The US – China discussions at the G20 meeting in Argentina were productive from the viewpoint that President Trump and President Xi met and acknowledged that there was problems to solve. However, we at Classiarius feel that regardless of the number of meetings and talks that these two countries conduct, the trade problem is structural and penetration by US, European and Asian firms is difficult at this point – it will take years of China working to transform from an export driven economy to a domestic demand economy. Sure, the government is driving this initiative but it will take years, many years for meaningful progress to take place.
So despite the excitement on Wall Street with regards to the so-called breakthrough in talks at G20, with the US stock market rallying on the back of said progress, the market today – just 24 hours later – is embracing reality. This short-term rally was only confused traders buying hope, and today, selling reality, the grim reality.
Now the US and China said they will conduct meetings over the next 90 days to reach some sort of conclusion – more or less to put the trade war on hold. In the coming months, we see the reality of two giant economies trying to cope with a timeline that is measured in years, not weeks or months. It might take 5 years or more for meaningful change. By then, China may have already slipped into recession.
For now, we see the chances of a full-blown trade war to be at 60%, or higher. Trump will lose his cool and start stacking up tariffs on Chinese goods.