Although the focus of oil markets in recent months has been on the impact of the COVID-19 pandemic and of the latest Saudi Arabia-instigated oil price war, still bubbling away under the surface is the previous major markets driver: the U.S.-China trade war. Progress in meeting the requirements of the deal were scheduled to be reviewed over the weekend by U.S. Trade Representative, Robert Lighthizer, and China’s chief economic adviser, Liu Hu, but have been postponed. Part of the reason for this is believed to be that as of the end of June, China had met less than 25 per cent of the targets set out in the deal. Tensions relating to this, and to tangential matters relating to the broader deal, are set to re-emerge dramatically in the run-up to the U.S. Presidential Election on 3 November 2020.
The effect on oil prices of this rapidly shifting-dynamic does not stem just from its impact on future crude oil supply and demand patterns but also on the accompanying oil price volatility that has recently proven to be a spark for wild movements in other risk-on assets. As U.S. President Donald Trump noted: “Every time there’s a little bad [trade war] news the market would go down incredibly…Every time there was a little bit of good news the market would go up incredibly… And yet, other news that was also very big, the market just didn’t really care.”
Crucially for China’s view on its trade war stance with the U.S. is that its economy is recovering at a faster, more sustainable, and more safeguarded way than the U.S.’s, to such a degree that domestic COVID-19 cases are increasingly irrelevant to its macro outlook. “Beijing has proved it can contain new infection clusters through highly-effective local lockdowns that leave the national and even city level economy relatively unscathed,” Rory Green, senior China and North Asia economist for TS Lombard, in London told OilPrice.com last week. “Since mobility restrictions began to gradually ease, there have been three major infection clusters: Harbin in Heilongjiang province, and Beijing and Urumqi, both in Xinjiang province, with a further imported infection cluster, as the Chinese authorities characterised it, arising as overseas Chinese returned home,” he said. “In each instance, track and trace measures as well as strict targeted local lockdowns prevented a wider outbreak of the virus, and these measures also allowed the national economy and, indeed, the local economies, to continue to function without damage,” he added.
This effectiveness in containing the COVID-19 virus resonated in China’s recording positive second quarter 2020 (2Q20) growth of 3.2 per cent compared to the same period last year (y-o-y), and its continued controlled containment clearly remains crucial for a similarly sustained recovery through to the end of this year. “We think a major second wave is unlikely and anticipate only local lockdowns, so we expect China to reach pre-COVID-19 levels of GDP by early 4Q20,” according to Green. Specifically, these are 2H20 GDP growth in the 4.5-5.5 per cent y-o-y range, followed by a stunning 8.5 per cent growth next year.
So far, China’s economic recovery has been spearheaded by heavy industry and state investment, with this infrastructure investment and export-oriented manufacturing providing a base level of jobs and activity, but from now the question is how this recovery will broaden into the services sector and private demand. Within the services sectors, the clear winners so far, Green highlighted, have been software and internet businesses, with revenue up 6.7 per cent year-to-date (ytd) y-o-y and profits up 1.3 per cent ytd y-o-y.
“Finance and property services are benefitting from the equity bull market, rising house prices, and the growth of total credit, and slightly less well-recovering are the production services, including transport, logistics, and warehousing,” said Green. The worst performers are catering, leisure and tourism, which, as they account for the biggest share of total employment, are crucial to the jobs outlook. “However, the pace of improvement is likely to pick up following the easing of mobility restrictions and the improving macroeconomic backdrop,” he underlined.
For the U.S., it is probably reasonable to posit that the previously almost completely accurate equation of presidential election success to U.S. economic performance has been undermined somewhat by the extraordinary effects of the COVID-19 pandemic. According to U.S. NBER statistics, the equation was that since World War I, the sitting U.S. president has won re-election 11 times out of 11 if the U.S. economy was not in recession within 24 months ahead of an election but presidents who went into a re-election campaign with the economy in recession won only once out of seven times (Calvin Coolidge in 1924). Even the Coolidge win is debatable as, although he was a sitting president that won the election in 1924, he had not actually won the previous election but merely succeeded to the presidency after the sudden death of sitting President, Warren G. Harding (so he was, strictly speaking, not ‘re-elected’).
Despite the broader deterioration in U.S.-China relations – due to the details of the 25-year deal with Iran, the flouting of U.S. sanctions on Iranian crude oil exports, the U.S.’s recent sanctioning of China over alleged human rights violations against Muslim minorities in Xinjiang, and the extension of sanctions against Huawei over cyber-espionage and technology theft concerns – what has always mattered more to President Trump is the Phase 1 trade deal, TS Lombard’s chief emerging markets economist, Lawrence Brainard, told OilPrice.com. “As Trump’s ratings have deteriorated in recent weeks owing to his disastrous handling of the COVID-19 crisis, he has opined that the trade deal means less to him now than at the time when he concluded it,” he said. “But the deal promises to deliver major export contracts for soybeans and other agricultural products, thus shoring up his electoral support in the Midwest, and his need to secure the farm vote suggests he will refrain from actions that might torpedo China’s soybean purchases,” he underlined.