With the recent extensive coverage on the political landscape of U.S. and Eurozone, let us take a focus on Asia in this week’s #MarketMonday and delve deep into the impact of Trump’s protectionism on China and other Southeast Asian countries.

“I don’t want China dictating to me”

What might have truly won the hearts of American voters is Trump’s protectionist policies and his promise to boost the economy by venturing inwards and creating jobs for his citizens through bold expansionary fiscal policies. His anti-globalisation agendas and more specifically his anti-China sentiments are resonated deeply within his voters. This might indicate a change in U.S. foreign policy against China and imply a growing tension between the world’s top two economies.

China Hit Hard by Trump’s Protectionism

Top on the list of Trump’s expected anti-China policies is the slapping of 45% tariffs on China-made products.  “We can’t continue to allow China to rape our country,” Trump blamed China for manipulating the Yuan and causing the U.S. trade deficit. The constantly devalued Yuan is one of the factors that boosted the price competitiveness of Chinese products in the global market and is the main reason why China has been enjoying generous trade surplus and shoving trade deficits to U.S.

 

 

The punitive import taxes would make Chinese products more expensive and hence less desirable to U.S. consumers, effectively reducing China’s export revenue by 420 billion dollars, as pointed out by analysts.

Thus it came as no surprise when the Shanghai Composite Index fell by 1.3% during election day as investors were afraid that Trump would honour his promise and reduce its imports from China.

This protectionist stance ran head on with our globalised world and sparked off negativity instantly. Apple’s stock price fell by 2.5% with growing concerns that their China sales would decline should Trump really erect the trading barriers. Other companies that were similarly affected by the selloff on elections day included Microsoft, Amazon and Facebook. In fact, China could retaliate with a “tit for tat” approach by having tariffs targeted at American companies. This would place Trump and the U.S. in a tricky situation and make the tariffs harder to implement than one would expect.

Undaunted Chinese Investors

 

However, this anti-trade trade sentiment did not seem to significantly influence the Chinese investors who continued to buy into U.S. companies they are fond of.

For the past years, the top 2 economies have had strong trade links and Bloomberg analysts noted that the stock market that gained the most from this cross-border business is E Fund Hang Seng China Enterprises Index (E Fund HSCEI). It is a global exchange-traded fund (ETF) that holds the equities of 40 major companies which deals in Hong Kong dollars and hence tracks U.S. dollars movements. The Chinese liken having a share in the E Fund HSCEI ETF to owning U.S. currency.

In 2016, Chinese investors contributed $549 million into the ETF which consequently outperformed other China ETFs in terms of annual asset growth. In fact, it made an attractive investment yield of 10% and was on par with the performance of Standard & Poor’s 500 Index’s, a largely diversified U.S. portfolio often used as the benchmark. Trump’s victory even propelled business confidence and the daily inflow into E Fund HSCEI ETF hit its highest in close to 5 months immediately after the U.S. elections.

Chinese Consumer Staple Industry Retaining a Strong Foothold

Chinese companies also continued to be profitable and retains its strong foothold in the global economy.

In particular, the consumer staples industry fared the best with a 15% Yuan-based total returns this year. In comparison with MSCI World Consumer Staples Index that dropped 0.37% over the past year, the MSCI China Consumer Staples Index gained 16.93% in the same period.

Bloomberg analysts reported that several Chinese consumer staples companies provide very appealing investment options as they are 10% lower than foreign companies in terms of price to earnings. These companies were also acquired at a premium of 20% on average from 2010 to 2015.

Who Stands to Gain? South East Asia.

Faced with the possibility of losing its largest source of export income, China has been aggressively fortifying trade deals with other nations. As the Trans-Pacific Partnership (TPP) pact, backed by U.S., slowly crumbled, Chinese President Xi Jinping picked up his pace in advancing the Regional Comprehensive Economic Partnership (RCEP).

It is a proposed free trade agreement between ASEAN nations and major Asian economies including China, India, Japan etc. which focuses on lowering trading taxes as opposed to TPP that focuses on lowering non-tariff barriers such as state regulations. In the course of advocating for free trade, China has already doubled its foreign direct investments into ASEAN’s 6 largest economies and would hit $16 billion this year according to Credit Suisse analysts.

Countries that China are heavily investing in such as Philippines, Thailand and Indonesia would be the biggest winners. The Philippine Stock Exchange Index gained 2.9%, the sharpest rise in 5 months, and reflects the growing business confidence after China’s investments.

Singapore, however, would stand to gain the least from this agreement because it is already well connected and has strong trading relationships with the RCEP member countries.

Unshaken World’s No. 2

Trump’s declaration of protectionism and repeated accusation of China led to pessimism and concerns that China could risk losing its largest trading partner.

Should Trump really live up to his promise, without a doubt, there would be a significant impact on the export revenue of China, further slowing down its already stagnating growth. However, given its strong local economy and recent expansion into the South East Asian markets, Bloomberg analysts predict that China’s growth would continue to be robust and further secure its position as world’s number two.

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