US Election Countdown: China Is Ready!

If we look at the performance of the CN50 and Hang Seng Index since mid-October, it’s clear that prices have been trading in a narrow range. This indicates that, with the details of China’s stimulus policies yet to be disclosed and the US election results still uncertain, traders find it challenging to gauge asset movements and are in urgent need of news updates to adjust their positions. 

Once there’s new development and the market gets increasing clarity on the election result and China’s fiscal programs, the consolidation built up over the past couple of weeks could lead to significant volatility and rapid directional movements.

Currently, the market is concerned about how much the new US administration will hinder the upward trajectory of the Chinese economy, while also hoping that Chinese authorities are prepared to face these challenges head-on.

If Trump takes office, it would mean...

Although both presidential candidates are nearly tied in polls within swing states, traders are leaning more toward Trump's victory, largely due to his significant advantage in the betting markets. One of his most eye-catching proposals is to impose a 60% tariff on all Chinese imports.

Undoubtedly, the implementation of such policies would severely impact China's exports. Looking back to 2018-2019, Trump imposed three rounds of tariffs on China, raising duties to as high as 25%, with the scope expanding from an initial $50 billion to $300 billion. 

These measures clearly targeted high-end industries with low import reliance, such as electronics, communications, and automobiles, before moving on to lower-end industries like home appliances, which are more dependent on imports. At that time, China responded by deliberately devaluing the yuan, which depreciated against the dollar by over 11% at one point to counter the tariff impacts on exports.

However, times have changed. Under the slogan of "Make America Great Again (MAGA)," Trump has proposed raising tariffs on all Chinese imports to 60% in one fell swoop, with additional tariffs of up to 100% on certain sectors like electric vehicles. Furthermore, he aims to prohibit US businesses and individuals from investing in China and to comprehensively boycott Chinese products such as electronics, steel, and pharmaceuticals. The ultimate goal of these proposals is to bring industries back to the US and improve domestic employment and manufacturing conditions.

If Trump is ultimately elected, the more significant concern would be if the Republican Party gains a majority in both the House and Senate (a "red wave"). This legislative and budgetary advantage would pose a tangible threat to Chinese exports through tariff policies. As one of the pillars of the Chinese economy, weakened exports would inevitably impact growth figures and future expectations, significantly increasing economic headwinds and selling pressure on the stock market.

Of course, even if Harris is elected and faces a divided Congress, tariffs and trade barriers focused on high-tech and sensitive areas may still persist. China's technological upgrades are likely to depend on domestic demand and supportive industrial policies. Additionally, her potential regulatory and compliance measures could become more stringent, affecting capital flows between China and the US These challenges, alongside China's own insufficient domestic demand and demographic issues, continue to pose severe risks to its asset performance.

Building a Framework + Managing Expectations: China is Prepared

In response to potential tariff policies, China might consider addressing the issue as it did last time by devaluing the yuan. However, merely devaluing the currency would lead to rising import costs, imported inflation, and capital outflows. Additionally, if the dollar experiences "competitive devaluation," China's hedging options would be significantly weakened.

Faced with these uncertainties, Chinese authorities have clearly reserved time for policy deliberation. Unlike previous sessions of the National People's Congress Standing Committee meeting held in late even-numbered months, this meeting has been postponed to November 4-8, giving policymakers the opportunity to devise corresponding strategies based on the election results. 

Market speculation suggests that the Ministry of Finance may issue special bonds worth 10 trillion yuan to alleviate local debt issues and boost the real estate market. If Trump is elected, the Ministry will likely need to enlarge the deficit to achieve the 5% GDP growth target, in addition to the recent interest rate cuts and reserve requirement reductions made at the end of September.

Moreover, although the capital market's response has been limited, a series of structural tools proposed by China over the past month is gradually constructing a framework to maintain market stability. The stock buyback and relending program announced at the end of September showcases the market's inherent strength, while the swap facility (SFISF) highlights the capabilities of major institutions. The market stabilization fund mentioned last week is designed to curb irrational fluctuations through reverse operations, leveraging the central bank's influence.

Ahead of the November meeting, the authorities are actively releasing information to manage market expectations, which is beneficial for enhancing the resilience of the Chinese stock market.

Exciting Market Shifts Ahead

With the US election results still hanging in the balance and the scale of China's policy responses yet to unfold, we find ourselves on the brink of exciting changes. One thing is certain: early November is set to bring significant volatility to Chinese assets.

As traders, we must stay agile, adjusting our positions while keenly watching the unfolding news—the potential opportunities are ripe for the picking!