By Hudson Lockett
HONG KONG- On its face, last week should have been a bad one for China’s $12 trillion in equities. First, Donald Trump, who has vowed to slap the People’s Republic with across-the-board tariffs of 60 percent, was elected president of the United States. Then, China’s top leaders announced a debt relief package for local governments that stopped well short of large-scale stimulus analysts consider necessary to jump-start sluggish growth in the world’s second-largest economy. So, of course, the benchmark CSI 300 index finished the week up 5.5 percent.
Explaining that counterintuitive rise requires digging into how market expectations for Trump’s early presidency are shaping up. First, traders say most investors view the threat of 60 percent tariffs as a negotiating tactic and that plenty of carve-outs can be expected. As evidence, they point to likely lobbying from billionaire Trump advisor Elon Musk, who owns a Tesla factory in Shanghai.
Instead of 60 percent, economists at Goldman Sachs and other investment banks have latched onto a base case of 20 percent tariffs on Chinese goods, which falls neatly in line with the maximum level Trump has used to threaten all other trading partners. China, the thinking goes, is already dealing with effective tariffs of 10 percent imposed by the then-president from 2018 through 2019 and has far more capacity to deal with higher duties than other emerging markets like Mexico or Vietnam.
China also has good reason to keep its powder dry. By keeping details light on policy drivers like bank recapitalization and property developer support for now, Beijing ensures it has greater flexibility to deal with a more belligerent White House later.
None of this builds a bull case for Chinese equities, as key benchmarks are up nearly 20 percent this year. But they could still end up trading in a tight range until January thanks to two questions which are, for now, impossible to answer: how high new tariffs will be, and what China will do in response. In the meantime, equities are supported by schemes from the People’s Bank of China to fund stock purchases and company dividends.
During Trump’s first term, it took about a year for the United States to begin the tit-for-tat tariff war that continued until late 2020. But the returning president has signaled a desire to work far more quickly in his second term. Meanwhile, the yuan is coming under pressure against the US dollar and Trump’s early appointees are looking very hawkish on China. The best-case scenario that’s currently priced in looks precarious at best. – Reuters
