Calm Chinese financial markets, but US-China tensions on the rise

03 September 2020

Peiqian LiuChina Economist. Ranked Top 10 China forecasters by Bloomberg.

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Peiqian Liu, China Economist, takes a look at some of the reasons why Chinese equity markets have performed well recently despite some concerning developments in the already-fractious relationship between the US and China.

The relationship between the US and China is still highly precarious, but that hasn’t stopped the Chinese equity market from performing well in recent months. Let’s take a look at why.

US-China relations have taken a downturn in recent months for a number of reasons, including technology disputes, US criticism of China’s initial response to the coronavirus outbreak, the closing of consulates, and tensions about China’s actions in Xinjiang, Hong Kong and Taiwan.

The US has taken some punitive actions in response to these technological and geopolitical disputes, including:

  • Putting more Chinese companies on its entity list of firms subject to export restrictions;
  • Revoking Hong Kong’s special status, sanctioning certain Chinese officials;
  • Closing the Chinese Consulate in Houston; and
  • Threatening to ban some Chinese social media apps from the US.

What’s more, the tensions could escalate further as we approach November’s US election, with a tough stance on China seeming to be the consensus position among leading US politicians.

Despite the increasingly unfavourable backdrop, Chinese financial markets remain relatively calm. Natwest Markets’ proprietary China Stress Index, which we designed last year to assess investors’ general level of concern about what’s going on in China, has gradually eased from a peak of 131 in mid-March amid the coronavirus crisis to 101, its lowest level since May last year. How can that be?

First, the relatively restrained Chinese response to the US’s measures may have supported market sentiment. Thus far, China has not escalated tensions over the US entity list and its ban of Chinese apps.

Instead, China is showing its willingness to open up and reform the economy to attract more foreign business and investment. In addressing a group of global CEOs in mid-July amid heightened US-China tensions, President Xi Jinping reaffirmed that China would continue to reform and open up its domestic market, and will stick to “peaceful development”.

Despite the severe disruptions to supply chains and tourism and education resulting from the coronavirus crisis, both the US and China have remained constructive on the prospects of the Phase I trade deal being fulfilled. In fact, key US and Chinese officials have stated that progress is being made and China is on track to meet its obligations, especially its commitment to buy US agricultural products. 

Of clear benefit has been the healthy recovery in Chinese economic growth since the coronavirus outbreak was brought under control in early April, as we discussed recently. This is thanks in large part to targeted government support. Even though the pace of recovery has remained uneven and been led by supply-side industrial production, China’s real GDP returned to positive year-on-year growth in Q2, and is on track to move back to its long-term potential growth rate of around 5.5% by Q4.

We expect China to continue to recover gradually in the coming quarters as it has coronavirus under relatively good control and the implementations of earlier announced fiscal easing policies to stimulate domestic demand. The central bank may ease at a more measured pace from here, but is likely to resume stronger easing if growth momentum slows unexpectedly.

  • Market sentiment towards China should remain relatively upbeat, with China continuing to make progress in meeting the terms of the Phase I trade deal and its economic recovery on track.
  • Rising geopolitical tensions have increased the risks of worsening US-China business ties and a technology cold war, but China still seems committed to reforms to attract more foreign business and investment.
  • The escalating technology disputes could be a major risk to market sentiment as they could undermine China’s long-term ambition to dominate the global tech supply chain.
  • However, dependence on China’s tech supply chain will remain for the foreseeable future, especially with many countries still struggling to bring coronavirus under control. This should be supportive of China’s financial markets in the near term.
Regional focus: China
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emerging markets


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