Diversified stocks in developing economies experience gains due to economic alignment.
The relations between the United States and China are poised for a potential shift, with significant implications for both economies.
The U.S. economy, already showing signs of slowing down, could see a reprieve in inflationary pressure if relations between the two nations improve. This is particularly true for low-income earners who tend to buy cheap Chinese imports. China, in turn, is in need of better access to global markets to boost its economy.
Economist Galy suggests that if the de-escalation process continues, investing in emerging market equities, particularly those focused on the Asia-Pacific region, could be a wise move. However, the exact sequence of events in this process is uncertain.
From a political perspective, the next step in this process could come from China. One way China could demonstrate goodwill is by allowing its currency to appreciate, reducing inflationary pressure and signaling a trade imbalance with the U.S. is not a side effect of a favorable currency. This move would be a strategic one, aimed at stabilizing China's economy and global position, but would likely be cautious and calculated rather than a full diplomatic shift.
China's economy, while currently running well, is expected to slow down long-term due to population aging. To counter this, China is taking steps to make its economy more productive and agile, including reducing the dominant position of large IT giants.
An agreement between the U.S. and China could open up opportunities for U.S. exports to China, which could help make the U.S. economy more competitive. Conversely, the U.S. could be interested in dismantling some of its trade barriers against China to further this goal.
The development signals significant challenges for the Chinese government, including economic stagnation risks and structural problems like high debt and demographic shifts; these pressures may incentivize China to initiate steps towards easing tensions with the USA.
The pressure on the U.S. Federal Reserve (Fed) to tighten monetary policy could also be reduced with improved relations between the U.S. and China. The de-escalation process, however, is likely to be slow in the short term.
Previous U.S. trade sanctions have affected some sectors of the Chinese economy, and any agreement between the two trading powers is more urgent for the U.S. than for China. Given China's strategic ambitions and recent actions, any such steps would likely be cautious and calculated rather than a full diplomatic shift.
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