Whilst the recent tariff rates applied by the US on China imports were not as harsh as feared the rhetoric between the two nations is expected to continue. The optimists would argue this is part of the strategy by President Trump to bring home jobs ahead of the US mid-term elections, but a trade deal may be possible following a favourable election result. The pessimists look to the Presidents inner circle that has highlighted the threat of US technology falling into the wrong hands and the potential risk to future US security.
The focus of the Aubrey GEM philosophy has continued to be on the secular growth opportunity that is presented from the Chinese population continuing to accrue wealth, and wanting to spend more on the increasing products and services that are available to them both domestically and internationally.
Behind the Twitter debate on the trade dispute China continues to transform the economy and exports now account for less than 20% of GDP compared to almost 35% 10 years ago, with the US accounting for less than 20% of total exports. The country has moved on from a low cost manufacturing model that has dominated the US President tweets to a service sector economy which now accounts for over 50% of GDP.
Whilst the trade dispute cannot be seen as positive for sentiment and is likely to impact China exports to some extent, there is a compensating factor which has been developing behind the media headlines.
The government is about to reduce the levels of taxation that are applied to the working population and this increase in disposable income is expected to support the consumption dynamic which has been an important driver in the growth of the service industries in recent years.
The Ministry of Finance periodically reviews income tax rates and allowance sums, and this has not been reviewed since 2011. The average citizen has enjoyed over 9% annual disposable income growth since then and this has resulted in an increasing number of workers falling into the tax net. The pending change will raise the minimum threshold for paying personal income tax from Rmb42,000 to Rmb60,000 per year, and the Ministry of Finance estimates the share of the population paying tax will fall from 44% to 15% as a result.
Although this is not a direct response to the trade dispute we expect this initiative to compensate to some extent, and believe that the increased disposable income will be embraced by consumers and have a positive economic impact.
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