Volatility in China creates opportunity

The Chinese economy continues to suffer under US tariffs and slower domestic demand, despite efforts by policy makers to provide economic stimulus. Factory output rose 5.3% annually but declined 0.4% from December. This is the weakest reading since 1995. Chinese exports fell 21% in February from a year earlier. The stock market suffered deep decline in 2018 (CSI 300 Index down -26%). Yet these revaluations created a unique situation. Chinese stocks are up 27.8% this year through 5 March.

The MSCI Indexes will increase weighting of China-A shares for 5% to 20% by yearend. This will push USD 67 billion of investment into mainland China equities. Historically China stocks have been driven by retail investors, due to information gaps and liquidity issues. Now they are attracting institutional investors hungry to get a piece of the world’s second largest economy. The yuan has gained widely on expectations for a US-China deal: it should stabilize USD/CNY around 6.7 or even higher. U.S. Trade Representative Robert Lighthizer indicated that negotiations are in their final weeks. The positive effect on China stocks will be profound.