Republican presidential candidate Donald Trump speaks at a campaign rally at Charleston Area Convention Centre, in North Charleston, South Carolina, on February 14. Photo: AP
Opinion
Macroscope
by Nicholas Spiro
Macroscope
by Nicholas Spiro
China’s stock market has little to fear from Trump presidency – unlike the US
While Donald Trump has taken credit for the fall in Chinese stocks, the truth is that domestic, not external, factors are at play in China
Instead, the focus should be on Trump’s threat to US democracy, the rule of law and the credibility of American economic policy should he be re-elected
Equity investors in China have plenty of reasons to worry, so many that it is unclear what the most important factor is in the rout that has wiped some US$7 trillion off the market value of shares in mainland China and Hong Kong since the early 2021 peak.
The longer the slump persists – speculation that Beijing is readying more forceful measures to prop up the stock market sparked a rally but have been met with scepticism – the more uncertainty there is over the principal driver of the sell-off.
During the past month, more attention has been paid to tensions between the United States and China. In a report published on February 2, Goldman Sachs said one of the most frequently asked questions from its clients in Beijing and Shanghai – who are mostly mutual funds, private equity funds and asset managers – was what a Donald Trump victory in the US presidential election in November would mean for China.
This is not surprising, given Trump’s threat to revoke “most favoured nation” trade status for China and impose a flat 60 per cent tariff on all Chinese imports. According to Bloomberg, that would slash the proportion of US imports coming from China – the largest US trade partner in the past two decades – to almost zero, inflicting the most damage on China’s electronics and textile industries.
True to form, Trump boasted last month that the reason Chinese stocks were falling was because he won the Iowa caucuses by a wide margin, strengthening his grip on the Republican Party and reinforcing the perception among some pundits that he is the favourite to win the election.
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Trump clinches Iowa caucus as he seeks third consecutive nomination for US presidential election
Trump clinches Iowa caucus as he seeks third consecutive nomination for US presidential election
Currency traders are starting to price in US political risk. A measure of the cost to hedge the offshore yuan that covers the election – the spread, or gap, between nine-month implied volatility in the offshore yuan and its six-month equivalent – has shot up to its highest level since 2017 relative to comparable periods, according to Bloomberg data.
Should all this be taken as a sign that the prospect of a second Trump term is undermining sentiment towards China? This would be a gross misreading of the determinants of Chinese asset prices. It is domestic, not external, factors that are at play.
If markets were worried about Trump’s return to the White House, the benchmark S&P 500 index would not have hit a record high last week. The overriding factor behind the plunge in Chinese stocks is the loss of confidence in Beijing’s management of the economy. While the exact cause of this “trust deficit”, as Goldman Sachs calls it, is the subject of intense debate, and the best way to restore confidence remains unclear, the problems are incontestably home-grown.
In Bank of America’s latest global fund manager survey, published on Tuesday, 33 per cent of respondents said more aggressive fiscal support for the property market would convince them to increase their exposure to Chinese equities. However, 22 per cent said a “structural underweight” position in Chinese stocks was the correct allocation. Tellingly, only 14 per cent said an easing in US-China tensions would encourage them to increase their allocation to China.
Moreover, Trump does not have a monopoly on the strong-on-China stance. US President Joe Biden kept in place the tariffs imposed by his predecessor and showed his hawkish side on China early on in his presidency. While Republicans and Democrats agree on little, both compete over who can be tougher on China.
Chinese stocks fared well under Trump, keeping pace with the S&P 500 and posting gains between 2017 and 2020. An online survey of Chinese citizens carried out by the Grandview Institution, a Beijing-based think tank, revealed that 60 per cent of respondents wanted Trump to win the election.
The reason, it appears, had little to do with his policies and was instead based on the assumption that a second Trump term would plunge the US into chaos, potentially benefiting China.
What is clear is that Trump poses a far bigger threat to US democracy, the rule of law and the credibility of American economic policy, including the autonomy of the US Federal Reserve, the world’s most important central bank.
Although a deepening US-China rift is a given if Trump returns to the White House, it is the transatlantic alliance that would suffer the most. Trump’s mind-bogglingly reckless invitation to Russia to attack Nato members that do not spend enough on defence is a taste of things to come if he is elected president again.
Some prominent corporate leaders and investors might claim Trump’s bark is worse than his bite. Not only is this an egregious misreading of a man who is under indictment – in addition to seeking to overturn the 2020 election, Trump is campaigning on a pledge to dismantle the civil service and replace it with loyalists – it reveals a dangerous level of complacency about the US election.
In the Bank of America survey, the election did not even figure among the top four “tail risks” in markets. China, by contrast, barely made it into the top six. There is no reason Wall Street should be fretting about China, given that its problems do not pose a systemic threat to the global economy. The US election, on the other hand, is hugely consequential.
Trump might hold little sway over China’s markets, but the chance that he will win the election poses a grave threat to the US and the rest of the world.
