Key Trends for the Quarter
Weathering the Trade War
While U.S.-China trade talks will likely hit additional speed bumps, for most of the fourth quarter the two sides will explore a truce to support further talks. The outreach would consist of a narrow, preliminary deal under which China would, at a minimum, resume purchases of U.S. agricultural products, and perhaps energy, in exchange for Washington lifting some restrictions on Huawei and withholding new tariffs. But even as this preliminary deal opens the path toward a more substantial deal, deep uncertainty will still roil the Chinese and global trade outlook as the two sides wrestle with thorny questions about Beijing's industrial policies, protections for intellectual property and support for state-owned enterprises.
Beijing will expand stimulus measures in the next quarter to prevent rising manufacturing unemployment after the Lunar New Year celebrations.
Regardless of whether China and the United States strike a truce, Beijing will expand stimulus measures in the next quarter to prevent rising manufacturing unemployment after the Lunar New Year celebrations in late January. The government will combine measured monetary easing, such as selective interest rate cuts and fiscal subsidies for vehicle and household appliance purchases, to stimulate consumption. Beijing will force local governments, which are already facing growing budget constraints, to spend more on infrastructure projects and employment training, but that will incite resistance — and rack up debt — among local jurisdictions well beyond the next quarter. Take a look at this Stratfor assessment for more on how China hopes to use tax cuts to stimulate its economy.
Ultimately, China's stimulus measures will not prevent its economy from slowing or the trade war from hurting Asia-Pacific countries that trade with China and the United States, especially Singapore, South Korea and Taiwan. Together with others such as Indonesia, Thailand and Malaysia, these countries will combine rate cuts and investment spending with incentives for manufacturers leaving China. But Indonesia is particularly vulnerable because of its current account deficit and weak currency, which compel Jakarta to find other export destinations and offer sweeteners to draw investment.
Although Vietnam has served as a key destination for relocating manufacturers, it faces serious risks from an extended trade war and an ailing South Korean electronics sector. But with few monetary options, Vietnam will worry that significant easing will invite further U.S. accusations that it's manipulating its currency. To learn how the rest of Southeast Asia could benefit from China's economic woes, click here.
The Elephants Fight, and the Grass Suffers
As the White House squeezes China and the region on trade, it will also ramp up the pressure on China in its periphery with moves like the $8 billion sale of F-16V jets to Taiwan and the possible imposition of human rights sanctions on Beijing over its crackdown on ethnic Uighurs in Xinjiang. The Better Utilization of Investment Leading to Development Act will take effect on Oct. 1, giving Washington more financial tools to counter China's Belt and Road Initiative. While the rest of Southeast Asia remains cautious about endorsing U.S.-led restrictions on Huawei and backing freedom-of-navigation patrols in the South China Sea, Vietnam's ongoing Vanguard Bank standoff with China gives it another reason to improve security ties with the United States during President Nguyen Phu Trong's expected visit to Washington in October. Read this Stratfor assessment for more about how Beijing is trying to sweeten the pot on the Belt and Road Initiative.
Two Hot Spots on China's Edges
Hong Kong's protests are trending toward de-escalation, but they are far from over. Although more radical protesters will struggle to sustain momentum, they will continue to use extreme tactics to push their demands; at the same time, the city's deep grievances against mainland control could easily reignite larger demonstrations. Even if Hong Kong avoids a harsh crackdown or, in an unlikely scenario, a costly direct intervention by Beijing, it will have to expand its pro-business policies to bolster its economy as the extended unrest gives alternate financial centers like Singapore and Taiwan the opportunity to reap gains. For more on where Hong Kong's protests are heading, see Stratfor's latest assessment.
Ahead of Taiwan's January 2020 elections, incumbent President Tsai Ing-wen will focus on Chinese intimidation and the Hong Kong crisis to highlight sovereignty and democracy. Elevated security ties with Washington will precipitate a Chinese response — and perhaps even lead to unintended clashes in the Taiwan Strait — during the electoral season.
Walking the Line on North Korea
North Korea faces a tough decision as it confronts internal pressure to alleviate sanctions and considers the possibility that U.S. President Donald Trump could lose the 2020 elections. North Korea will express its growing impatience as the self-imposed year-end deadline for progress approaches by pushing the envelope on weapons tests.
If North Korea senses that Trump will lose in 2020, it may agree to a compromise nuclear deal, calculating that it can obfuscate and hold on to much of its nuclear program.
But given the costs of a complete rupture in U.S.-North Korean talks and the dubious value of an interim deal to either side, discussions are likely to stagger along without major eruptions. Still, if North Korea senses that Trump will lose in 2020, it may agree to a compromise deal as insurance, calculating that it can obfuscate and hold on to much of its nuclear program. Of course, such a breakthrough would require Washington to soften its demands — which will prove to be a difficult sell in the White House. Click here to see Stratfor's most recent take on U.S.-North Korean talks.
The Japan-South Korea Rift Deepens
South Korea's economy is in for worse days ahead as trade disputes with Japan intensify. Even as it is buffeted by the effects of the U.S.-China trade war, South Korea will rally around the flag, with continued boycotts of Japanese goods and export restrictions. Japan, having initiated the trade standoff, will continue its pressure given that blowback from South Korea amounts to a marginal economic concern as it balances between supporting exports and threatening growth with a consumption tax hike. With Tokyo and Seoul having scrapped their direct intelligence-sharing agreement, their standoff will trouble the U.S. alliance structure but not damage core cooperation given Washington's ability to facilitate interactions as needed. Perceiving an opportunity in the alliance's internal disagreements, China will move to incrementally boost economic links with the feuding neighbors.
- The U.S.-China trade war and China's slowing economy will force key Asian economies to navigate carefully to minimize pain and maximize gains.
- Tokyo's pressure on Seoul will sap South Korea's beleaguered economy, delaying reforms to the chaebol, the family-controlled conglomerates that dominate business in the country.
Key Dates to Watch
- October: Vietnamese President Nguyen Phu Trong is expected to visit Washington.
- Oct. 1: Japan imposes a long-awaited consumption tax hike.
- Oct. 1: The People's Republic of China celebrates the 70th anniversary of its founding.
- Oct. 31-Nov. 4: Thailand hosts the 35th Association of Southeast Asian Nations Summit and Related Summits.
- Nov. 16-17: Chile hosts the Asia-Pacific Economic Cooperation summit.
- Nov. 19: The White House's 90-day deadline for a reprieve for Huawei runs out.
- Nov. 22: The Japan-South Korea intelligence-sharing pact formally expires.
- Dec. 24: China hosts a possible trilateral summit also featuring South Korea and Japan.
- Jan. 1, 2020: North Korean leader Kim Jong Un issues his New Year's address as Pyongyang's deadline for greater U.S. flexibility expires.
- Jan. 11, 2020: Taiwan holds general elections.