Since President Trump’s inauguration in January of this year, the DOW Jones industrial average, the most basic metric for watching the American stock market, has increase by about 5%. Just a few weeks ago, the average broke 21,000, signaling an all-time high. While financial experts were initially worried by what a Trump presidency would do to the American economy, the earliest signs have been positive, despite a short lived downturn after the failure of the American Health Care Act.
Turning to China, the story has been very different. In the first few months of the Trump Presidency, the Chinese markets have taken a sharp downturn. The Shanghai Composite Index, a similar metric for the Chinese exchange, has fallen about 5.2% since peaking shortly after the election. While uncertainty in the Chinese manufacturing sector is partly to blame, experts in Asian markets both in the US and in China also cite Trump’s tough talk on trade as a potential cause for the downturn. Trump has repeatedly discussed a desire to level the playing field and crack down on alleged unfair dealings by the Chinese government. Similar effects have been seen in Mexico, though not as pronounced. Manufacturers, particularly those on the unsophisticated side as described by Hessler in his travels do not totally understand the political reality of Trump’s campaign positions and perhaps overreact by predicting a greater effect. Much of this rhetoric has been incredibly vague using words like “cheaters” and “play fair.” While it’s easy to infer by the downturn that investors fear rash action on this rhetoric, what exactly can Trump do? What do Chinese manufacturers have to fear?
An all-out trade war would appear to be the worst case scenario, however even the most pessimistic Chinese investor sees this as unlikely. A more likely outcome of this tough talk is smaller actions that subtly cut into the profit margins of Chinese businesses. A previous post discussed the likelihood of tariffs on Chinese imports. During the campaign, Trump talked up the notion of a 45% tariff on imports to “level the playing field.” Though this figure itself is not totally feasible, it has terrified Chinese companies with heavy reliance on exports, injecting uncertainty into the markets. Domestically, we know that campaign promises of this magnitude often are just talk never turned to action, however individual Chinese firms are less certain.
Lastly, and a little more far-fetched, the instability in the market could also be a function of perceived military threat from the United States. While, again, all-out war is unlikely, the Trump administration talking tough on actions on the South China sea and a relationship with North Korea that appears far too cozy, is enough to make Chinese industry squirm just enough to instill more uncertainty in the markets. Overall, it’ll be interesting to continue to watch the Chinese markets throughout the Trump Presidency. Will they continue to react to rhetoric alone? Will this further the recent downturn?
Sources:
http://money.cnn.com/2017/03/31/investing/trump-rally-first-quarter-wall-street/
http://www.washingtontimes.com/news/2017/jan/22/donald-trumps-45-percent-tariff-on-china/
http://blog.runnymede.com/is-there-value-in-the-chinese-stock-market-or-is-it-a-dangerous-bubble
The one thing that investors place value on more than anything is certainty, and with the Trump administration there has been little to none of it. I believe that the current market conditions are suggestive of other market conditions and not just President Trump. On election night, S&P futures were down over 500 points, which signals the knee-jerk reaction of investors to the election news. Similarly, I wonder how much of China’s recent market volatility is due to non-geopolitical factors. Rhetoric is a strong force in market volatility but I wonder if there will come a point where the markets become immune to Trump’s talk, and wait for job growth, revenue growth and other important metrics to form their opinions on the strength of the market. There is no arguing that we are reaching a market peak, and it will be interesting to see how President Trump handles the markets if a downturn comes, especially given his stance towards China, an important trade partner of the US.
I think the other important thing to consider is the fact that Trump’s effect on Chinese financial markets can only go so far. At the end of the day, internal data could prove more influential on Chinese markets than trade negotiations with the US. While exports to the US are certainly an important part of many Chinese firms’ business model, one must not forget that many are more internally focused on the Chinese population, something that will continue as the shift towards service industries gains headway.
I find the perceived military threat quite intriguing. North Korea and Chinese relations have been declining over the past few years, however, as North Korea continues to violate U.N. sanctions by testing ballistic missiles. If North Korea does manage to successfully fire a missile at a U.S. ally, inevitably the U.S. would be required to act and North Korea-China relations will be tested. This could cause a slew of problems including potential a potential embargo on Chinese goods, which would spell disaster for their export market.
I suspect that if North Korea were ever to try something as brash as an open invasion or ballistic missile attack, it would quickly find itself abandoned by the Chinese. While there are benefits for China in having the regime there as a friend, those benefits would almost certainly be outweighed by the prospect of a war, nuclear or conventional, with a power like the US. Furthermore, I also find it unlikely that North Korea would even attempt such an attack, as for all the talk of the regime as an “irrational actor”, there has yet to be a provocation on their part that led to open warfare in the decades since the Korean War truce.
Following this meeting with Trump, assuming that analysts are correct in predicting a softening in trade rhetoric, I would expect to see some positivity in the Chinese markets. Also, like the American markets, the Chinese will become numb to Trumps empty words.
Just some of my opinions on the American markets: We have seen stock market uptrend since the election. The market no longer seems to be having the “knee jerk reactions” to Trumps tweets or words as it did earlier in the year. The “Trump” market is actually reacting to an economy that is chugging along at a strong pace, not his policy suggestions. Other than his infrastructure promises, I don’t believe that investors really changed their predictions based on him being in office.
I think you are right in saying the markets are continuing an upward trend, but my question is what political responses to a downward turn in the market might look like. What policy direction would President Xi take if Chinese markets were to decrease, say, by 10 percent? We have learned that Chinese reserves are dwindling quickly, so a shift in monetary policy is likely in the near future. It will be interesting to see what form this takes in the months ahead, especially in the face of a Trump White House.
Like Professor Smitka said in class, the Chinese equity markets are nowhere near as developed as American markets (150 years), and is essentially a “glorified gambling den”. That being said, uncertainty is a constant in any markets, and long term usually reflects where intrinsic value really is.
While I agree with you, I don’t think that many Chinese stocks reflect intrinsic value. The nature of China’s stock market is very opaque and there have been several instances where companies have released false earnings in order to boost stock prices. Until the government cracks down on securities frauds like these, I think that investors will still be wary to invest in China.
This seems very relevant. When I was in China last year, even graduate students would ask me whether Trump would start a war with China if elected president. I wonder how sophisticated knowledge of Trump’s policy agenda is among financiers in China, but I think that his consistently unpredictable stance suggests that, for better of worse, there’s no guarantees for the future of the Us China economic relationship.
Doing a comparative between American and Asian markets as it relates to President Trump’s inauguration is an interesting exercise. For example, the yen is growing stronger against the dollar recently as Trump has raised public concerns that the dollar might be too strong. As it relates to the political concerns, Trump’s decision not to label China a currency manipulator might ease the tensions risen from the murmurs of a trade war.