US Protectionism, what to expect from China?
22 March 2018
By Fabrice Jacob, CEO of JK Capital Management Ltd., a La Française group member company
The threat of a trade war, launched by the United States against pretty much all its trading partners, has triggered fears for a steep correction of global financial markets. Without being named, China appears to be the prime target of the White House. China exported USD506bn worth of goods to the US in 2017, resulting in a USD375bn net goods surplus. After imposing tariffs on solar panels, washing machines, aluminium and steel that only account for USD6bn of exports to the US, the White House is now considering another train of tariffs applying this time to USD60bn worth of exports. President Trump has already said that he would go after telecommunication equipment, which may include laptops and smartphones.
Will China retaliate? The answer is yes, in their-own way. They definitely have the means to do it. Just look at how China has behaved in recent history with Korea and Japan. The Chinese government may simply ask industrialists and consumers to stop buying American products, using its powerful propaganda machine, coupled with the very strong sense of patriotism that exists among the Chinese population. That being said, we reckon China will be much more careful handling the Sino-US situation simply because the US is not Japan or South Korea. We expect China to react. We will not know what is going on behind the scene, but for sure, the Chinese government will communicate with President Trump to avoid a full-blown trade war.
Would the risk of a trade war create downside risks for Chinese stocks? Yes, in the short-term, avoiding large Chinese exporters to the US could make sense, but it is important to wait for details to be announced before jumping to conclusions. In the meantime, technology sectors focused on internal demand could offer great prospects. The same goes for discretionary consumer names pulled by rising salaries, for e-commerce players, for insurance companies benefitting from an under-penetration of savings products, among others. In the medium to long-term though, we would like to argue that one should not miss the multi-year big picture: a re-rating of a Chinese market that has suffered for years from a discount factor related to structural risks within the economy (over-leverage of state-owned enterprises, overcapacities in commodities, property “bubble” to name a few). As China has started to tackle these risks over the past few years and will continue to focus on them in the near future, we anticipate a structural re-rating driven by improved investor sentiment based on higher quality yet sustainable Chinese growth.
This document is intended for relevant professional and qualified investors only and is not for retail use.
This document is provided for informational / educational purposes only and is not intended to be, nor should it be, relied upon as a forecast, research or investment advice, and does not in any case constitute advice, an offer, a solicitation or recommendation to invest in specific investments or to adopt any investment strategy. Where La Française group has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Issued outside of Hong Kong by La Française AM Finance Services, home office 128, boulevard Raspail, 75006 Paris, France, regulated by the “Autorité de Contrôle Prudentiel” as investment services provider under the number 18673 X, affiliate of La Française. Issued within Hong Kong by JK Capital Management Ltd., a La Française group member company, is licensed and regulated by the Hong Kong Securities and Futures Commission.