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US | Asia-Pacific

Chinese Equities Gain on Tariff Hike Delay

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In his Twitter post, Trump citied that the US has made substantial progress in the talks with China on important structural issues including intellectual property protection, technology transfer, agriculture, services, currency, and many other issues. As a result of these productive talks, Trump will be delaying the US increase in tariffs scheduled for March 1st.

While the language allows for the possibility of tariffs should the countries not make further progress before the Trump-Xi meeting, the fact that the Presidents will meet makes it more likely that a “victory” will be declared for both at that Summit.

 

Implications on Chinese Yuan

The trade deal would involve keeping the Chinese yuan (CNY) stable versus USD and it was a condition tentatively agreed between China and US amid the trade negotiations.

Citi analysts expect CNY to strengthen not only in the short term but also in the long term, with equity and bond index inclusions in the coming 2 years. 

 

 

Implications on Chinese Equities

Citi analysts believe that the Chinese stimulus and an end to the worst case outcomes of a potential trade war are likely to boost Chinese, Asian and trade-lined Emerging Markets equities meaningfully.

Chinese stimulation policy has turned more aggressive, credit easing has started to see effects and fiscal easing is on the way. Citi analysts believe we are likely to see a bottoming on macro data in 1Q.

Equity and bond index inclusions may bring in over US$200bn in passive inflows to China through 2020.

A turnaround in the “credit impulse” is likely to trigger a valuation re-rating seen in Mar 2009 and Jan 2016. Currently, MSCI China is trading at 13x PE, lower than the upper bound of the PE range at 18x over a 10-year period.

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