MNI CHINA MONEY WEEK: Sell The Rumour, Buy The Trade War?

--Value Seen In China Stocks At Near Record Valuation Discount

By Stuart Allsopp

     SINGAPORE (MNI) - Based on the performance of financial markets since

President Donald Trump delivered the opening salvo in the U.S.-China trade war

back in March, the U.S. appears to have already won. U.S. stocks, U.S. interest

rates, and the greenback have outperformed China assets, as stocks, interest

rate expectations and the yuan have all plunged. 

     China's CSI 300 has underperformed the S&P500 by 17% since mid-March, while

1-year interest rate swaps have moved 90bps in the U.S.'s favour, and the dollar

has risen 5% against the yuan. This week alone has seen China's 1-year swaps

fall yet another 20bps hinting at an increasingly dovish policy stance by the

PBOC.

     Markets appear to see the Chinese economy, with its higher degree of trade

openness and large bilateral trade surplus, as far less insulated than the US

from a potential full-scale trade war. In the short term this may be the case,

as China's GDP takes a greater hit due to a likely drop in exports.

     However, over the longer term, as long as China's economy continues to

liberalise and engage in free trade with the rest of the world, as it appears to

be doing with the continued advancement of Regional Comprehensive Economic

Partnership (RCEP) talks, other markets for Chinese products, both domestic and

foreign, will open up. On the other hand, the U.S. will face the arduous task of

having to rebuild its industrial capacity and trying to compete in manufacturing

industries where it has a comparative disadvantage, while paying a higher price

for imports.

     --STOCKS OVER YUAN

     With this in mind, and with Chinese monetary policy looking increasingly

dovish relative to the U.S. due to the short-term impact of the trade war, China

stocks are likely to reverse their underperformance, supported by a near-record

valuation discount. 

     The yuan, on the other hand, continues to face medium-term downside risks

as MNI highlighted on June 8 (see 'MonPol Divergence With US To Widen Further')

owing to the ongoing divergence in monetary policy between China and the US.

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

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

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