Navigating Trump 2.0: China’s Lessons from the Past

It’s been three weeks since the US election and markets are scrambling to predict the potential impact of Donald Trump's presidency on the global economy, particularly for China and the rest of Asia, excluding Japan.

The reality is that we don’t yet have enough detail about future policy to form a definitive view. We know that some of Trump’s initial cabinet appointments have historically had a hawkish attitude to China. Then again, there are others close to Trump with meaningful business operations in the region — Elon Musk’s Tesla for example manufactures about half of its vehicles in China, which also accounts for approximately one-third of its sales.¹ Markets reacted favorably to Scott Bessent's appointment as Treasury Secretary, in the hope that he can help mitigate the risk of a global trade war.

While more tariffs (there are already a significant number on many Chinese goods) seem inevitable, there is still room for optimism in the region. Asia is one of the most dynamic areas in the world and home to many world-class companies. As the magnitude of external tailwinds has perhaps reduced, the onus will now be on internal solutions to ensure the future of economic growth in the region.

China’s lessons from Trump 1.0

Let’s not forget that China is no stranger to Trump’s, or indeed Biden’s, tariffs. Trump may have introduced them during his first presidency, but as recently as May of this year, the outgoing President Joe Biden raised them again, with some going into effect immediately, while others are currently scheduled for 2025 and 2026.

Despite this backdrop, even with tariffs, many of China's companies have been able to more than compete with their counterparts in the US and globally.

The country has also worked hard to diversify its exports since the last Trump administration, reducing its reliance on the US and other developed markets (Figure 1) and increasing its presence in emerging markets. Throughout these shifts, it has retained its crown as the world’s largest exporter.

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All eyes are now on China’s response to the latest developments. Markets have been clamouring for a large stimulus package to jolt the economy out of its post-Covid slumber and recent initiatives received a lukewarm reaction. Earlier this month, the government announced a local government debt swap which had been largely expected, and it reaffirmed its commitment to break the deflation cycle by stabilising the housing and jobs markets.

However, details remain vague, and the magnitude of China's policy response will likely depend on US policy developments. Investor sentiment, particularly within sectors focused on consumption, has been negatively impacted by the government's perceived lack of detailed stimulus plans but we feel that there is more to come.

To shore up investor support, the Chinese government has reiterated that stimulus measures can be scaled up if necessary.

China's approach to future stimulus will be iterative, rather than reactive, allowing for adjustments based on the evolving US policy landscape.

However, the long-term outlook remains positive, especially for sectors with growing market shares and those benefiting from existing stimulus programmes and client replacement schemes.

There’s more to Asia than China

It's important to note that Asia's story is diverse and not solely dependent on China. Southeast Asia, Taiwan, Korea, and India are dynamic economies and, in some cases, maintain more amicable relationships with the US. This diversification could mitigate the broader impact of any adverse US-China relations stemming from Trump's policies.

Furthermore, these countries could benefit from manufacturers shifting their operations from China.

Trump's influence will likely be felt through currency movements, shifts in monetary policy, and potentially also tariffs.

We expect that Asian central banks will likely adopt a more cautious stance on monetary easing given the stronger dollar and anticipated inflationary policies in the US, which may lead to a more gradual rate-cutting path by the Federal Reserve.

While the US trade deficit with China has narrowed since Trump's last administration, deficits with other Asian exporters have increased, potentially drawing more scrutiny. Trump's focus on reducing trade deficits could eventually result in tariffs on other Asian economies. Their potential impact may be felt well before they are implemented, as the increased uncertainty is likely to dampen corporate confidence, leading to delays or a decline in short-term capital expenditure.

Cautiously optimistic outlook

Ultimately, while Trump's victory introduces uncertainty, the diversified nature of Asian economies, coupled with China’s methodical policy approach, provides a buffer against potential economic disruptions. The region's structural reforms and the emergence of new technology cycles continue to offer strong growth catalysts, underscoring a cautiously optimistic outlook.

All data Bloomberg unless otherwise stated.

With contributions from Nick Wilcox, Managing Director for discretionary equities at Man Group.

1. https://www.scmp.com/news/china/diplomacy/article/3287323/elon-musks-ch…