Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. Joining us for the conversation today, glad to welcome back emerging markets strategist for the Americas with the UBS Chief Investment Office Xing Chen Yu.
Xing Chen is joining us today to provide an update on U.S.-China trade negotiations. We will spend some time discussing the state of China's economy as well as touch on the benefits of global diversification when it comes to portfolio positioning. So with that, Xing Chen, nice to be on with you as always.
Thank you for spending some time today with our listeners and clients. Welcome back. Great to be back, Dan.
Thank you. So Xing Chen, to begin, let's touch on U.S.-China trade negotiations. Going back to last week, we did see some notable developments take place last Monday and Tuesday as U.S. and Chinese officials met in London.
Talk to us about the latest developments and where this all stands. Definitely. Maybe let's start with the bigger picture.
The U.S. and U.S.-China trade talks in London, I'd say, largely met market expectations and built on the Geneva consensus reached in May, where both sides agree on a framework for moving forward. Both countries came to the table with some leverage, China as the domino supplier of rare earths and the U.S. with its control over advanced technology exports. This latest round zeroed in on two hot topics, rare earth exports and high-tech export controls.
While we haven't seen a very detailed agreement yet, both sides have confirmed some progress they made out of the London talks. China has agreed to resume approvals for rare earth exports, mostly for civilian use. And there are signals that the U.S. may consider rolling back some of its latest export restrictions, although the scope and timing remain unclear.
What's encouraging is that both sides seem to have a better grasp of each other's priorities and red lines. But let's be realistic. The strategic rivalry between the world's two largest economies runs deep, and mutual trust is still in short supply.
That means we should expect bumps in the road and boats of market volatility as negotiations and implementations continue to unfold. In Washington, D.C., even the term, quote-unquote, strategic decoupling is considered mild, while in Beijing, there is a strong perception that the U.S. aims to contain China's rise. So reaching a stable, mutually beneficial arrangement will take time and sustain effort.
One thing to watch is whether President Xi and Trump will meet in person soon. A face-to-face summit could provide potentially the breakthrough needed to move things meaningfully forward then. Curious, Xing Chen, from your vantage point, what is China's strategy here on negotiations with the U.S.?
And domestically speaking, from the perspective of China, what is the reception of this all? Well, sure. I think China's strategy when it comes to negotiating with the U.S. is highly correlated with its own sort of development strategy, particularly for the longer term.
So when we think about China's longer-term, long-term strategy, which is pretty clear, i.e. achieve self-sufficiency in critical technologies while maintaining global reliance on its advanced manufacturing capabilities, the goal is to shift toward a more consumption-led economy. But in the near term, China still faces challenges like overcapacity and potentially softer exports. The government's hard-line stance is very much focused on the trade talks with the U.S. from the beginning, and this approach was well-received at home, but later on, by negotiating a lower rate of tariffs, so de-escalations occur, I think China is buying time to de-risk, to innovate and rebalance its economy, so all while deepening ties with the rest of the world.
Interestingly, even some voices in Silicon Valley have recently pointed out a number of times that the U.S. export controls may have been counterproductive, potentially spurring China's drive for tech independence. Royal Earth is a prime example of China's leverage, on the other hand, the country accounts for close to 90% of global refined production and 90% of magnetic capacity. The challenge for Beijing now is to use this dominance strategically, keeping global supply chains dependent, but not pushing too hard its partners to diversify too quickly.
Lastly, I think China's quote-unquote dual circulation strategy, i.e. boosting domestic demand while remaining open to global trade, I think that strategy has helped cushion external shocks, however, there is also recognition that more needs to be done and more even need to accelerate, especially in cleaning up housing inventory and addressing overcapacity in sectors like EVs and solar from here. So in terms of the impact or potential impact to the Chinese economy, looking at economic activities in China in recent weeks, any interesting observations or signs of tariff impact? Sure, Dan.
First on the trade front, exports have certainly taken a hit, but the impact has been manageable so far, thanks to frontloading and transshipment. Looking ahead, we expect export growth to indeed moderate, with full-year growth likely dropping to zero as early frontloading unwinds and the U.S. economy potentially slows in the second half. Now on the consumer side, actually over the years, we are seeing a shift from goods to experiences to services.
More people are traveling and spending on lifestyle and retail experiences in recent days. On the other hand, big ticket items are still sort of lagging, but recently are getting a boost from government subsidies. For a more sustainable recovery, we think we need to see stronger job growth, rising consumer confidence, so some of the more structural challenges can hopefully be overcome in order to see sustained improvement in consumer sentiment.
Now when it comes to tariff impact, I think tariffs are prompting some supply chain shifts, without a doubt, but the risk of further escalation seems to be fading. Over the longer term, transshipment may become less attractive as the U.S. pushes to bring sort of manufacturing back home. So given these dynamics, China hasn't felt the strong need for very aggressive fiscal stimulus yet, but we do expect some, you know, continuation of monetary easing, for instance, further RRR and policy rate cuts, and under a base case of 30 to 40 percent tariffs, from a growth outlook standpoint, we're looking for China's GDP growth to land in the mid-4 percent range for this year.
Now looking at China's investment markets, especially the offshore equity space, that in particular has been doing well, so what do you think has been priced in, and what hasn't? Sure. I think we've seen renewed interest from investors such as hedge funds and retail investors in China's equity space this year, but long-only institutional investors seem to be still sitting on the sidelines.
What's priced in, I think, number one, is stable to improving economy, and also reasonable stimulus and steady progress in both cyclical growth and AI development, even as geopolitics remain challenging. I think what's not priced in is, for instance, the potential for strong tech earnings growth, especially as AI innovation continues, and within China, you know, we see China tech as a key preference, given its secure earnings outlook, policy support, and attractive valuations. There is also room for more inflows into the Chinese equity space if institutional investors decide to increase their China exposure.
Now on the downside, markets have yet to fully price in the risk of a rapid re-escalation in US-China tensions, or the possibility of further domestic policy adjustment that could potentially impact some industry profitability. So these remain important sources of uncertainty and could trigger renewed volatility if they do materialize. If we look at US markets, they've been rebounding as well from the April lows.
What are your thoughts in terms of how investors should position across regions? Yes, I think it's more important than ever to have balanced exposure to both US and international equities. The US market, as you highlighted, has rebounded sharply in recent days, mostly led by tech and strong earnings with structural AI trends keeping the US in the global lead.
But don't overlook international markets as well. China, for example, has outperformed here today, and there are opportunities in other regions as well. In a nutshell, I think I have highlighted a number of times before, a diversified approach, meaning participating in both US and ex-US equities can help investors capture upside while managing risk in this evolving global landscape.
Well, Xing Chen, as always, do appreciate your timely insight and perspective. Thank you for dropping by Top of the Morning today to spend some time with our listeners and our clients, and looking forward to picking back up with our conversation again soon. My pleasure.
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