The U.S. stock market is likely to benefit from the unpredicted move of the People’s Bank of China (PBoC) to insert $28 billion into the nation’s domestic banking system, which shows the slowdown of the Chinese economy.
Strategists like Becky Liu, head of China macro strategy at Standard Chartered, said that the injection of cash by the country’s central bank at this time of the year has not been expected by investors.
The decision directly reflects fears of slowing growth rate of the Chinese economy amidst an ongoing trade dispute with the U.S., making a comprehensive deal more appetizing for China heading into 2020.
U.S. stock market is pricing in potential roadblocks in trade talks
The U.S. and China mutually agreed on the intricacies of a phase one trade deal earlier this month, but the deal remains unsigned by both sides.
The hopes of investors after the announcement of a phase one trade deal were a speedy shift to a phase two trade deal that would include more sensitive areas of the talks including industrial policy change and intellectual property protection.
However, the passing of the House Resolution 543 by the U.S. House of Representatives, which condemns the handling of the Hong Kong protests by China and sanctions officials involved in the matter, increased the intensity of the relationship between the U.S. and China.
Despite the worsening relationship between the two sides, the slowdown in the economy of China and the PBoC’s relatively fast response to it could indicate that China will look to establish a deal in the near term to alleviate pressure on the economy.
The signing of a phase one trade deal and growing sentiment around a phase two agreement by the year’s end, following solid earnings reports from major sectors like finance, could sustain the strong momentum of the U.S. stock market heading into 2020.
What’s holding China back from signing a deal?
The prolonged U.S.-China trade dispute has started to take a toll on the global economy as well as the U.S. and Chinese economies, sending investors to bond markets and safe haven assets to safeguard from uncertainties.
Yet, reports throughout the past week have suggested that China has expressed reluctance towards signing the first phase trade deal on paper, causing the U.S. stock market to slip.
Hu Xijin, the editor-in-chief of the English and Chinese editions of the Global Times, emphasized that it is the habit of China to remain neutral and that it is cautious in signing a large deal as the country would have to fully commit to it once finalized.
“China has the market demand to buy $40 billion-$50 billion worth of US farm products. China won’t make a commitment that it can’t honor; once it promises, it will fulfill it,” he said.
As China introduces various stimuli to prevent further slowdown of the domestic economy, finalization of a mini trade deal would become favorable for both countries, establishing a robust foundation for the U.S. stock market to maintain its upside trend throughout the next three months.