China’s Stock Tax Cut May Be Temporary

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(Bloomberg) — President Donald Trump gave China’s stock market a pleasant surprise by not announcing any tariffs on the Asian nation on his first day in office. But investors are not resting easily.

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Trump, who threatened tariffs of up to 25% on Mexico and Canada on February 1, left traders guessing about his plans for China by refusing to say when he would impose additional tariffs. While Chinese shares in Hong Kong gained more than 1% on Tuesday, the uncertainty has some investors looking for more volatility in the coming days.

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For Ronald Temple, chief market strategist for Lazard’s Financial Advisory and Asset Management businesses, it is not yet time to buy Chinese stocks.

“I would be reluctant to add any exposure to China now because the markets have not priced the risk of tariffs in China properly,” Thembi said in an interview on Tuesday. “The actual announcement of tariffs will likely give you a sell-off in Chinese equities and perhaps in broader EM equities.”

Expectations for Trump’s actions in China were largely dominant in the markets where he was inaugurated. Stocks rallied in recent sessions as Bloomberg News reported last week that Trump’s team was considering taking a gradual approach to raising rates. Prior to that, concerns over rising trade tensions and a slowdown in China’s economy caused the MSCI China Index to enter a bear market.

Volatility spikes are expected to become common over the next four years, given Trump’s uncertainty about policies.

Read: Xi Dodges Trump’s Ex-Costs, Buying Time for China to Influence US

Tuesday’s market performance also suggests that investors are taking Trump’s lack of immediate attack on China with a grain of salt.

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The CSI 300 Index, a benchmark of offshore stocks, erased a bulk of its 0.6% gain to end the day up 0.1%. The offshore yuan weakened 0.4% after strengthening more than 1% overnight.

Global markets continued their rollercoaster ride as investors eyed a slew of executive orders signed by Trump. The Bloomberg dollar gauge gained 0.5% after slipping more than 1% on Monday. Ten-year US Treasury yields fell 10 basis points in Asia on Tuesday, as traders re-evaluated inflation bets on fears of faster inflation.

After Trump’s comments about Canada and Mexico, their currencies fell to 1.4% each.

“We think volatility will increase,” said Norman Villamin, group strategist at Union Bancaire Privée. “That’s one of the reasons we’ve built that 15% position in hedge funds now because we think they’re in a position to profit from that volatility.”

Hopes for an easing of Sino-American tensions are rising following a phone call between Trump and Chinese President Xi Jinping last week, which the American leader described as “very good.”

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However, during a press conference in the Oval Office when he signed executive orders Monday night, Trump sometimes indicated that he was planning to impose tariffs because of China’s role in exporting fentanyl precursor chemicals, and his anger at the Chinese influence on the Panama Canal.

He also hinted that he could impose tariffs on Chinese goods if Beijing blocks the sale of the social media app TikTok to the US company. While a trade war is nothing new in Beijing, China’s economy is in a much weaker position than during Trump’s first presidency, relying heavily on imports.

“Tax concerns in China are not over but at least we have avoided the worst,” said Xiadong Bao, fund manager at Edmond de Rothschild Asset Management. “We are always expecting a potential change in tariffs from Trump, and we are very focused on corporate guidance for the first quarter.”

—Courtesy of John Cheng.

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