Breaking: Following the publication of this story, the US officially announced it will raise tariffs on Chinese goods on May 10, citing an “erosion of commitments by China.” US Trade Representative Robert Lighthizer told reporters, however, that trade talks will continue later this week.
The Trump dump in equities is a buying opportunity for Chinese stocks, especially for financials and domestically-oriented tech companies unlikely to suffer a sales drop even if the US imposes higher tariffs on Chinese goods.
The Chinese financials ETF (ticker: CHIX) was down 4% on the day Monday, and offers exposure to large insurers and banks, for example. But I don’t think investors will go wrong with any of the leading Chinese investment vehicles, including ASHR, the ETF that tracks CSI 300 A-shares (-5% on the day).
US equities opened down 2% and regained almost all of that loss in the course of the day, as investors struggled to make sense of President Trump’s threat to impose 25% tariffs on a wide range of Chinese imports. The bounce-back in the US market should lend a strong tone to the Asia open.
It isn’t clear how or why the president launched the tweet that sank a thousand stocks on Sunday. China isn’t responding to the provocation; on the contrary, trade negotiators led by Vice-Premier Liu He are still preparing to leave for Washington, according to the Chinese government, and Chinese-language media suppressed mention of the Trump tweets altogether.
China, meanwhile, has demonstrated that it can expand domestic demand to replace lost exports if necessary. As I pointed out on April 5, China’s exports have fallen as a percent of its GDP from 36% in 2006 to 18% today.
A combination of monetary ease, tax cuts, and infrastructure spending have buoyed the forward-looking measures of Chinese growth during the past six months while US growth has slowed. The chart below shows the Markit Composite Purchasing Managers’ Index (goods plus services) has fallen for the US and risen for China during the past several months.
I explained yesterday why recent GDP and employment data weren’t as strong as the headline numbers suggested. The purchasing managers’ index shows the percentage of expanding firms, not the rate of economic growth (a bit above 6% in China, and a bit below 2% in the US, by my reckoning).
The analyst consensus forecasts a 20% increase in earnings for the Shenzhen 300 Index during 2019, versus a 10% increase for the S&P 500.
It is far from clear what President Trump has in mind. It’s well and good to threaten China with tariffs, but if he actually were to impose such tariffs, the US consumer would have to pay them. An association of apparel retailers estimated that a family of four would pay an additional $500 a year for clothing alone under the threatened tariff hikes. Cheap consumer electronics, which Americans have come to regard as their birthright, would cost a good deal more. The price of industrial components for US manufacturers already has risen under the existing tariffs, and that helps explain why manufacturing output has shrunk during the last three months.
Trump might believe that he can bully Beijing into accepting a one-sided enforcement mechanism under which the United States is allowed to impose retaliatory tariffs in case of a dispute while China is not. That simply isn’t going to happen. Nor will China agree to stop subsidizing industries. Asians have subsidized capital-intensive industries since Japan’s 1868 Meiji Restoration, and that won’t change any time soon.
Enforcement of claims to intellectual property is a cosmetic issue, not a substantive one. “Forced technology transfers” to China are for the most part mythical. The reality is that America’s largest technology companies from Intel to Boeing are lining up to hand their technology to China in the context of their strategy for China’s domestic market.
If the United States doesn’t want China to get American technology, it should impose export controls on US companies, as former Pentagon official and frequent Asia Times contributor Stephen Bryen has proposed.
The emerging consensus is that Trump isn’t fooling anyone. At the end of the day he wants a deal as much as do the Chinese, and “Art of the Deal” negotiating tactics are a distraction from the main event.