Chinese stock indexes have posted steep losses in recent months, with market volatility rising so far this year, but U.S. stocks are up and volatility is down. Indeed, with the U.S. markets on a tear and Chinese shares on a downturn, it appears that U.S. stocks have thus far weathered the effects of the trade war.
The trade war and stock markets
In early November, when President Trump told reporters that a deal with China was a near possibility, the markets had risen in response. However, when later reports suggested that the deal might not happen anytime soon, stock markets soon fell, showing how sensitive investors are about the trade dispute.
“The stock market is focused on tariffs and they believe that increased tariffs are going to hurt the economy… There was the belief overnight that we were close to a trade deal with China and now it looks like that is not the case,” Mike Rask, director of trading at Hodges Capital in Dallas, said to The Globe and Mail.
However, America has a significant advantage over China – its stock markets have shown an improvement since the trade war started while the Chinese markets have been on a downward spiral. After Trump announced the tariffs on Chinese imports in late March, the Dow Jones Industrial Average has risen by 370 points, which comes to a 1 percent rise after adjusting for inflation. In contrast, the Shanghai Index has fallen by a whopping 30 percent (adjusted for inflation) during the same period.
“In China, far more of those companies are dependent on trade than in the U.S. To the extent trade is a factor, those expectations have dropped massively in China since the beginning of the standoff. So who is winning? Thus far — America, even if some farmers and manufacturers are feeling the pinch. And if you think in relative terms, the U.S. is an even bigger winner,” according to PBS.
One major reason for rising U.S. stock values is that corporate profits have been booming — they were up more than 20 percent in the first two quarters of the year, compared to last year — is because of the Trump administration’s corporate tax cuts and a strong domestic economy. And that has thus far softened the blow of the trade war on U.S. markets.
Deal or no deal?
One big cloud that remains over the markets is whether the trade war will escalate further or whether a deal will soon be inked. Surprisingly, China has shown a willingness to end the dispute and also declared that it will consider accepting some of the demands put forward by America. “China and the U.S. both wish to expand cooperation on the economy and trade… The Chinese side is ready to have discussions with the U.S. on issues of mutual concern to push for a proposal acceptable to both sides to resolve their economic and trade issues,” Wang Qishan, Vice President of China, said in a statement (South China Morning Post).
China stocks gain on the hope of trade war end
Stock markets in China recently gained on the news that President Trump said trade talks with Beijing were “moving along nicely” in a tweet. The announcement also follows media reports that pointed to progress on the U.S.-China trade dispute.
Just had a long and very good conversation with President Xi Jinping of China. We talked about many subjects, with a heavy emphasis on Trade. Those discussions are moving along nicely with meetings being scheduled at the G-20 in Argentina. Also had good discussion on North Korea!
— Donald J. Trump (@realDonaldTrump) November 1, 2018
With the Chinese economy slowing, public sentiment about the economic future is weakening, so it is no wonder that Beijing is eager to end the trade war. At the G-20 meeting set to take place in the last week of November, experts predict that both Xi and Trump may well work out a deal.