China ETFs Surging Ahead Of Trade Deal

February 28, 2019

The market seems to think the U.S.-China trade war is coming to an end. Since bottoming out at the end of last year, Chinese stocks have roared back on hopes the year-long trade war could be resolved soon.

On Monday alone, the $1.6 billion Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR), which tracks mainland Chinese stocks, surged 6.3%, bringing its year-to-date gains to a hefty 25.8%. The move followed news that President Trump had delayed a scheduled hike in tariffs on Chinese exports to the U.S.

 

ASHR YTD Performance

 

The U.S. has made “substantial progress” in trade talks with China, Trump tweeted. Therefore, “I will be delaying the U.S. increase in tariffs now scheduled for March 1. Assuming both sides make additional progress, we will be planning a summit for President Xi and myself, at Mar-a-Lago, to conclude an agreement,” Trump added.

On the surface, the president’s optimistic tone makes it seem like a trade deal with China is likely to be clinched by next month. But is that truly the case? And if so, what form will the trade deal take, and what will the lasting impact be on Chinese stocks?

Trade Deal Likely

Most analysts tend to agree that some sort of trade deal with China is likely this year, though there’s disagreement on the details.

“A trade deal is very likely given that both the U.S. and Chinese economies are weak, and both leaders are under pressure to get a deal done,” opined Jay Pelosky, CIO at TPW Investment Management. He expects a deal to be struck relatively soon, because the impetus for a deal is significant, and “a lot of the heavy lifting has been done.”

Gregory Daco, head of U.S. Macroeconomics at Oxford Economics, agrees that a deal is more likely than not. He pegs the odds of a deal in the next month at 60%, and the odds of a deal in the next three months at 75%.

“The deal will involve promises by China to import more goods from the U.S., address intellectual property rights and maintain a stable currency,” Daco explained.

Will It Have Teeth?

While a deal seems likely, whether or not that agreement eliminates current tariffs on $250 billion worth of Chinese exports remains to be seen.

Daco expects existing tariffs to remain in place. On the other hand, Brendan Ahern, chief investment officer at Krane Funds Advisors, believes there is a high probability they could be eliminated if important issues related to intellectual property and joint ventures can be solved.

Of course, whether those tough issues are adequately resolved is what will be most closely scrutinized to determine who “won” in the trade war.

Pelosky believes both countries can end up winners, since the U.S. is asking China to do what is in its best interest anyway, such as rebalancing its economy more toward consumption.

But not everyone is convinced that the deal will have teeth. Hao Zhou, senior emerging markets economist at Commerzbank, said that China “will probably agree to buy more stuff from the U.S. and lower the barrier for farm goods imports,” but really meaningful structural change to its economy is unlikely. Additionally, Zhou notes that any pact will be fragile given the unstable U.S.-China relationship.

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