Just as the Chinese stock market was recovering after a long period of underperformance, Donald Trump’s presidential comeback raises the prospect of a new trade war with the United States. China’s equity markets immediately fell after the US election, and fund outflows are already evident. Asset managers focused on the region look at what that means for investors, and how China may respond.
Key Questions for Investors in China:
- Will Trump’s second term be a re-run of the last?
- Will China launch more stimulus and when?
- Are China stocks now more risky?
- Will China equity outflows continue?
China/U.S. Trade War Part Two?
China/US Trade War Part 2?
What can investors expect? During his campaign, Trump promised tariffs of 60% or more on everything made in China, claiming this would protect US industry and jobs. Some argue this may not materialize.
“We think that the 60% tariff call may be a starting point for negotiations rather than a set-in-stone number,” wrote Lynn Song, chief economist for greater China at ING, in a note published Nov. 6. Despite the rhetoric, the previous trade war ended in a truce after China agreed to take more agricultural goods from the US. Song says a similar outcome this time would be a welcome outcome for the Trump administration and take the heat out of the fraught diplomatic situation.
Sandy Pei, senior portfolio manager for Asia ex-Japan at Federated Hermes, says the Chinese economy has already changed in advance of the change in the US government next year. Chinese companies have set up alternative manufacturing bases in Southeast Asia, Eastern Europe, and Mexico, and some have capacity in the US too. Pei thinks there is also room for some Chinese currency depreciation, which makes exports cheaper and imports more expensive. While consumers would share some of the impact of tariffs, “the net impact should be manageable.”
Whatever happens, the tariffs won’t be immediate. Song believes they could take effect in the third quarter of 2025 at the earliest, with a more likely timeframe being the fourth quarter of 2025 or even the first quarter of 2026.
China Stimulus Now?
Over the last few months, a common argument has been that a Trump win and the perceived shock from additional tariffs would lead to a more aggressive stimulus response from China to offset the likely loss from exports. This follows previous efforts to jumpstart the economy, like the first monetary stimulus package in September, which gave markets a short-lived boost.
This follows previous efforts to jumpstart the local economy, for example the first monetary stimulus package in September, which gave a shortlived boost to markets.
“We are in a typical liquidity trap,” said Erik Lueth, global emerging market economist at Legal and General IM in a video interview with Morningstar. He continued: “We don’t think that, at the stage where we are, this will do the trick.”
On Nov. 11, China unveiled a CNY 10 trillion (USD$1.40 trillion) debt package to ease local government financing strains and stabilize flagging economic growth. The plan amounts to a one-off increase in the CNY 6 trillion local government debt issuance over three years, and CNY 4 trillion special local government debt issuance under the annual quota over five years.
“While the scale of this program is at the upper end of expectations as far as markets are concerned it is what they didn’t say that was more important. [There was] no mention of buying unsold property or stimulating consumption,” says Justin Thomson, chief investment officer and head of international equities at T. Rowe Price. “China is not prepared to front-run any move on tariffs and is keeping powder dry for the new year.”
Are Chinese Stocks Riskier Now?
The Chinese equity market’s initial reaction to Trump’s victory showed modest capital outflows and price falls. According to Morningstar data, in the week following the election (Nov. 5-Nov. 12), global investors pulled USD$1.1 billion from mutual funds investing in Chinese equity.
Hong Kong’s Hang Seng index bore the brunt of the post-Trump selling pressure, falling more than onshore markets in Shanghai and Shenzhen. Song believes this demonstrates that foreign investors are more concerned than domestic ones about the change in president.
“Trump’s victory does not change our outlook for Chinese stocks,” says Pei, who reasons that “the market has priced in continuous geopolitical risks.” Federated Hermes fund managers believe the current outlook remains uncertain, but that the country is experiencing a necessary transition rather than a long-term decline. They are optimistic that China can successfully transform its economy, although it will take time and will never be painless.
Pei adds that Trump policies may negatively affect exporters in industries with established competitors in the US. She says that “domestic replacement,” wherein Chinese companies manufacture for their home markets rather than export, is a powerful force. This is evident in tech, healthcare, high-end consumer companies, and manufacturing companies that are industry leaders with supply chains outside China.
Investors could continue to shun China even after the small rally this year, with Trump’s second term adding further uncertainty. Still, Song argues that domestic catalysts like stimulus packages and economic reform could play a bigger role in Chinese equities
And Chinese stocks are trading at cheap valuations not seen in about a decade. According to CEIC data, the Shanghai Stock Exchange’s price/earnings ratio is at its lowest since late 2015. In addition, according to Morningstar’s Global Market Barometer, Chinese equities are currently undervalued by 18%.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
