Dear emerging markets fund manager: If you think the trade war is ending this year, I want my money back.
China is returning to its subsidy playbook and plans on subsidizing companies hit by tariffs. The latest recipient is tech companies, according to an article in the South China Morning Post on Friday.
State subsidies to favored industries were a key issue in trade negotiations. China has no interest in rolling them back. They’re not even signaling a willingness to try. Any Memorial Day happy talk tweets by Trump over the weekend should be glossed over and ignored. We are in a “no deal” situation now.
What makes it worse is the fact that Washington is throwing everything plus the kitchen sink at Beijing.
Here’s a list of anti-China measures coming from Democrats and Republicans. Some of them are old, but are being resuscitated as the trade war heats up.
- Expanding the list of Chinese companies on the Department of Commerce’s Entity List to includeSen. Marco Rubio, R-Fla. has a bill that seeks to sanction China for its treatment of a Muslim minority group in Western China. (AP Photo/Carolyn Kaster) ASSOCIATED PRESSfive companies manufacturing video surveillance equipment. Huawei was added May 15th.
- A bipartisan bill (H.R. 2483) in Congress to sanction Chinese producers of Fentanyl.
- A Department of Commerce proposal on May 23 seeks to impose tariffs on countries that undervalue their currencies.
- China hawk Marco Rubio is reportedly going to reintroduce 2017 legislation (S. 659) to seize assets of anyone involved in “actions or policies that threaten the peace, security or stability” of contested areas of the South China Sea.
“The U.S. strategy is intended to signal to allies and multinational corporates that ‘it’s on’,” says Brian McCarthy, chief strategist for Macrolens in Stamford, Conn. “The message to allies in Europe and Asia is that – like it or not – it’s time to pick a side. And to corporates with supply chain vulnerabilities in China – like it or not – it’s time to move.”
Besides bills and threats of ending the Treasury Department’s longstanding position that China is not manipulating its currency, the U.S. Trade Representative is going over the legalities of slapping 25% tariffs on another $300 billion of Chinese imports.
Chinese President Xi Jinping, hoping for a Democrat in 2021. But not staunch free trade critic Bernie Sanders. Preferably Joe Biden or even anti-tariff man Peter Buttigieg. (Jason Lee/Pool Photo via AP)ASSOCIATED PRESS
If the yuan sinks to 7.50, “their tariffs go to 50%,” says Michael Every, head of financial markets research for Rabobank in Hong Kong. Overly bearish Rabobank sees the yuan depreciating to 8.50 against the dollar to compensate for tariffs.
The yuan is currently trading at 6.89 to the dollar.
Official China is likely to keep with its nationalist rhetoric at home, while growling here and there at what they now see as anti-competitive capitalists in the West. The G-20 meetings are next month in Osaka, so Xi Jinping might not want to ruffle feathers ahead of that date.
As it is, he now has a U.K. chip maker, ARM Holdings, signing onto the Department of Commerce’s restrictions on Huawei. A Chinese diplomat in London got so fired up about ARM joining forces with the Americans that he publicly threatened retribution.
(There goes London’s luxury real estate market.)
Investors should not expect headlines to improve on the trade variable over the weekend. Long-term investors might consider buying the dips in U.S. equity, with shorter and medium-term investors selling out of the China A-shares market now that it’s still outperforming the MSCI Emerging Markets Index.
There is also some chatter among contrarian investors that Washington could pressure MSCI for its inclusion of the A-shares in its emerging markets index. Anyone holding an emerging market equity fund benchmarked to that index is holding Shanghai and Shenzhen listed stocks, known as the A-shares.
Barclays added China to its Global Aggregate Bond Index this year. Global fixed income investors in the U.S. buying funds benchmarked to that index are now the proud owners of Chinese government debt. Photographer: Michael Nagle/Bloomberg © 2019 BLOOMBERG FINANCE LP
The same may hold for the Barclays-Bloomberg Global Bond Aggregate Index, which recently added Chinese sovereigns and some policy banks to its index. Any global fixed income fund benchmarked to that index holds China debt.
China’s stock closed mixed and with low volume on Friday, while the X-Trackers China CSI-300 (ASHR) is down again.
Trump’s late afternoon press conference yesterday saying that Huawei could be part of a trade deal and a meeting at the G-20 between him and President Xi would occur enabled China’s market to duck and cover. But that’s not a trend. China faces serious headwinds.
For ASHR investors who have been struggling to beat the benchmark over the last year and are up only 1% in the last two, the big hope is for more stimulus and corporate-saving subsidies from Beijing (which Washington abhors).
Best trade in emerging markets is going short a trade war settlement with China; whatever it takes. Photographer: Michael Nagle/Bloomberg © 2019 BLOOMBERG FINANCE LP
“The primary driver of U.S. and global equity performance over the last decade have been technology stocks. Could the trade war’s evolution into a technology war lead to a value comeback?” Brendan Ahern, CIO of KraneShares, a China ETF company in New York, asks out loud.
A bloodletting in China’s stock might make it a cheap buy for long-termers, but KraneShares’ China Internet and E-Commerce (KWEB) fund is down 15% from its May 3rd high. Over the last 12 months, China’s tech has done them no favors either, down 32%.
ASHR is down 45% since its all-time high reached May 1, 2015. It reached that height on speculation that MSCI would include the A-shares in its mighty emerging markets index. When they did not, Shanghai and Shenzhen crashed and have not recovered since.
ASHR is up 19% from its all-time low on Feb 1, 2016. Over that same period, the MSCI China, which includes a lot of China banks and Hong Kong-listed shares, is up 54%, beating the S&P 500’s 50% gain.
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