Trade War? Not in China Trade Data

If there is a "trade war", no one has told China's importers/exporters. The growth of China's exports unexpectedly rose above expectations despite US tariffs and heavy media rotation of protectionist rhetoric. Imports also accelerated, indicating solid domestic demand. A key focus for the market was China's surplus with the United Sates, which fell only marginally. The China July trade balance came in at $28.05 billion; Exports are up 12.2% vs. 10.0% y/y; Imports increased 27.3% compared to 16.5% y/y.

Trump has indicated that tariffs are "working big time", but this ignores signs that quickest way for the US to balance trade is via energy exports which Beijing has been limitng import. Ironically for US President Trump, the negative sentiment on trade, which has driven the CNY down 10% since April against the USD, actually supported exports.Incoming data indicates that declines in currency and captial exodus has slowed (supporting regional stock markets).

Yet with no sign that either nation is prepared to back down and disagreement expanding further than trade into intellectual property, investments and technical transfer, the downside risk to China's growth has increased. In response, Chinese officials have moved proactively by releasing additional liquidity into the banking system, raising the reserve requirements on foreign exchange forward positions and suggesting further fiscal stimulus. As the potential for a trade war shifted from a tail-risk into base scenario, equities, specifically Chinese shares, become vulnerable to deeper correction.

Our base scenario: China will now seek to negotiate with the US to avoid further escalation, but the outcome is uncertain. The directional risk to the CNY at this point is at an unstable equilibrium.

China Online Certificate (SQ Symbol: PSTA1V).