Aura Global Insights – Issue No. 21
CHINA SYNDROME or NOT?
Chinese stocks have significantly underperformed the global benchmark, as have Hong Kong stocks in response to escalating local protests. Also, a sharp decline in the Chinese Yuan and the U.S. labelling China as a currency manipulator have alarmed global investors. The anxiety was further compounded by President Trump’s threat to further hike U.S. import tariffs on more Chinese products at the beginning of September.
As evidenced this week, the Yuan depreciation was the weakest level for the currency since the global financial crisis (GFC), and the decline has clearly occurred in response to last week’s tariff threat by the U.S. President. What is critical is that any decline in the Chinese exchange rate must be measured in order to stabilise domestic earnings as well as the economy. This is particularly important as Chinese growth has slowed over the last few months.
Whilst the short-term outlook remains volatile for Chinese assets, we believe the recent events will force policymakers, both in China and the U.S., to address the economic weakness to avoid a fully blown tariff war and material economic dislocation.
We believe a China Syndrome type event is unlikely and expect an eventual reflationary response from Chinese policymakers to boost domestic demand enough to offset the drag from weak external demand. An example of this may be through domestic or local bond issuance.
Bottom Line: With respect to the potential lag effect of any stimulus by Chinese policymakers, the local market may trend lower in the near-term, however the likelihood of a cyclical pick-up must not be underestimated which would bring some end of year cheer to fatigued investors.
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