U.S. and China plot a new course

E*TRADE Securities2

05/25/17

Maybe it was the chocolate cake.

On May 11, the U.S. Department of Commerce announced that the U.S. and China agreed to kick-start a 100-day action plan called the U.S.-China Comprehensive Economic Dialogue.1 The pact essentially puts into motion several long-discussed initiatives, some of which China has slow-played for years. It comes after President Xi Jinping and President Donald Trump summited in April, a meeting in which the leaders broke bread, discussed diplomacy, and, yes, even shared some of that aforementioned cake.2

This week, we highlight some of the provisions in the agreement, and their potential investing implications.

Singing new tunes

Some market observers say the 10-point action plan may be a small step forward in trade relations between the two countries, especially after Trump was critical of China’s trade practices during his campaign trail.3 Should the two sides follow through on the agreement’s initial actions, investors may want to think about the potential impact on several industries, including the following:

  • U.S. beef producers. The deal paves the way for the U.S. beef industry to export to China, which it has been barred from doing since 2003 following a mad cow scare. In return, provided that outstanding issues are resolved, the U.S. will accept cooked chicken products made in China.     
  • Biotech seed makers. The plan may allow U.S. companies to sell genetically modified seeds in China, by way of speeding up China’s National Biosafety Commission’s review of pending biotechnology patents. As a result, players in the agrochemical and biotechnology industries may find a fertile market at their disposal.
  • LNG exporters. Built into the agreement is approval for Chinese companies to negotiate with U.S. liquefied natural gas (LNG) producers. The provision could be another positive development for an industry that hopes to find new markets for its abundant supply.     
  • Credit raters. Joint ventures permit American credit rating agencies limited access to China currently, but this pact may give Fitch, Moody’s, and Standard & Poor’s the opportunity to offer their services in China. That access could lead to better understanding and assessments of China’s corporate debt market. 
  • Electronic payment players. After several years on the sidelines, China agreed to comply with a 2012 World Trade Organization ruling that calls for an open electronic payments market that allows foreign firms to issue credit cards in yuan. Local banks will also continue to offer dual-brand currency cards that allow U.S. card companies, including American Express, MasterCard, and Visa, to process card transactions.    

China branches out

Another part of the deal is that the U.S. agreed to officially recognize the importance of China’s One Belt, One Road initiative, and to send a delegation to China’s forum on the matter in Beijing. Dubbed a modern version of the Silk Road, the $1 trillion plan involves China-led infrastructure projects that will connect more than 60 countries across Asia, Europe, the Middle East, and Africa.

How the ambitious One Belt, One Road project proceeds remains to be seen, but several U.S. multinationals see big potential. General Electric plans significant bids on equipment orders in the near future and Honeywell is looking to capitalize on its expertise in natural gas equipment in Central Asia. On the financing side, Citibank scored a contract from Bank of China to shepherd a bond offering designed to fund branch openings in Asia, Eastern Europe, and East Africa.4

Beyond the 100-day plan, China’s desire to extend its reach internationally may present opportunities for investors to explore new markets, especially with firms appearing interested in getting their own piece of the action. 

  

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1. Initial Results of the 100-Day Action Plan of the U.S.‑China Comprehensive Economic Dialogue, U.S. Department of Commerce, 11 May 2017. https://www.commerce.gov/news/press-releases/2017/05/joint-release-initial-results-100-day-action-plan-us-china-comprehensive

2. Denyer, Simon. “Chocolate cake and chemistry repair U.S.‑China ties. But will North Korea spoil the party?” The Washington Post, 14 Apr. 2017. https://www.washingtonpost.com/world/chocolate-cake-and-chemistry-repair-us-china-ties-but-will-north-korea-spoil-the-party/2017/04/14/5cf5a950-206e-11e7-bb59-a74ccaf1d02f_story.html?utm_term=.f2e8559fc25a

3. “Trump’s Pretty Good China Deal,” The Wall Street Journal, 14 May 2017. https://www.wsj.com/articles/trumps-pretty-good-china-deal-1494796265

4. Bradsher, Keith. “U.S. Firms Want In on China’s Global ‘One Belt, One Road’ Spending,” The New York Times, 14 May 2017. https://www.nytimes.com/2017/05/14/business/china-one-belt-one-road-us-companies.html?_r=1