China must focus on its own priorities amid trade row
The Chinese stock market has suffered heavy losses this year. During the Ambrosetti Forum in Italy last month, Zhou Xiaochuan, former governor of the People’s Bank of China, said that the trade war was a “major reason” for the stock slump. The Chinese economy has also seen a cooling trend this year against the background of government efforts to pursue deleveraging, higher environmental protection standards and strengthened debt controls. All these have contributed to the generally weak investor confidence and the sluggish performance in the mainland stock market.
However, compared with the pessimistic sentiment among domestic investors, foreign institutional investors have shown eagerness to join the A-share market through such channels as the ShanghaiHong Kong stock connect, the Shenzhen-Hong Kong stock connect and the Qualified Foreign Institutional Investor (QFII) scheme. At present, overseas investors are already the third-largest institutional investors in A shares, behind only public funds and insurance funds.
Overseas investors do not seem to be so concerned about the risks facing the Chinese economy.
China’s private enterprises may be under pressure from deleveraging, environmental protection requirements and a drop in business, but foreign companies have accelerated their China business development. With relatively sufficient capital flows, multinationals haven’t felt much impact from deleveraging. Also, the impact of policies aimed at strengthening environmental protection is limited for them because they already had to comply with higher environmental requirements. Furthermore, multinationals are generally bullish about the huge and fast-growing market in China.
Meanwhile, the Chinese government is increasing its financial openness, which also attracts foreign investment.
This openness is not just a response to pressure from the external trade situation; it is also part of the trend toward further reform and openingup.
So far, a total of 15 foreign private funds have received licenses to invest in A shares, with 10 of them already launching investment products onshore. In the meantime, China’s stock market has been further integrated into the global market. In June, the MSCI Emerging Markets Index officially included A shares. All these developments have increased the attractiveness of China’s capital market to global investors.
Moreover, overseas investors generally attach more importance to the medium and long-term impact of China’s economic reform and deleveraging measures. They believe growth that has been supported by increased debt over the years is not sustainable. Although policies like deleveraging and capacity elimination will slow down economic growth in the short term, reduction of the debt burden will make the economy healthier in the long run.
In this sense, the accelerated investment in A shares by foreign capital is simply based on China’s economic fundamentals. Despite the current bearish sentiment, the mainland stock market is expected to recover. Looking ahead, the prosperity of the domestic capital
market will depend on whether the risks can be properly controlled. At the end of July, a meeting of the Political Bureau of the Central Committee of the Communist Party of China emphasized stability in six key areas: employment, finance, foreign trade, domestic investment, foreign investment and expectations. The meeting also said that China will carefully control the pace of deleveraging, as well as adopting more active fiscal policy measures and stepping up investment in infrastructure.
As regards the China-US trade war, after the US announced new tariffs on $200 billion worth of Chinese goods, effective from September 24, China retaliated with tariffs on $60 billion worth of US goods, leading to an escalation of the trade row. Nevertheless, it is possible that both parties will recognize the negative impact of the trade war and that it will be controlled within a certain range.
But China should also be prepared for the possibility of a protracted trade war. There is no need to be over-pessimistic. The best response to the outside pressure is to focus on China’s own business, such as stabilizing expectations and ensuring economic growth through strengthened policy coordination. In addition, China should speed up supply-side reforms, with a focus on fiscal and tax reforms and reform of State-owned enterprises. If China can successfully turn external pressure into a driving force for its own development, the impact of the trade war on its economy will be limited and market confidence will be restored.