The Chinese stock market, together with Argentina and Turkey, is among one of the worst performers this year. The SSE Index, a stock market index of all stocks traded at the Shanghai Stock Exchange, has decreased by almost 23% from the beginning of the year and no stocks in China have resisted this trend: Baidu, a major tech company providing services similar to Google in China and Alibaba, the famous e-commerce retail company, although having performed really well, registering record revenues and an increasing market share, have lost respectively 25% and 16% stock value from the beginning of the year.
What are the reasons behind the sell-off?
Obviously, a stock market decrease can be partly attributed to a revaluation of the Chinese deteriorating economy fundamentals (the country suffered its first current account deficit since 2001 and its economy grew of about “only” 6.5% during the third quarter, value below the expectations and the lowest since the financial crisis). However, analyzing charts we observe that the sell-off started in exact coincidence with Trump’s 22nd of January first trade war announcement regarding Chinese solar panels. From this date on, the SSE registered a 26.68% decrease. It is therefore clear that the trade war had a huge effect on stock prices, even higher than major economic data such as interest rates or unemployment. Based on this assumption, there could be very good opportunities right now in the Chinese stock market.
THE SSE COMPOSITE INDEX PERFORMANCE FROM TRADE WAR ANNOUNCEMENTS
What are the reasons behind the sell-off?
Obviously, a stock market decrease can be partly attributed to a revaluation of the Chinese deteriorating economy fundamentals (the country suffered its first current account deficit since 2001 and its economy grew of about “only” 6.5% during the third quarter, value below the expectations and the lowest since the financial crisis). However, analyzing charts we observe that the sell-off started in exact coincidence with Trump’s 22nd of January first trade war announcement regarding Chinese solar panels. From this date on, the SSE registered a 26.68% decrease. It is therefore clear that the trade war had a huge effect on stock prices, even higher than major economic data such as interest rates or unemployment. Based on this assumption, there could be very good opportunities right now in the Chinese stock market.
THE SSE COMPOSITE INDEX PERFORMANCE FROM TRADE WAR ANNOUNCEMENTS
Why is there an opportunity?
This opportunity arises now because on the 30th of November the G20 summit will be held in Buenos Aires and this will be an excellent excuse for the presidents of the US and of China to discuss. Even though very probably a complete deal will not be drafted, it will be an occasion for investors to understand better the relation between the two countries and to have a clearer view on the future.
This is not only an important moment for financial markets but also an opportunity. Firstly, because financial markets have already priced in some bad news from G20, and secondly because communication between the two countries has already started with some positive notes.
Larry Kudlow, the US National Economic Council Director (or also, more simply, Trump’s economic adviser), has said that there is a "good possibility" the two countries can reach some sort of trade agreement over the weekend. This caused major Asiatic indexes to jump more than 1% on Wednesday and pushed the Japanese yen, which typically rises in times of uncertainty, lower. However, Kudlow has also stated that it was up to Chinese President Xi Jinping to “step up and come up with new ideas” to break the deadlock at Friday’s G20 summit in Argentina and that until now “We can’t find much change in their approach”. Among other things, the US have asked Beijing to purchase more US products to narrow the trade gap and to recognize intellectual property theft, propositions seen as very unrealistic by Beijing.
On the other hand, Mr. Liu He, China’s vice-premier, said that “The development of the Chinese economy in the future can only be guaranteed on the basis of even greater openness,” and that “China’s door of opening up will open even wider”. Promising declarations but the path to a deal remains unclear.
The last element to take into consideration is Mr. Trump himself. The US president has announced further tariffs on China, but we all know how unpredictable he is. Mr. Trump has never neglected his estimate for the Chinese president, so who knows if its declarations could just change in a few hours, as it happened with North Korea (causing a positive shift in the Chinese stock market)?
Edoardo Celani
This opportunity arises now because on the 30th of November the G20 summit will be held in Buenos Aires and this will be an excellent excuse for the presidents of the US and of China to discuss. Even though very probably a complete deal will not be drafted, it will be an occasion for investors to understand better the relation between the two countries and to have a clearer view on the future.
This is not only an important moment for financial markets but also an opportunity. Firstly, because financial markets have already priced in some bad news from G20, and secondly because communication between the two countries has already started with some positive notes.
Larry Kudlow, the US National Economic Council Director (or also, more simply, Trump’s economic adviser), has said that there is a "good possibility" the two countries can reach some sort of trade agreement over the weekend. This caused major Asiatic indexes to jump more than 1% on Wednesday and pushed the Japanese yen, which typically rises in times of uncertainty, lower. However, Kudlow has also stated that it was up to Chinese President Xi Jinping to “step up and come up with new ideas” to break the deadlock at Friday’s G20 summit in Argentina and that until now “We can’t find much change in their approach”. Among other things, the US have asked Beijing to purchase more US products to narrow the trade gap and to recognize intellectual property theft, propositions seen as very unrealistic by Beijing.
On the other hand, Mr. Liu He, China’s vice-premier, said that “The development of the Chinese economy in the future can only be guaranteed on the basis of even greater openness,” and that “China’s door of opening up will open even wider”. Promising declarations but the path to a deal remains unclear.
The last element to take into consideration is Mr. Trump himself. The US president has announced further tariffs on China, but we all know how unpredictable he is. Mr. Trump has never neglected his estimate for the Chinese president, so who knows if its declarations could just change in a few hours, as it happened with North Korea (causing a positive shift in the Chinese stock market)?
Edoardo Celani