Still a long and bumpy road to travel on the way to a U.S.-China deal
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Headlines about trade wars between the U.S. and other nations have been moving global financial markets this year.
In spite of talks toward free-trade agreements in other regions, trade frictions between the U.S. and China, the two largest economies in the world, have intensified recently. The increased frictions follow several rounds of cooperation, negotiation, retaliation, and escalation. So far, there has been limited progress on cooperation and negotiation. Instead, there has been another round of tit-for-tat tariffs on imports. The U.S. also has announced an additional tariff list that could take effect in the fall, if implemented. This has pushed us much closer to a trade war.
In disputes such as these, there are two final scenarios: win-win and lose-lose. Given the greater temptation not to cooperate, an ending in which both players lose is quite likely. Hence, it is understandable that the markets are highly concerned about an eventual trade war, especially since the risk of miscalculation and miscommunication between the U.S. and China is quite high, given numerous social, political, and cultural differences between the two countries.
The silver lining is that this is not a one-shot game. The U.S. and China could go for several rounds before they eventually settle into a more stable relationship, for better or worse. It is true that neither side is willing to let the other win easily and that each is still trying to test the other's limit at this moment. However, when the pain of the trade war becomes unbearable, the players may decide to back off, get back to the negotiation table, and restart. For the U.S., it may take a sharp decline in the financial markets and a significant deterioration in the labor market. For China, it could be the risk of a sharp deceleration of economic growth to below 6.3%, the pace necessary to achieve China's goal of doubling its 2010 GDP by 2020. Obviously, we are not there yet.
Higher chance of ending up with the lose-lose scenario
As the U.S. midterm elections approach, there is a decent chance of further escalation in the near term. Hence, we have revised the chance of a “trade wars” scenario from 30%–40% in May to 40%–50%. A trade war would lower growth in both the U.S. and China. The direct impact on growth in both countries would be manageable. Obviously, both are major players in the global economy; combined, they produce 38% of the world's GDP. However, their international trade, as large as it is, represents only 1.8% of total world trade and about 2% of their combined GDP. China's exports to the U.S. represent about 4% of Chinese GDP and U.S. exports to China represent about 1% of U.S. GDP.
Nonetheless, the indirect impact could be felt through the effect on the labor market and consumption, or via the effect on financial markets and business confidence.
This won't lead to a hard landing, but it does pose some downside risk to China's 6.5% growth target this year. In fact, Chinese policymakers have paused their deleveraging campaign and started to ease monetary and fiscal stimulus to cushion the potential negative impact from trade frictions. Our U.S. economists believe that in this scenario, the U.S. economy could face a modest reduction of 10–15 basis points given China's retaliation. In fact, since the second-order effects would be the more important negative driver, the U.S. administration will keep a close eye on financial market developments.
There will be a spillover effect on the rest of the world, too. From a value-added perspective, more than one-third of the goods exported from China are actually made somewhere else. This is particularly true for China's electronic and machinery exports, which have been the target products in the U.S. government's investigation into China's trade practices. For every dollar of goods that China is exporting, 20 cents comes from Asia and 7 cents from Europe. Certain Asian markets would be particularly vulnerable, such as Japan, South Korea, and Taiwan, given how integrated they are into the regional supply chain. Nonetheless, as long as the trade war is strictly limited to tariffs and protectionist measures, the global economy may not collapse into a deeper recession.
We see a 10% chance of ultimate “isolationism,” which would involve damaged diplomatic ties between China and the U.S. on multiple fronts—economic, political, and cultural. If major retaliatory measures are involved—such as a broad-based sanction against China and China's dumping U.S. Treasury bills in return—it could result in significant financial market disruption and eventually a global recession. Luckily, the chance is very low in our view since the outcome would be extremely negative for both China and the U.S., as well as for the rest of the world.
Not yet at the point of no return
Despite a higher chance of a trade war, there is still hope for eventual peace. Both countries understand that a trade war would be a lose-lose situation. As such, we continue to believe there is room for negotiation, especially when the pain becomes unbearable. We assign a 40%–50% chance to a “protectionist” scenario, with modest implementation of trade tariffs/retaliation and an ultimate negotiation on a comprehensive trade and investment agreement between China and the U.S. Even so, the path to that eventual deal is likely to be bumpy. While this scenario will have only a marginal impact on the global economy and inflation, it will translate into volatility in the market.
Trade frictions to get worse before getting better
Select U.S. tariffs likely to be used to gain leverage in future trade negotiations.
Source: Vanguard Investment Strategy Group as of July 2018
U.S. and China frictions over the long haul
Disagreements on bilateral trade represent only the first of two conflicts between China and the U.S. The other conflict is over longer-term issues and will be much more strategic and prolonged. It will focus on issues fundamental to the structure of the Chinese economy. The U.S. is pressuring China to live up to its promise to the World Trade Organization by further opening markets and pushing forward market-oriented reforms. Hence, although a comprehensive trade and investment agreement could be reached eventually, the bumpy path of negotiation on other issues will continue.
On this front, China has shown willingness to cooperate as this would ultimately benefit its long-term development through more efficient capital allocation. That in turn will eventually lead to higher productivity and growth potential. Indeed, President Xi announced at April's Boao Forum that China is planning to further open the domestic financial market, relax the foreign ownership limit in the auto and financial industries, enhance the investment environment, strengthen protection of intellectual property rights, and ensure a level playing field. However, the pace and scope of any such opening and reforms are at the core of the second conflict, especially regarding government subsidies to high-tech industries and state-owned enterprises.
What should investors do?
Along with the long and bump path of negotiation between the U.S. and China, volatility in global financial markets is likely to persist. Despite the up and downs, we advise investors, first, to maintain a diversified portfolio given the heightened uncertainties in the current environment and, second, stick to their long-term investment portfolio. That should give investors a better chance to weather the short-term volatilities and achieve long-term investment success.
By Qian Wang, PhD Managing Director and Chief Economist, Asia-Pacific 14 August 2018 vanguardinvestments.com.au
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Tess has over 22-years experience in Chartered Accounting Firms and in this time has had a broad range of experience in superannuation, taxation, business services, and financial strategy.
Over the last seven-years, Tess has turned her attention to Financial Planning, earning a Diploma of Financial Planning in 2015 and leading the newly established financial division of the Wybenga Group as a director of Wybenga Financial.
Tess’s mission is to bring the ethics and integrity of her Chartered Accounting background to the area of wealth management.
As a woman in a male dominated field, Tess is active in promoting gender equality in the industry through various programs and mentoring opportunities.
Using her depth of knowledge and experience in tax and accounting Tess is able to demonstrate a level of competence that is unique in the Financial Planning sector.
2001 – Commenced employment with Wybenga & Partners and part-time accountancy studies
2004 – Graduated Masters of Commerce from the University of New South Wales
2005 – Admitted as an Associate Member of the Institute of Chartered Accountants Australia
2007 – Promoted to Manager at Wybenga & Partners
2012 – Appointed as Associate Director
2015 – Awarded a Diploma of Financial Planning
2016 – Appointed as Partner of Wybenga Group and Director of Wybenga Financial
B.Bus, B.Sc, CA, DipFP
Adam has over 18-years experience in Chartered Accounting Firms and in this time has had a broad range of experience in superannuation, taxation, business services, and financial strategy.
Over the last seven-years, Adam has turned his attention to Financial Planning, earning a Diploma of Financial Planning in 2015 and leading the newly established financial division of the Wybenga Group as a director of Wybenga Financial.
Adam’s mission is to bring the ethics and integrity of his Chartered Accounting background to the area of wealth management.
Combining traditional accounting and financial services has been a welcome move for Adam, allowing him to operate and advise in the financial sector that has been a long time personal passion.
Using his depth of knowledge and experience in tax and accounting Adam is able to demonstrate a level of competence that is unique in the Financial Planning sector.
2005 – Graduated Bachelor of Science from the University of Western Sydney
2005 – Commenced employment with Wybenga & Partners and part-time accountancy studies
2007 – Graduated Bachelor of Business from the University of Western Sydney
2010 – Admitted as an Associate Member of the Institute of Chartered Accountants Australia
2010 – Promoted to Manager at Wybenga & Partners
2012 – Appointed as Associate Director
2015 – Awarded a Diploma of Financial Planning
2016 – Appointed as Partner of Wybenga Group and Director of Wybenga Financial
What is an Advisory Cadetship? An Advisory Cadetship enables you to commence your career whilst attaining the necessary university qualifications by studying part-time.
How does it work? Generally, our cadets complete a relevant business or accounting degree at the University of New South Wales, the University of Technology Sydney, Macquarie University, or the University of Western Sydney.
The Firm provides 3-hours paid study leave per week to attend university. This can either be taken at the one time or broken between days depending on the individual’s requirements. In addition, the Firm provides paid study leave for both mid-semester and end-of-year exams.
We take the work life balance very seriously at Wybenga Financial and our cadets are encouraged to have a fulfilling life outside the office. A typical day will have you arriving at the office at around 8.30am with most days concluding at 5.30pm.
What are the benefits of an Advisory Cadetship with Wybenga Financial? Our cadets benefit from the following:
Career path – on completion of their degree our cadets have significant practical experience which will assist them in advancing their careers
Work helps your studies – by working full-time our cadets are able to apply their practical knowledge in the university subjects
Camaraderie with other cadets – the Firm has a number of cadets at various stages of their career
Mentoring – cadets are paired with a senior staff member who oversees their progress and training both at work and with their studies
Communication and feedback – the Firm has an open door policy which enables all cadets to interact with all members of staff including Directors
Culture – the Firm promotes a friendly social culture with a number of functions throughout the year
Modern environment – including ‘socialising’ areas such as pool table and break out area
Training – ongoing support and technical training. We also provide internal and external training on a monthly basis
Remuneration – working full-time provides a market salary and independence with salaries being reviewed every 6-months
What happens when I complete my degree? The completion of your degree is the first step of what we hope to be a long and successful career with us. The next step is the commencement of a Diploma of Financial Planning followed by completing the requirements to become a Certified Financial Planner (CFP).
There are always progression opportunities for the right cadets and we are dedicated to the long term development of our staff.
Who should apply? Current Year 12 students or first/second year University Students who:
want to commence their career in financial advisory;
are due to commence or are currently completing a part-time business or commerce degree at university with an advisory major;
want to gain valuable hands-on experience while completing their qualifications;
are looking for a friendly working environment;
are team players who display initiative;
have a commitment to self-development;
possess excellent personal presentation and communication skills; and
are motivated and mature minded.
How do I apply for an Advisory Cadetship? To apply for a Cadetship position at Wybenga Financial send us your details. Please also include in your covering letter why you wish to do a cadetship, include relevant qualities you possess, main interests / achievements, and any previous employment.
Interested candidates should initially forward a resume/covering letter of no more than 3-pages. Please provide full details of contact information (telephone or e-mail).
What if I have more questions? For further information about our Cadetship program, please send your enquiry to .