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It’s Too Late for China to Rally if Biden-Xi Call Ends Tariffs
(Bloomberg) -- Tariffs on Chinese goods by the US hit markets with shock waves in 2018, but as they look to be rolled back, the move may barely make a ripple.
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Expectation is building that President Joe Biden may scrap some of the tariffs imposed on roughly $350 billion in Chinese imports following a highly-anticipated conversation with Chinese leader Xi Jinping on Thursday.
A reversal of Trump-era tariffs should help improve the strained ties between the world’s two-biggest economies. But with other global headwinds building from higher US interest rates to a still-raging pandemic, strategists say any positive impact on Chinese markets and beyond will be modest.
That would be a sharp contrast to 2018, when a trade war with the US pushed Chinese stock benchmarks into bear markets and triggered a slump in the yuan, as traders shuddered at the thought of an economic slowdown from higher tariffs and any further reprisals from the Trump administration.
Here’s a look at potential market responses if tariffs are reduced:
Equities
Traders say a potential rollback of US tariffs can add limited upside momentum to Chinese stocks, as the market has become more jaded toward incremental shifts in the bilateral relation.
Despite brewing talks of a reduction, the benchmark CSI 300 Index is down nearly 6% in July as investors focus on the nation’s Covid restrictions and the drag from the troubled property sector.
The most optimistic estimate is a boost to China exports by 1.8%, but the impact would vary vastly across industries, according to analysts at Topsperity Securities Co.
Others say it will be mostly small cap stocks to be affected. An analysis from Haitong Securities Co. based on corporate statements showed that while a total of 130 listed firms have said they were impacted from the 2018 levies, three quarters of them have a market cap of under 10 billion yuan ($1.5 billion).
Yuan
The prospect of yuan appreciation thanks to additional gains in Chinese exports is limited, as shipments will be more affected by the risk of a looming global recession. The onshore yuan has weakened around 6% versus the dollar this year.
“US tariffs haven’t hurt China’s trade that badly. Withdrawing them, therefore, won’t provide that big of a benefit,” wrote David Qu, an economist at Bloomberg Economics. “This is especially true now that demand for Chinese products is weakening so dramatically.”
Driving the yuan’s performance this year has been a divergence with the US monetary policy, as the Federal Reserve hiked aggressively while the People’s Bank of China kept rates low.
The likelihood of large yuan appreciation “driven by improving US-China trade relations is low,” wrote Barclays Plc analysts led by Jayati Bharadwaj earlier this month.
An entire removal of tariffs will add 0.3 percentage points to China’s gross domestic product, resulting in a 1.8% increase in the yuan’s real effective exchange rate, but the actual currency impact could be smaller, they wrote.
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