Xi-Trump bromance hopes spring eternal for China bulls

Some China bullishness is beginning to re-emerge from the shadows as hopes for a trade breakthrough build. But buyers beware.
Xi-Trump bromance hopes spring eternal for China bulls

Fears of a renewed Sino-US flareup were in evidence on Thursday as public markets again slumped, but for some analysts and investors ruminating over the previous weekend's trade-war truce, things are starting to look up for Chinese assets.

What that reveals, arguably, is just how eager some market participants are to turn bullish on China once more.

Causing anxiety on Thursday was news the chief financial officer of Huawei Technologies had been arrested in Canada and could yet be extradited to the US over the possible violation of US trade sanctions against Iran.

But that news -- rather than the arrest, which also occurred at the weekend -- was after a 90-day truce was announced by the US and China at the G20 summit to allow for bilateral talks, effectively removing the threat of stinging tariff increases on January 1. The US has already imposed a 10% tariff on up to $250 billion of Chinese goods but was threatening to increase that to 25% in the new year, spurring an inevitable Chinese retaliation.

In the aftermath of the truce announcement, Ronald Chan, chief investment officer for equities Asia ex-Japan at Manulife Asset Management, said he believed markets had probably seen the peak in trade frictions between the two countries.

“Markets and sectors that have been most impacted should respond positively to the outcome in the near term, in particular, China A-shares, North Asian bourses and exporters,” he said in an investor update published on Monday.

He was not alone.
“I'm mildly positive for stocks in China, with the uncertainties about trade war fading away,” one senior executive at a large Chinese insurance company said on Wednesday on condition of anonymity. 
“I think the two sides, Xi Jinping and Trump, are going to go back to the internal issues. Eventually, in 90 days, I think there will be an agreement,” the executive said.

A recent roundup of market views -- before the 90-day trade truce was announced -- also hints at a growing latent buying interest in Chinese stocks from investors currently on the sidelines. The Shanghai Shenzhen CSI 300 Index of mainland Chinese shares is down more than 20% so far this year, after all.

Giving them some succour this week was Jack Siu, a senior Asia-Pacific investment strategist at Credit Suisse.  

"Despite short-term volatility, we expect more upside for China equities in the coming weeks,” he told FinanceAsia.“With the ceasefire outcome of the Trump-Xi meeting which we anticipated, we remain positive on H-shares, the shares of Chinese companies listed in Hong Kong.”

In the case of debt markets, Credit Suisse expects five-year Chinese government bonds to yield 3.4% over the next three months and 3.3% in 12 months' time, implying some downside on prices as economic optimism improves. But if the Trump-Xi meeting had gone badly, the corresponding numbers would have been 3.1% and 3.0%, it said. 

Also in a bullish frame of mind was UBS Securities strategist Ting Gao: “We believe the outcomes of this productive meeting can offer unlimited possibilities for both the US and China, which is ahead of market expectations,"  he said in a report, also on Monday.  

Given how markets are performing this week though, maybe it's the bulls that are getting ahead of themselves.


In a tweet on Tuesday, Trump hinted that he was willing to extend the 90-day truce, if needed, to successfully conclude negotiations with China, which arguably underlines the idea that the dispute has entered a more constructive, drawn-out phase that puts paid to a worst-case scenario of an all-out trade war. 

But perhaps looking for that essential trade trigger that spurs a rush of capital back into China and lifts all asset prices is actually a false quest because the underlying issues are just too complicated. 

As Michael Taylor, managing director of credit strategy and standards at Moody’s, put it on Thursday: “Despite the recent temporary de-escalation of hostilities, we expect the relationship between the world's two largest economies to remain contentious. Narrow agreements and modest concessions will not bridge the wide gulf in their economic, political and strategic interests.”
It's a point echoed by Samson Lee, head of financial products at BOC International: "The immediate positive outcome of the meeting between Trump and Xi will cause investors to buy more bonds and equities in the global markets ... However, issues between China and the US will not go away, so that will create uncertainty for capital markets around the world."
The new Huawei controversy is a case in point insofar as, when you sweep away the specifics of the alleged violations, reminds us of the growing battle to own the future through the development of new technologies. As a recent FinanceAsia article highlights, ensuring the cyber-security of supply chains between the two rival economic superpowers has probably never been more important. 
US politicians have already accused Chinese equipment makers like Huawei, specifically, of being a security threat to US interests. The British government is also under pressure to exclude Huawei from the UK's new 5G telecoms system (foreign companies are excluded from China's 5G).
So it seems, to paraphrase a commentary on Monday by London think tank Enodo Economics, that the Sino-US trade war could well morph into a tech war in 2019, highlighting how market-moving US-China tensions could be with us for a considerable time longer.
Han Shih Toh, Ernest Chan, Jolie Ho and Indira Vergis all contributed to this article.


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