• Chinese equities were unfazed by Trump’s win, finishing 5.5% up last week
• Exports to the US only account for 3% of Chinese GDP
• We expect further stimulus from China, following the latest $1.40 trillion package to reduce local government off-balance sheet debt

While campaign rhetoric doesn’t always translate into policy; if Trump’s 60% tariff were to take effect across all Chinese imports, we’d expect the impact to be far less severe on economic growth than one might initially fear. The percentage of Chinese exports to the US represents just under 3% of annual GDP which is predicted to translate into a manageable 1% overall reduction – and could even drive short-term increased output as US businesses could look to front run the tariffs, importing more before they take effect. Further, given this is Trump’s second term, the longer-term possibility of such tariffs remaining active is uncertain.

Chinese GDP – sources of demand 2023

Source: OECD and Capital Economics

Dollar power

Trump’s campaign talk around tariffs, mass deportations and tax cuts are viewed as inflationary, and have helped bolster the greenback’s strength post-election. Foreign exchange markets are primarily driven by interest rate expectations, and since they are a core combating tool at central banks disposal, the argument towards ‘higher for longer’ rates has gained conviction. This of course has implications for the attractiveness of goods priced in Dollars, making them more expensive for non-USD dominated buyers and hence less competitive.

The Chinese Yuan is managed by the People’s bank of China to stay within a narrow range, but even so, it has faced significant downwards pressure since Trump’s win, falling from 1CNY/0.141USD to 1CNY/0.138USD. As Trump’s inflationary rhetoric persists, we can expect a continuation in Dollar strength, making Chinese exports relatively cheaper.

Retaliation

Slapping a tariff on all goods, no matter what the percentage size, would be unlikely to go without a reciprocated penalty and although we believe that China are limited in what they could impose, since predominantly agricultural products are imported, what they do have is control over businesses activity; looking back at the soybean tariff retaliation in 2018, demand for the good collapsed just before the tariff was actually brought in.

We believe their reliance on chips from US companies like Nvidia, Intel and Qualcomm are unlikely to be sanctioned – as they cannot yet be produced domestically and are crucial to China’s mission of technological dominance and leading innovation.

Bowmore portfolios

We take a long-term investment view across each of the mandates that we manage and while the threat of tariffs poses a likelihood of short-term volatility, we believe that there is still opportunity for an overall stock market recovery in China when bearing in mind that further stimulus packages have been promised by an increasingly supportive government, the property crisis is stabilising and much of China’s GDP is driven by domestic demand, so, their recovery needn’t necessarily rely much on the US.

As such, we have retained our mid-cap Chinese equity exposure within core portfolios which invests in undervalued businesses within the industrials, technology and consumer cyclical sectors that are primed to benefit from an increase in domestic confidence and spending. The fund has returned 12.3% over three months.