Chinese stocks are falling as the Chinese currency is falling in the early innings of Trump’s trade war.
Tariffs on Chinese exports are being met by that government loosening the strings on the yuan. The currency was trading Aug. 8 at 6.84 to the dollar, against 6.29 to the dollar as recently as March. By Aug. 13, it was up to 6.89 yuan to the dollar.
It could move further. The yuan was trading at 6.95 to the dollar in December of 2016. Central bank moves to tighten reserve requirements are expected to keep it under 7.
Stock prices adjust to currency moves, and Chinese stocks are no different. Since March, Alibaba (NYSE:BABA) is down 10%, and rival JD.com (NASDAQ:JD) is down 13%. The Shanghai Composite is down 18% for the year, and most of the fall has come since June, as trade tensions increased.
Is it time to bail on China? No, it’s time to buy Chinese stocks.
China Playing the Long Game
China’s strategy is to wait out Trump and act like the adult in the room.
Rather than use the yuan as a weapon, the country’s central bank is quietly using currency swaps to maintain the yuan’s value. It has ceded Shanghai’s status as the second-leading market to Tokyo, for now, focusing on efforts to reduce speculation.
The government is matching the U.S. tariffs tit for tat, but the government is not escalating the trade war. While Chinese state media is talking tough, the government is playing more of a long game.
One result it that Chinese stocks have turned into bargains. The price-to-earnings ratio for Alibaba, for instance, is down to 48.6, even though it’s bringing over 20% of its revenue to the net income line and growing its top line at 60% per year.
Amazon.com (NASDAQ:AMZN), by contrast, now has a PE of 148, while profits are just 4% of sales, and the top line is growing at 31% per year.
China Is Winning
China’s total economy is still just two-thirds the size of the U.S., and the real financial headline in East Asia is China’s move of production to “cheaper” countries like Vietnam. China is an increasingly mature, consumer-driven country, with first-class infrastructure and an educated labor force. It is no longer an “emerging market.” It has emerged.
This means China has enough domestic demand, and controls enough overseas production, to go toe to toe in a trade war. Washington may not have considered the end game, but China has, and it wants to appear an island of stability in a troubled world.
It’s a myth that the U.S. is “winning” the trade war. There are no winners in a trade war, only losers. The trick is to hold down your losses. China will lose some market share, and businesses there will be forced to adjust, but they will adjust. China will be able to blame its internal market troubles on the American bogeyman and continue as it has.
Bottom Line on Chinese Stocks
The optimism over the trade war’s results among Americans is turning the strongest Chinese stocks into bargains. It is having the perverse effect of tightening China’s control over other East-Asian economies, as Chinese companies shed low-wage industries while retaining control, just as the U.S. has done for decades.
In the early stages of any conflict, predictions of imminent victory are common. And in this trade war, those predictions are already being made.
But while the U.S. is focused on China, China is wisely focused on China. Trump has given Xi Jinping a great gift. Xi now speaks softly while carrying the big stick. After all, who makes your iPhone?
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Romantic Detective Finds Her Family, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in BABA and AMZN.