Vice President Mike Pence, a man who I, until today day, believed to be an octogenarian incapable of signaling highway lane changes and, even less so, use social media, announced on Twitter (TWTR) that President Trump and China have not been seeing eye to eye. Pence said, in a tweet, that “China is meddling in American democracy.” Pence’s tweet goes on to one that “Trump said just last week, we have ‘found that China has been attempting to interfere in our upcoming midterm election.”
Following this tweet, the American market has yet to react on any real measurable scale, but this is subject to change because Monday morning, Shanghai equity markets dropped significantly. As of Monday morning, indexes in Shanghai and Shenzhen, and Hong Kong are down
- Shangahi (SHCOMP) dropped 3.72% to $2716.51 per share, its worse close since Nov. 27, 2014
- Shenzhen (SZSE) dropped 3.83% to $8,060.83 per share
- Hong Kong (HKXCY) dropped 1.49% to $26.78 per share
These decreases follow President Trump’s plans to announce new tariffs, with China immediately reacting by vowing to “retaliate to any new U.S. tariff action, and may decline to participate in further talks if new tariffs are announced,” according to Reuters. All tariffs and resulting reactions between the US and China are all factors playing out in the long-drawn trade war between the two countries.
Fiona Cincotta, a senior market analyst at City Index, gave her take on why Chinese markets reacted the way they did:
“Chinese investors were primarily reacting to a week’s worth of news and they have a lot to digest, including the prospect of a slowing and maturing economy and a bubbling trade dispute with the United States.”
– Fiona Cincotta, Senior Market Analyst, City Index
On Sunday, the People’s Bank of China (PBOC) officially announced a 100 basis points cut to the reserve requirement ratio (RRR) for most banks, resulting in an injection of 750 billion yuan ($109.2 billion) in cash into the banking systems, according to CNBC. The PBOC’s decision to create a neutral monetary policy comes from their abstention of economic stimulation, be positive or negative. The more “accommodative” policy allows for businesses and households to borrow more easily, this lifting the economy. This move comes after “Golden Week,” China’s week-long national day holiday, which saw the closures of Chinese markets for the duration of the holiday.
During this time, CNBC reports that Hong Kong stocks (HKXCY) fell for “four consecutive days as investors grew increasingly concerned that the impact of the trade war is starting to show.”
“China is a bit nervous. There are so many headwinds towards it now and I think it’s right to prepare for the worst and expect the best,” Gareth Nicholson,. Hard of fixed income at Bank of Singapore, told CNBC’s “The Rundown” on Monday.
Financial markets and institutions in China are reacting to tariff threats from President Trump by taking the initiative to protect their economy, while financial analysts in US markets are suggesting that the suggested tariffs are the “bee’s knees.” While the popular opinion is that China is poised to be the next global superpower, CNBC’s Jim Cramer thinks otherwise. He believes that “the president is right” and he thinks tariffs against the Chinese are a smart move, given that the Chinese are “far more of a paper tiger than people realize.” For your viewing pleasure, the term “paper tiger” is used to describe something that seems very scary or frightening, like dads wearing socks with crocks, but is actually ineffectual, like dads wearing socks with Crocs.
There is another school of thought which suggests that the volatility of Chinese markets cannot be used to indicate the strength of the Chinese economy, as a whole, because, according to CNBC, households in China have very little of their own wealth invested in equity markets.
Only time will tell as to whether President Trump enacts these tariffs against China and, if he does, how they will alter the health of the Chinese economy. If the recent drop in major Chinese indexes is any indication of what is to come for Chinese markets, US investors may want to reconsider investing overseas.
