent from last quarter. They were active purchasers in the first part of the year, though Chinese outbound investment was tepid due to ongoing capital controls and regulatory scrutiny. Investors from Hong Kong, Singapore and South Korea have stepped in to provide liquidity, demonstrating the depth of the buyer pool from the region. While many of these investors have favored the U.S. market in prior years, pricing pressures in core markets and rising hedging costs are driving many Asian groups to consider investments in Europe instead.

As we look ahead to 2019, we expect investment in Asian real estate to rise moderately at around five percent. Investors remain selective and disciplined and are increasingly reluctant to exit investments partly because of their inability to find alternatives that provide the same income stream. This has widened the bid-ask spread in investment markets and stands to have an impact on activity levels going forward.

We know that as the U.S. and China work out an uneasy compromise, the effects will continue to ripple throughout the world. While we do not see great systematic risk, negative consequences could materialise depending upon how well the negations progress in the next 90 days. Measures implemented thus far should have little impact; however, increasing trade restrictions would prove more severe. Construction costs are already rising, economic growth would slow, and the industrial market could face constraints on demand and rent growth.

How it all plays out remains in the crystal ball, but for those of us in the real estate business, there are many reasons to be optimistic. What impact do you think the trade truce will have? Drop me a note in the comment box.