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Donald Trump’s sudden eagerness for a trade deal has lifted Chinese markets

More than Beijing’s stimulus measures or a dovish Fed, it has been the US president’s need for a political win that has spurred a rally in China’s stock markets. This, however, may not last

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Many observers have noticed that the timing of US President Donald Trump’s optimism about a trade deal with China has coincided with worrying developments for him at home. Photo: AP

Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm.

Published: 2:31pm, 7 Mar 2019Updated: 10:26pm, 7 Mar 2019

On Monday, the benchmark Shanghai Composite Index rose above the 3,000-point level for the first time since last June, taking its gains since the beginning of this year to a whopping 24 per cent, satisfying the popular definition of a bull market: a 20 per cent rally from a recent low.

China’s other main stock indices are also in bull market territory, with the ChiNext gauge of small caps and technology shares up a staggering 38 per cent since the end of January. In corporate debt markets the spread – or risk premium – on Chinese high-yield bonds has plunged 135 basis points this year, one of the sharpest declines among the leading emerging markets, according to data produced by JPMorgan. The yuan, meanwhile, has risen to its strongest level versus the US dollar since last July.

This year’s strong gains in Chinese assets have been part of a broader rally. The MSCI All Country World Index, a gauge of stocks in developed and developing economies, has increased more than 10 per cent this year, while the S&P 500 Index is on the verge of re-entering a bull market.

However, mainland-listed stocks, which were the world’s worst-performing major equity market last year, have experienced the sharpest rebound. While the rally stems from a confluence of factors – progress in US-China trade negotiations, the Federal Reserve’s decision to put its interest-rate-hiking campaign on hold, Beijing’s more forceful fiscal stimulus measures and attractive equity valuations in China – the most significant catalyst has been the actions of American President Donald Trump.

It was the adverse effects of Trump’s trade offensive on US business and consumer confidence, coupled with the broader tariff-induced slowdown in the global economy, that led to the Fed’s crucial decision in late January to take a “patient” approach to further changes in rates. Hints from Fed policymakers just after Christmas that a dovish tilt was forthcoming were enough to trigger a sharp rally across global markets. In early January, the yuan enjoyed its best week against the dollar since 2005, while the Shanghai Composite was up nearly 5 per cent by the end of the month, having dropped nearly 8 per cent in the last six weeks of 2018.

An investor eyes the results at a stock exchange in Nanjing on March 4, a day when Chinese shares closed higher following the MSCI's decision to increase the weight of China A-shares in its indexes. Photo: Xinhua

Yet the rally in Chinese assets really took off after Trump stated on February 12 that he was considering extending a March 1 deadline for imposing new tariffs on US$200 billion of Chinese imports. In the fortnight leading up to the president’s decision on February 24 to let the deadline slide, the Shanghai Composite jumped a further 11.6 per cent as markets seized on Trump’s new-found willingness to reach an accord as soon as this month, resisting pressure from trade hawks to maintain tariffs as leverage to extract concessions from Beijing on intellectual property protection and structural reforms.