• The US-China relationship appears to be deteriorating. US recently published a list of an additional $200bn of Chinese products subject to 10% tariff rates that will be put forward for the public hearing process by 30 August and could possibly be implemented in September.
  • As trade talks intensify, Chinese assets are under pressure, with the potential for corrections to the renminbi (RMB) and equity market occurring. While uncertainty looks relatively high in the near term, our central scenario is that serious escalations could be avoided and US tariffs applied to imports from China should have relatively mild macro impact. We estimate that the direct impact of a 10% tariffs on $200bn (40% of US good imports from China) could knock off around 0.2% of China’s GDP, given US imports account for around 3% of China’s GDP (in value-added terms).
    • While we are waiting to see what China might introduce as possible retaliatory measures, we expect potentially more meaningful policy supports in H2 to soften negative impacts.
    • Economic fundamentals and clear messages from the PBoC since last week look set to prevent the RMB from overreacting and our 12-month USD/CNY target is not far off recent levels given the current scenario.
    • The sharp depreciation in the RMB, combined with deteriorating growth expectations in China in recent weeks seems to have negatively affected market sentiment. Nonetheless, we believe that a moderate slowdown, along with very gradual deleveraging could represent a very likely positive outcome in the medium term.
    • On equity, the MSCI China A-share [1] market is down almost 30% since the peak seen at the end of January 2018. It offers an attractive premium in both absolute and relative terms to the H-share market on an historical basis.
    • In the short term, we prefer to remain cautious on both the A-share and H-share markets, at least until we receive more clarity on a near term resolution to negative drivers. We think that on a medium- to long-term horizon, the A-share market looks attractive, and we are looking for entry points. At a stock level, we believe that the best opportunities are in domestic and consumption driven stocks.
  • Beyond the short-term weakness, from an investor’s perspective, we think it makes more sense to consider China as a new investment asset class in its own right, not just as part of an emerging market exposure, to take advantage of the transformation of the Chinese economy and its global economic power…