Investors will be hoping the US and China can put trade talks back on the road to a deal after President Donald Trump said he’s unlikely to meet President Xi Jinping before a March 1 deadline to avert higher American tariffs on Chinese goods.
Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are leading a group of administration officials headed to Beijing, although Lighthizer said recently that it’s not certain a pact could be reached.
The US working team will arrive in Beijing on Monday and the two sides will discuss issues of common concern, as they build on talks that took place in Washington in late January, China’s Commerce Ministry said in a statement on Saturday. It gave no further details of the talks that will take place on February 14-15. Time is running out for the world’s largest economies to strike an agreement before next month, when the Trump administration is set to more than double tariffs on $200 billion of Chinese goods. While the US has said it’s a hard deadline, Trump has also suggested he could agree to extend negotiations beyond the month’s end if progress is being made.
“Our base case is that China will package together enough concessions for the US to declare a partial victory and hold off on tariff hikes,’’ said Tom Orlik, chief economist at Bloomberg Economics.
A big US fund is ready to nibble on Chinese bonds
As China’s domestic bonds head for imminent inclusion in a benchmark global index, one large US fund manager is taking a cautious approach.
“My guess is that we will buy some once we get the settlement capabilities, but it’s not a high conviction sort of view,” said Brendan Murphy, who helps manage $37 billion at Mellon, a $482 billion asset manager based in Boston. The first step would be to buy “a small amount” of government bonds as the team gauges the market’s liquidity and trading conditions, he said in an interview in Sydney.
China has mounted a years-long campaign to boost foreign investment into its bond market, set to become the world’s second biggest, in part to counter downward pressures on the yuan’s exchange rate. While record inflows have indeed come, they have been dominated by central banks, rather than private-sector investors. Just how big the global demand for Chinese debt will be depends on the decisions by Murphy, his counterparts and their clients.
Chinese bonds proved a great diversification play in 2018, advancing steadily while many markets saw losses — reflecting the People’s Bank of China’s shift toward stimulus mode in contrast to tightening by the US Federal Reserve. Foreign investors tend to prefer government and so-called policy-bank securities, issued by key state-owned lenders.
Chinese bonds have much less liquidity than major peers, something that’s given some investors pause. Goldman Sachs Group Inc. estimates that turnover for government bonds was 1.3 times in 2018, after annualizing January through September data. Treasuries turned over 4.6 times, while South Korean bonds came in at 3.4 times, Goldman analysts tallied.
China’s 2017 move to allow investments via the Hong Kong Bond Connect have made it easier for foreign investors to access the market, though logistics remain an issue for some, and a relative lack of hedging tools is also a concern.
Still, Goldman’s Kenneth Ho in December anticipated some $1 trillion in foreign inflows through the end of 2022. That would bring overseas ownership to about 6 percent of the total outstanding, from little more than 2 percent today, Ho wrote in a report.