Anxiety over the economic fallout of a trade war between the US and China has been a chief worry for equity investors this year. But the Chinese stock market has taken Donald Trump’s imposition of a new round of tariffs on $200bn of Chinese imports in its stride, with the CSI 300, an index of large companies listed on the Chinese mainland, rising 2 per cent on Tuesday.
Even if the news is bad, investors typically favour anything that diminishes uncertainty. And the announcement from the White House does that, at least in the short term. The Trump administration said that tariffs would start at 10 per cent from next week, but could be lifted to 25 per cent in January, giving investors a timeline and allowing investors to try to model the impact of the move.
“Now that we know the tariffs are 10 per cent, and a deadline has been set for 25 per cent, there is an opportunity to buy stocks, and that certainty is what the market has been lacking,” said Nicholas Chui, an investment director at Aberdeen Standard Investments. “And we’ve seen some exhaustion in terms of the selling [of the Chinese stock market]”.
The CSI 300, which is made up of big companies listed in Shanghai and Shenzhen, has fallen sharply this year and is down more than 25 per cent from a high for the year touched in late January.
Investors say the sell-off in Chinese stocks means companies with strong fundamentals are starting to look attractive. The greater clarity provided by the latest announcement gives investors an incentive to buy favoured stocks.
“It’s almost a case of the bad news had already been priced in,” said Catherine Yeung, an investment director at Fidelity International. “There are still a number of very attractive names; it’s a fallen angel situation where earnings are very attractive but [company shares] have been beaten up because of sentiment.”
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Investors also said that the latest tariffs were less severe than originally feared. “A lot of investors had expected the Trump administration to levy tariffs at 25 per cent, so the fact it’s actually at 10 per cent now does help,” said Ben Luk, global macro strategist at State Street Global Markets.
Although it was accompanied with the threat that the rate could be raised in January in the absence of broader progress on trade policy with Beijing, a three-month window has been provided to allow for negotiations. “It’s falling short of expectations, I think markets were too pessimistic,” Mr Luk added.
China’s response has also indicated that it is not immediately retaliating, paving the way for further negotiations and serving as a boost to Chinese stocks.
Mr Luk said China’s central bank fixed the currency at a relatively lower level but “not where people felt it was a retaliation to Trump”, in line with yesterday’s spot price. The renminbi was 0.14 per cent weaker on Tuesday at 6.8668 against the dollar.
Unlike previous occasions, China has not responded with details of how the country would retaliate. Rather, this time, investors said the commerce minister conveyed a more positive tone, with a focus on ultimately resolving the trade impasse.
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