In an official meeting of China’s State Council, Premier Li Keqiang called for the Chinese cabinet to “timely” lower the real costs of borrowings. The Chinese government and central bank that usually heed such requests from the State Council, could ease its monetary policy soon.
Over the past year, China’s Shanghai A-Shares have been on a rising tide and I have repeatedly encouraged investors to look into them. My optimism stems from my view that the Chinese government would implement measures to prop up the economy, as China continues to be embroiled in a trade war with the US.
What I did not expect though, was how swiftly the Chinese government stepped in to signal further stimulus. Recall at the start of 2018, the onset of the trade war, the Chinese government was on a tightening cycle, hiking the bank reserve ratio and implementing policies to deleverage the economy. It was only in 2019 when the trade war escalated, that the Chinese government loosen its monetary policy.
Despite recommending further policy easing, Premier Li also reiterated that the government would not be really shifting the dial and over-stimulate the economy. In a way, it also indicated to investors not to turn speculative and remain cautious.
This will also formulate China’s principle strategy on the trade war front. Digging their heels in for a prolonged trade war, the government is aware of the headwinds facing the economy. While aiming to dampen these headwinds, the Chinese government also needs to conserving headroom as further ammunition in case of further impacts and escalations.
The Chinese government also wants the US to feel the heat of an escalating trade war and moderate their stance. However, the initial 10 to 15 percent tariffs imposed on Chinese goods were hardly hitting US consumers. As Trump continues to raise higher tariff rates, US consumers would eventually see their daily lives being impacted by higher costs.
On its part, the Chinese government is targeting to lower the costs of borrowing in order to stimulate domestic consumption and hence offsetting the loss of export revenue to the US. This would be a logical response to the US’s confrontation.
Lately, I observed that the Hong Kong stock market has lost its correlation with Shanghai A-Shares. While HK-listed H-Shares may still share some correlation to Shanghai A-Shares, the Hong Kong stock market as a whole, is taking on a different direction than the Chinese stock market.
Looking ahead, both the US and China have agreed to resume trade talks next month in October. Underlying the postponement of the negotiation from September to October, is both countries’ reluctance to compromise and meet in the middle ground. As such, even if the talks take place in October, investors should not place too much hope to see any major breakthrough.
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