All eyes are on the Chinese economy these days. The world’s most populous nation has suffered under the weight of the protectionist policies that began in 2018. China has the second largest GDP and, in the past, when the Chinese economy caught a cold, the rest of the world came down with a case of the flu. In late 2015 and early 2016, a selloff in the Chinese domestic stock market led to a significant correction in other equity markets around the world and the US was no exception. In early 2016, the S&P 500 fell by over 13 percent before recovering and rallying steadily until the final quarter of last year.
The China 50 is based on the SGX FTSE Xinhua China A50 Index Futures and represents fifty firms on the SSE and Shenzhen exchanges.
The E-Mini FTSE China 50 had a rough year in 2018.
As the chart highlights, the China 50 dropped from a high at 24,410 in early 2018 to its most recent low at 17,160 on January 4, 2019, a decline of 29.7 percent. While stocks dropped in the US in 2018, the performance of the Chinese equity markets was far worse.
At the beginning of December 2018, Presidents Trump and Xi agreed to a 90-day window to negotiate a trade agreement that would avoid a trade war and the ongoing saga of tariffs and retaliation. Both leaders agreed to a moratorium on any new protectionist measures for the period. Trade negotiators from both sides are working hard to come up with common ground that can serve as a framework for an agreement. The latest news from the negotiations has injected some optimism in markets. On January 8, President Trump took to Twitter with an update:
A trade deal would likely cause a significant relief rally in both Chinese and US equity markets after the rocky period during the final three months of 2018.
While many market analysts are concerned over the “economic slowdown in China” it is important to remember that China continues to grow, even during the recent hard times. The period of double-digit economic growth came to an end in 2015, but the size of the Chinese economy swelled to a level where even 6 percent growth causes the GDP to increase at a higher nominal pace than it did a decade ago when the percentages were much more substantial. Moreover, with 1.4 billion people gaining more wealth in China, the populous is eating and consuming more today than ever before in history. Economists focus on the rate of economic growth, but those figures mask the fact that citizens of China are eating more hamburgers, drinking more coffee, buying more cell phones, and purchasing more products each day. A trade deal between the US and China could ignite a wave of buying in equities markets which move on sentiment that can shift from pessimism to optimism in a heartbeat. The bottom line is that China remains a growing economic beast and all the ingredients are present to cause a massive rebound in Chinese stocks and a bullish tsunami that could spread quickly around the world.
The trade negotiators hold the key to the future path of the stock markets around the globe. Since the China A50 took one on the chin in 2018, it could be poised to make significant gains if a deal materializes over the coming weeks and months. Fasten your seatbelts for news on from the trade negotiations. All signs are telling us that an agreement would work in favor of both President Trump and President Xi who will both be positioned to claim victory as a new framework would be a win-win environment for trade. The biggest winner could be brave traders and investors who have been picking up stocks at bargain prices before the dark clouds of protectionism dissipate.