Weekly Posts

China Last Week – Jonathan Shelon Discusses Trade Deal Implications and Mainland China Stock Outlook

Introduction

Hi! I’m Jonathan Shelon, Chief Operating Officer at KraneShares.

Welcome to our second China Last Week recap video, where we will be providing insights on the latest financial news around China.

Trade Deal Update

On Wednesday, January 15th, President Donald Trump signed the “Phase One” Trade Agreement with China’s Vice Premier, Liu He (Lee-Yo H-Uh), in Washington.

In exchange for the U.S. lowering existing tariffs, China has agreed to purchase a total of 200 billion in additional U.S. exports. These purchases will be comprised of $32 billion in agriculture and farm products, $80 billion in manufactured goods, $50 billion in energy products, and $35 billion in services.

China will also grant US businesses greater access to its financial services industry, and enhance protection for US intellectual property.

The US and China also agreed on a rough dispute resolution mechanism, which mandates three rounds of discussions upon the raising of a dispute.

We believe this more formalized dispute process may help prevent disagreements from escalating in the future.

The Phase One Trade Agreement is “the opening of a new chapter of trade relations” between the US and China.

While the tariffs will not be fully canceled yet, they will be cut in half from 15% to 7.5%.

On the data front, December trade data was stronger than expected.

China’s Trade surplus was $47 billion, versus November’s $38 billion.

Stock Performance News

With respect to performance, in 2019, The MSCI China A Index was up 36%, outperforming both the S&P 500 and MSCI Emerging Market Index despite negative headlines.

We believe improved Mainland Chinese investor sentiment paired with the signing of the Phase One Trade Deal will provide a continued tailwind for the performance of the A-share market in 2020.

In December, Hong Kong Exchange & Clearing reached an agreement with the Shanghai Stock Exchange to allow companies with dual-class share structures to be traded through Stock Connect by Mainland investors for the first time.

Hong Kong-listed Chinese companies will see an influx of new Mainland Chinese investors in July 2020 when the rule goes into effect.

During the trade war, the price of Hong Kong & US-listed Chinese stocks was driven by foreign investor sentiment rather than fundamentals & valuations.

 Gaining more Mainland Chinese shareholders could provide greater resilience for these names as future negotiations progress.

Mainland stocks with secondary Hong Kong listings, such as Meituan, Xiaomi (shaw-mi), Tencent, and Ailibaba’s Hong Kong listing are poised to benefit from this change.

Conclusion

We hope you enjoyed this 3-minute recap.

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Please tune in next week for the latest update on China’s equity, fixed income, and currency market performance.