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By Stuart Allsopp
SINGAPORE (MNI) - The recovery in China assets is gathering pace and this
week's equity market rally has provided support for a continued rise in both
Chinese interest rate swaps and the yuan. A sustainable rally now appears to be
in the offing.
MNI have written on several occasions over the past two months in China
Money Week about the potential for a recovery in China assets, first calling for
the end of the 'great fall of China' back in August (see 'MNI China Money Week:
Markets Bounce Back As Yuan Steadies' 0943GMT, Aug 10). Following the positive
China market reaction to the U.S. tariff action earlier this week, we noted a
potential case of 'sell the rumour, buy the news'. Since then the rally has
accelerated, suggesting the recovery is gaining steam.
Since the trade war begun to heat up earlier this year, the divergence in
equity prices between the U.S. and China has been notable, with the bull run on
Wall Street giving U.S. President Donald Trump the upper hand in the trade war.
Beijing's relatively measured response, together with the commitment to not
devalue the yuan and maintain prudent monetary policy, has reduced the potential
for a race-to-the-bottom scenario where the PBOC looks to combat any external
slowdown with easy money and currency weakness, which could further aggravate
trade tensions with the U.S.
The huge discount that has opened up between U.S. and Chinese stocks leaves
the latter well placed. A continued rally in U.S. stocks would give room for
China to play catch up after month of underperformance. Meanwhile, should U.S.
stocks start to give back gains, this could temper President Trump's willingness
to pursue further protectionist policies.
China's equity market likely holds the key to a recovery in Chinese assets
more broadly, and there is potential for a virtuous cycle. Continued equity
gains would support the rally in interest rate swaps, which is needed to help
the yuan recover. A stronger yuan, meanwhile, would support inflows into local
equity markets given the positive signal this would send regarding the economy.
--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com