MNI CHINA MONEY WEEK: Chinese Whispers On Talks Burn Stocks

     LONDON (MNI) - Both the Shanghai Composite and CSI 300 have retreated into

technical correction territory in recent weeks, aided by an escalation in trade

war worry as the latest round of U.S.-China trade talks saw only a souring of

relations between the two superpowers.

     For talks to progress smoothly, China has laid down its three red lines for

the negotiations: 1) U.S. is to remove all additional tariffs; 2) Set Chinese

purchases of U.S. goods targets in line with real demand; 3) Ensure that the

text of the trade deal is balanced to ensure the dignity of both nations.

     Although no firm date is tabled for the next round of discussions, talks

are set to continue at some point, with President Trump even playing down his

recent rhetoric to suggest a deal "much faster than people think!"

     --CHINA HARDENING APPROACH

     China is still involved in the talks process, but Beijing has certainly

hardened its stance, with the "Chinese whispers" suggesting some are seemingly

growing tired of Trump's approach.

     The latest instance of a firmer stance came from Taoran Notes, a WeChat

blog run by the state-owned Economic Daily, suggesting China may have no

interest in continuing trade talks with the U.S. for now, as it sees little

"sincerity" in U.S. President Trump's recent approach to trade matters.

     The blog went on to note that if the U.S. doesn't make any new moves

showing sincerity then it is meaningless for its officials to come to China to

hold trade talks.

     There are other factors weighing on China markets beyond the trade talks,

including increased worry surrounding corporate defaults, a very disappointing

corporate earnings season and cooling macro data for April.

     --OUTFLOWS

     Flows have reflected this, with the Shanghai-Hong Kong Stock connect

pointing to money streaming out of Chinese equities on every trading day bar one

so far in May, including one instance of record daily outbound turnover.

     These outflows will likely accelerate if USD/CNH or USD/CNY broke above

7.00, triggering a broader worry and exerting pressure on the Chinese current

account. Chinese policymakers remain are aware of the possibility this could

happen, with many commentators speculating the currency would not be allowed to

break above 7, at least not in a disorderly fashion.

     Wang Haifeng, director of International Trade and Investment at the Chinese

Academy of Macroeconomic Research, run by the National Development and Reform

Commission, told MNI that "Beijing will not weaponize the yuan in its trade war

with the U.S. despite Washington's latest tariff hike."

     Such thoughts have also been reflected in the recent PBOC fixings, with the

central bank seemingly deploying the counter cyclical factor in its daily

mid-point setting on several occasions, effectively smoothing the yuan's fall,

further widening the CNH/CNY differential in the process.

     Looking ahead, there is a chance of targeted stimulus in an attempt to

offset the impact of the deepening trade war, although such policy tweaks seem

to be having less of an impact on investor sentiment than in times gone by.

Maybe China will have to open the liquidity floodgates as a last resort,

although every effort to prevent such measures being adopted is likely.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44 203 865 380; email: anthony.barton@marketnews.com

[TOPICS: M$A$$$,M$Q$$$,M$$FI$,MN$FI$,MN$FX$]