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China Slowdown, Trade, and Stocks: Connecting the Dots

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China’s slowdown has been making global headlines, and so has news related to the US-China trade war—more recently, Phase 1 of their trade deal. If we move beyond the pessimistic headlines, we can see that equity markets are pretty much on a joyride this year. US markets are hovering near all-time highs, while Chinese stocks are also sitting on strong YTD (year-to-date) gains. Does it all add up?

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China’s slowdown and the Shanghai Composite Index

Plenty has been written about China’s slowdown. The Chinese economy is growing at multiyear lows, and the trade war has further aggravated the slowdown. There’s little denying the Chinese economy is slowing and is widely expected to slow even further in the near term.

However, despite all the noise about China’s slowdown and the US-China trade war, Chinese equity markets have largely held their ground. Based on today’s closing prices, the Shanghai Composite Index is up 16.4% YTD. Alibaba (BABA) and JD.com (JD) are also up sharply this year. Apparently, Alibaba reported record Singles Day sales this year despite slowdown concerns.

Does China badly need a deal?

On multiple occasions, US President Donald Trump has said that his tariffs have hit China hard and the country badly needs a trade deal to avoid a slowdown. He’s gone to the extent of saying China’s economy could enter a recession if it doesn’t make a deal with the US. Read Trump Sees Recession in China If No Trade Deal Is Made for more analysis.

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Trade deal and China’s slowdown

Nomura has echoed similar views. According to CNBC, Richard Koo, the Nomura Research Institute’s chief economist, said in a note, “I suspect the increasingly pronounced slowdown in China’s economy, coupled with recent employment data pointing to continued strength in the US economy, are putting heavy pressure on China to settle sooner rather than later.”

In the past, China has sought to delink its economic activity from the trade deal. On that note, the US economy has also slowed, which some analysts blame on the trade uncertainty.

UBS still favors Chinese stocks

Despite China’s slowdown and trade war uncertainty, some brokerages are bullish on Chinese stocks. According to CNBC, UBS is “overweight” on Chinese stocks despite the country’s slowing economy. The Chinese central bank has also joined the action amid global easing. While most central banks globally were on an easing spree this year, the Chinese central bank largely stayed put. Read Slowdown Deepens, China Resorts to Rate Cuts for more analysis.

In my view, an escalation in the trade conflict isn’t something the markets are currently factoring in. While a US-China trade deal won’t solve the global economic slowdown, the continuation of trade uncertainty will only add to economic troubles.

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