Trade war is 2 years old but China escapes with flesh wound

Srinivasan Sivabalan

It was this day in 2018 that President Donald Trump fired the first salvo against China by raising tariffs on solar equipment and washing machines. The series of tariff hikes that ensued have slowed growth in the world’s two largest economies and erased $416 billion from Shanghai shares, or almost $300 for each of China’s 1.4 billion people.

But given the scale of Chinese markets, that loss looks modest, representing just 5% of its current $7.7 trillion capitalization. Bonds have been even more resilient, with the average yield on yuan-denominated debt falling by a third during this period. A weaker currency has left exports more competitive, while sovereign default risk, measured by credit-default swaps, has eased to a 13-year low.

Employees work in a metal workshop in Hangzhou in eastern China's Zhejiang Province, Friday, Jan. 17, 2020.

As the U.S. and China move to the second phase of their trade talks, having signed a preliminary deal last week, the signal from China’s markets is one of strength. The nation’s technology and consumer-discretionary stocks are rallying, driving gains in the main gauge for emerging-market equities, as the upside from domestic demand outweighs risks on the trade front.

Here’s a recap of how emerging-market assets, and those of China, have behaved in the past two years:


The MSCI Emerging Markets Index fell 8.5%, contributing to a reduction of $1.79 trillion in overall market capitalization for the asset class.

However, it increased in number and size if you include MSCI Inc.’s promotion of Saudi Arabia and Argentina to the “emerging-market” bracket. When both those countries are considered, stock values actually increased by $623 billion since January 2018.

Not counting China or the new members, the price of the trade war paid by the 23 other emerging economies was $1.37 trillion in lost equity value. That’s a shrinkage of 6.8%.


A gauge of dollar-denominated bonds in emerging markets saw its average yield rise as trade tensions simmered. But the increase was a mere 11 basis points to 4.72%.

Local-currency bonds performed better. The average yield on a Bloomberg Barclays index for this group fell 87 basis points to 4.07%. One of the biggest beneficiaries, ironically, was China, where the opening up of the local bond market to foreign investors was the talk of the town.

As inflows poured in, the yield on yuan-denominated securities declined to 3.14%, a narrowing of 148 basis points in average borrowing costs.


MSCI’s emerging-market currency index slipped 2.6% since January 2018. In a period that would be remembered most for a Turkish meltdown and a new crisis in Argentina, a sudden drop in the yuan in the middle of 2018 briefly raised concerns of a currency war. The yuan then stabilized and is down 7.2% over the two years.

The Mexican peso and Indonesian rupiah rewarded carry traders, but overall, borrowing in the U.S. dollar and investing in emerging-market assets was a losing proposition: a Bloomberg gauge of carry positions in eight currencies fell 6.1%.

Currency volatility dropped, in line with global trends. A JPMorgan Chase & Co. index of three-month implied, or future, volatility fell to 6.1%, an almost 2 percentage-point drop from two years ago.

The MSCI currency index’s 100-day historical volatility has fallen to the lowest level since April 2013.

Most stocks, bonds and currencies are now better off than the depths of a sell-off in 2018. As the rebound gains momentum, the trade war seems to have been pushed to the back of traders’ minds.

Rising earnings estimates, expanding central-bank stimulus and the scope for fiscal support by developing nations such as India are likely to be the key investment themes of 2020. The main risks could be resurgent inflation, fears of a U.S. recession, the country’s presidential election in November and a vast array of idiosyncratic events that have become a regular feature of the emerging-market landscape.