3 Reasons Why China’s Markets Laughed Off Trump’s Trade War Escalation

May 10, 2019, 11:11 AM UTC

The Chinese markets had a surprisingly good day Friday, given that the U.S. just massively jacked up tariffs against Chinese imports, and the trade negotiations between the two countries appear likely to fail.

The Hang Seng Index, having seemed set to plummet around lunchtime, ended up 0.84% up on the day. The Shanghai Composite Index did even better, soaring 3.1% by close. And the positivity may be spreading: the Stoxx Europe 600 Index is up 0.76% at the time of writing.

So, bearing in mind that Chinese companies will be hit hard by the tariff escalation, what gives? There are three possible factors at play.

They’re still talking

President Donald Trump may have sent negotiations into a tailspin several days ago by announcing those massive new tariffs, and China may be threatening as-yet-undefined retaliation now that the tariffs have come into effect, but the negotiations are still on.

Trump said Thursday that Chinese President Xi Jinping had sent him a “beautiful letter,” and the two would likely have a phone call. According to Trump, Xi said in the beautiful letter: “Let’s work together [and] let’s see if we can get something done.”

“The high levels of volatility that we have seen is stemming almost entirely from Trump’s comments and actions over China. Traders continue to swing from tweet to headline to comment to tweet as they try to make sense of the mixed messages,” wrote London Capital Group’s Jasper Lawler in a Friday note.

Chinese Vice-Premier Liu He met Thursday with U.S. Trade Representative Robert Lighthizer, and it was reportedly a short meeting. However, the two sides are still set to continue talking Friday.

“We think it’s clear that there will be no deal at the end of this round of talks,” wrote Lawler. “The best we can hope for at this stage is an agreement for the sides to keep talking. But with tariffs now at 25% both sides will want to see things progress more quickly.”

The tariffs aren’t biting yet

The escalation of the tariffs comes with one important detail: the new tariffs only apply to goods that are loaded onto ships in China as of Friday, and they will only bite once those goods arrive in the U.S. Goods that already on the high seas will only incur the old 10% tariffs.

The fastest cargo ships with the quickest routes take a couple weeks to get from China to the U.S., so that creates an effective buffer or “grace period” of as much as a month.

“Increased tariffs are in place though they only take effect on goods now leaving China so theoretically could be cancelled before anyone has to pay anything,” said Société Générale analyst Kit Juckes, according to the Guardian.

Support from Beijing

Bloomberg is reporting another possible reason why the Chinese markets had a buoyant Friday: they’re being propped up by the government.

The outlet’s sources said state-backed funds stepped in to buy Chinese equities after they started to plummet around lunchtime, local time.

The sharp slump followed a rise in the morning, and then it was over almost as abruptly. State intervention would certainly provide an explanation for this “sharp V,” but for now it remains unconfirmed.

Either way, Friday turned out better than expected on the Chinese markets. Whether that optimism holds after the day plays out in the U.S.—where futures currently point to a pretty flat opening—is another matter.

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