Strategy & economics

China vs the US: this is why the Huawei row is so critical

The company and its founder epitomise the pride the Chinese people take in their country's dramatic economic progress and technological innovation

13/12/2018

Janet Mui

Janet Mui

Global Economist

Since the US and China struck a trade truce in early December markets have become sceptical.

Why the doubts? One reason is that the official statement from China lacked specifics. The 90-day time limit has been excluded and there is no mention of products and quantities involved. China has been silent on President Trump’s claim that China will reduce tariffs on US vehicles.

The news that the Chief Financial Officer of Chinese telecom giant Huawei was arrested in Canada over a potential violation of US sanctions on Iran will complicate the already tough negotiations.

Huawei epitomises technological innovation in China, and so the arrest is highly significant. “Huawei” translates directly into “Chinese achievement and pride”.

Huawei’s innovations extend in to artificial intelligence and 5G wireless networks, and the company filed by far the most patent applications globally in 2017, followed by ZTE (also a Chinese technology company). It is the second biggest shipper of smartphones worldwide behind Samsung.

Huawei’s founder, Ren Zhengfei, has the status in China which is comparable to America’s Bill Gates. The situation is made more sensitive by the fact that the Huawei executive arrested in Vancouver is Zhengfei’s daughter. Action against Huawei will be viewed as a direct attack on China’s technological ascent.

What are the positive signs? China confirmed on December 5 that it will start buying some US products "immediately”, such as soybeans and liquid petroleum gas. Another positive is that China has announced new penalties for intellectual property rights violations to be implemented within this year.

In addition, the Chinese Supreme Court will set up a specific body to oversee intellectual property disputes in January. There is clear evidence that China is serious about addressing certain US demands.

As a native reading the G20 agreement in Chinese my understanding is that China will push for progress toward meeting “reasonable demands” made by the US. The language used suggests there is a mid-point that both sides need to reach, and China is not going to give in to excessive US demands. The arrest of Huawei’s CFO will certainly be perceived as highly unreasonable.

It is difficult to determine an outcome within the 90-day period amidst a whirl of daily newsflow – both positive and negative.

Our view is that the trade truce is welcome: at least there is a clear basis for negotiation.

Author

Janet Mui

Janet Mui

Global Economist

Janet is an Economist working in the Investment Strategy Team and a CFA charterholder. She joined in 2011 and previously worked in Citi Hong Kong as an analyst in Global Portfolio Management and subsequently as a relationship manager to multi-national clients. Janet graduated with a BSc in Economics from the London School of Economics (first class honours), holds an MBA in Finance from the University of Cambridge and obtained a Postgraduate Certificate in Econometrics from Birkbeck College, University of London.

This article is issued by Schroders Wealth Management, which is part of the Schroder Group and a trading name of Schroder & Co. (Hong Kong) Limited, Level 33, Two Pacific Place, 88 Queensway, Hong Kong. Licensed and regulated by the Hong Kong Securities and Futures Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

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