Chinese equities/US trade war: Beijing blushes
Too much optimism had been priced in too early
The “Tariff Man” strikes again. Two tweets by Donald Trump over the weekend have put markets into risk-off mode. US-China trade talks had seemed to be going well. A “historic” trade deal this Friday was possible. The US president’s motives might have been tactical, to increase pressure on Beijing. But for weeks, expectations of an imminent deal have been priced into the Chinese markets.
This could well reverse. China mainland’s CSI 300 index slipped 6 per cent on Monday, the biggest fall in more than three years. The renminbi hit its lowest level against the dollar since January. US futures, Treasury bond yields and oil prices also fell.
Even after Monday’s declines, the CSI 300 is up 18 per cent this year. More than a tenth of all companies in the CSI 300 are up more than 50 per cent this year, including the baiju (Chinese liquor) maker Wuliangye Yibin. With a $53bn market value it has become one of the world’s largest drinks companies.
Chinese markets look pricey. The broader MSCI China benchmark trades at 14 times forward earnings, compared with its historic average of 10 times.
Much of this year’s rally was fuelled by government stimulus plans and better than expected economic data. Another factor was expectations of a positive outcome to the US-China trade talks, given weeks of optimistic guidance from both sides. Too much optimism was priced in too early.
Mr Trump has threatened again to increase the current 10 per cent tariffs on $200bn of Chinese goods to 25 per cent. He also suggested 25 per cent levies on another $325bn. The possibility of imposing tariffs on all Chinese exports to the US remains.
An extended US-China trade war would damage China’s exports and employment. A fall in gross domestic product growth would follow.
The US, as well, has much to lose. It imported $540bn worth of goods from China last year. Higher tariffs on imported raw materials and products from China will mean increased production costs.
Bank of America’s portfolio manager surveys regularly cite US-China trade as a main worry. The tariff increases will go into effect this Friday unless both sides reach an agreement by Thursday. Should that happen, the art of the trade deal will have confounded investors yet again.