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Will Trump Tame the Dragon?

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Updated

In the eye of the storm?

Even if you haven’t followed the Donald Trump campaign closely, you likely know that he was very specific in his thoughts about two countries: Mexico and China.

Trump has been tough on China throughout his campaign. Like his belief that outsourcing to India is eating service sector jobs, he has accused China of stealing manufacturing jobs. He has expressed his displeasure over the wide trade gap between China and India and has held China’s currency responsible for being part of the reason for the deficit. During his campaign, Trump promised American voters to label China as a currency manipulator. He also talked about imposing a 45% tariff on Chinese goods.

Given that China and the US never have had a comfortable relationship, his position on China could spark further tensions between the two nations.

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Impact on US companies

If Donald Trump does execute plans regarding tariffs on Chinese goods, he would likely give rise to a trade war. But it won’t only be Chinese companies that ship their products in droves to the US that will be impacted.

Dislike it as he may, Trump will need to deal with the fact that several US corporations like Ford (F), General Motors (GM), Boeing (BA), and Apple (AAPL) consider China a vital sales destination. Some of them have large manufacturing hubs in China as well. In the case of a trade war, China would be more than happy to respond in kind by imposing tariffs on US companies. This could spell good business for Chinese corporations operational in the same line of business.

Impact on Chinese equities

The iShares China Large-Cap ETF (FXI) and the iShares MSCI China ETF (MCHI) were down ~2.5% each on November 9. However, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) was down only 0.3%.

Chinese equities are cautious about Trump’s presidency, but unlike Mexican and other Latin American equities, they aren’t overly worried. Politically, they see Trump’s victory as a sign of an inward-looking America and a sign of worry for the US, the capitalism champion.

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