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Zhang Shidong

Azar Zaidi

China and Hong Kong stocks have brushed aside an increase in tariffs on Chinese imports worth US$200 billion by the US from 10 per cent to 25 per cent, on expectations a deal will be reached between Washington and Beijing. 
Talks between Chinese Vice-Premier Liu He, who is in Washington for two days of talks, and US officials, including Robert Lighthizer, the country’s top negotiator, and Treasury Secretary Steven Mnuchin, will resume on Friday morning EDT.
On Thursday, US President Donald Trump said a deal was still possible, even as he reiterated plans to raise tariffs.
In the week since he announced the tariff increase, the S&P 500 has dropped every day. And of course, China, the world’s second-largest economy, has some market weapons it can deploy should this trade conflict escalate further. The trade war has already cost companies in both countries billions of dollars.
Follow us, Zhang Shidong in Shanghai and Azar Zaidi in Hong Kong, as we follow the day’s developments in the mainland Chinese and Hong Kong stock markets.


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Stocks

Stocks Blog:  China stocks hit six-week high amid hopes of trade deal  

Business

Markets

Talks between Chinese Vice-Premier Liu He and US officials, including Robert Lighthizer, the country’s top negotiator, and Treasury Secretary Steven Mnuchin, will resume on Friday morning EDT
Trump says a trade deal with China may still happen after Xi sent him a ‘beautiful letter’


Talks between Chinese Vice-Premier Liu He and US officials, including Robert Lighthizer, the country’s top negotiator, and Treasury Secretary Steven Mnuchin, will resume on Friday morning.


China stock market

Hong Kong Stock Exchange

Live

* Overnight markets/what futures foretell:
– Overnight in US markets, S&P 500 dropped 0.3 per cent, Nasdaq fell 0.4 per cent and Dow Industrials slid 0.5 per cent
– Hong Kong futures were 1.1 per cent higher, while the China A50 futures gained 2 per cent
– Northbound trading in the stock connect programme will be shut today ahead of a public holiday that will be observed in Hong Kong on Monday.
* IPO debuts: Shenzhen New Land Tool Planning & Architectural Design (300778 CH) will start trading in Shenzhen today and JBB Builders International Limited (1903 HK) will debut in the city.
* Economic statistics/central Bank action: nothing major
* Corporate events, earnings, meetings, news conferences: nothing major
* Next week: Key April data on industrial output, retail sales and fixed-asset investment is due on Wednesday.


Morning Guidance

What is non-negotiable in trade talks?

On Thursday, Donald Trump said a trade deal with China may still happen after Xi Jinping sent him a ‘beautiful letter’, Owen Churchill and Robert Delaney report from Washington.
 


‘Let’s work together’

Traders seem to be placing their wagers on the probability that China and the US will strike a trade deal after US President Donald Trump said he received a “beautiful letter” from his Chinese counterpart, Xi Jinping.
Chinese special envoy Liu He wrapped up the first day of talks in Washington on Thursday, but officials from both countries made no comments to the media. The Shanghai Composite Index rose 1.8 per cent, while the Hang Seng Index added 1.2 per cent in early Friday morning trading.
– Shidong Zhang


China, Hong Kong stocks drift higher at open on prospects of trade deal

Trump lacks the negotiating talent needed to resolve the US-China trade war in America’s favour, James Chip Massey, a former crisis negotiator at the US Federal Bureau of Investigation, tells Ryan Swift.


Former FBI crisis negotiator on Trump Vs Xi

The latest comments by Trump have buoyed sentiment. “The market has realised the threat of tariff increases is Trump’s tactics, and that he wants a trade deal to be struck,” said Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai. 
“At least from today’s market reaction, investors are once again optimistic that an agreement will be reached. Also, the market had earlier dropped significantly in an overreaction to trade tensions. That’s why we are coming back.”
– Shidong Zhang


Markets upbeat on realisation Trump wants deal, says Shanghai fund manager

Shares of JBB Builders International (1903 HK), a local marine construction engineering firm, fell 11 per cent when they traded for the first time at HK$1.05, compared with their initial public offering price of HK$1.18. Shares of Shenzhen New Land Tool Planning & Architectural Design (300778 CH), an urban planner, opened with a 20 per cent premium before soaring by their 44 per cent daily limit, from an IPO price of 27.33 yuan.
– Eugene Tang
 


Marine construction firm declines on IPO debut, urban planner soars

Chinese stocks are still in a bull market and investors should not be in a hurry to turn defensive, China Securities Journal said in a front-page commentary on Friday. Recent shrinking turnovers suggest selling pressure is drying up and a rebound is in store. The pattern is more like that which precedes a new round of rallies, it said.
– Shidong Zhang


Bull run in China stocks intact, China Securities Journal says

Trade talks have wrapped up in Washington, according to reports by Bloomberg and Reuters. “So far [there’s] no indication we’re walking away from the cliff,” a Bloomberg blog said.
The Wall Street Journal just tweeted that “the US will raise tariffs on US$200 billion of Chinese goods as planned Friday, even though the nations plan to resume trade talks in the morning.”
The S&P Futures are plunging, dropping 6.5 points – or 0.23 per cent – from positive territory before the talks ended.
– Eugene Tang


Trade talks finish in Washington 

The US to go ahead with planned China tariff increase at 12.01am, say two people familiar with the situation, according to Bloomberg.
– Eugene Tang
 



The US to go ahead with planned tariff increase at 12.01am

“Elevated noise constitutes a negotiating tactic on both sides … there will be some sort of a resolution,” said Howard Wang, head of Greater China equities at JPMorgan Asset Management in Hong Kong. “No one will benefit from a trade war. In the meantime, Chinese and other policymakers around Asia are likely to be more rather than less accommodating.”
Wang oversees more than US$5.5 billion in funds invested in mainland China-traded stocks and offshore equities.
A trade deal will bolster the case for investing in Asian stocks, which stand out because of faster growth in developing countries, improved quality of the investible universe and valuations below historical averages, he said.
Wang’s main stocks picks are the health care, consumer and technology sectors. In the electric vehicle supply chain, Wang said he was positioned for upstream players with relatively higher pricing power.
– Shidong Zhang


There will be some sort of resolution, JPMorgan Asset Management says

Gains that stocks in mainland China and Hong Kong had held onto in morning trading on Friday, were pared on news that Washington will move ahead with its plan to raise tariffs on US$200 billion worth of Chinese goods from 10 per cent to 25 per cent. 
The Shanghai Composite Index was up 1.5 per cent at the break, trimming an intraday gain of as much as 2.6 per cent, while the gains on the Hang Seng Index narrowed to 0.6 per cent. Futures on the Dow Jones Industrial Average were little changed in Asian trading hours after rising by as much as 0.6 per cent.
– Shidong Zhang
 


China, Hong Kong stocks pare gains as US proceeds with tariff increases

“If tariffs are augmented and their scope expanded to include remaining Chinese imports [around US$300 billion], leading to some sort of Chinese response, we estimate Chinese GDP growth in 2019 could suffer by 0.3 to 0.5 percentage points,” Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers, said in an emailed comment, as the clock ticks towards US tariffs taking effect. 
“This would effectively offset all of stimulus-driven gains accumulated this year.”
– Eugene Tang


Escalated tariffs to offset all ‘stimulus-driven gains accumulated this year’

The move, in accordance with a document registered by the Office of the United States Trade Representative (USTR), marks a serious escalation in the US-China trade war and stands to have far-reaching economic impact on exporters and importers from both countries, writes Finbarr Bermingham.


Tariffs on US$200 billion of Chinese goods rise to 25 per cent

China’s commerce ministry said in a statement it “deeply regrets” US tariff increases, but held out hope for more “dialogue and cooperation” to find a solution. The ministry said China is being “forced to retaliate”, without elaborating.
 
The ministry has not scheduled a media briefing in the wake of the increased US tariffs taking effect.
– Eugene Tang


Beijing ‘deeply regrets’ US tariff increases

The 25 per cent tariffs imposed by the US on US$200 billion worth of Chinese imports from the previous 10 per cent exacerbates the uncertainty in the global trading environment, further raises tensions between the US and China, negatively affects global sentiment and adds to risk aversion globally, Michael Taylor, managing director of credit strategy & standards at Moody’s Investors Service, said in an emailed comment.
“The higher tariffs could also lead to the repricing of risk assets globally, tighter financing conditions and slower growth,” he said.
“In addition, the trade war could result in an increasingly fragmented global trading framework, weakening the rules-based system that has underpinned global growth, particularly in Asia, over the past several decades.
“For China in particular, the higher tariffs will have a significant negative effect on exports, against the backdrop of a slowing economy. Further policy easing will mitigate only some of the impact, and increased uncertainty and weaker business sentiment will hinder private investment decisions.”
The Chinese advanced technology sector is also likely to be adversely affected, as the US intensifies restrictions on that sector.
And for the rest Asia’s export-dependent economies, a slowdown in China will dampen growth rates.
“While we believe that a trade deal will eventually be reached between the US and China, the risk of a complete breakdown in trade talks has certainly increased,” he added.
– Peggy Sito


Increased tariffs add to uncertainty, raise tensions, Moody’s says

25 per cent tariffs could be too much for most Chinese exporters, says Tom Orlik, chief economist at Bloomberg Economics. 
 
How many Chinese exporters could cope with 25% tariffs? Maybe not that many pic.twitter.com/kx9NLylwnq
— Tom Orlik (@TomOrlik) May 10, 2019


25 per cent tariffs could be too much for most Chinese exporters

Chinese stocks are brushing aside US’s planned move to more than double levies on US$200 billion worth of imports from the world’s second-largest economy, with the Shanghai Composite Index rising 1.6 per cent in afternoon trading. 
With top Chinese negotiator Liu He still in Washington for two-day talks and President Donald Trump softening his hardline tone, traders seem to be betting a deal can be reached. 
Gains on liquor distillers, insurance stocks and software developers are driving the benchmark into positive territory.
Hong Kong’s Hang Seng Index added 0.7 per cent.
– Shidong Zhang


Chinese stocks firmly up after US imposes higher tariffs

Touch-screen manufacturer OFILM Group (002456 CH) tumbled by the 10 per cent daily limit for a second day on Friday in Shenzhen, after the bourse asked it to explain two contrasting statements about stake transfers.
The company said in an exchange statement on Wednesday night its major shareholders had terminated a plan to transfer stakes in the company. Just a day later, it said these shareholders had signed a framework agreement with a Shenzhen investment firm on a stake transfer. The Shenzhen Stock Exchange immediately stepped in, requiring an explanation. The stock recently traded at 9.77 yuan.
– Shidong Zhang
 


Touch-screen maker OFILM slumps in Shenzhen 

Companies that had their goods out on ships or aeroplanes before Friday will for now be able to avoid the increased 25 per cent tariffs on nearly half of goods exported from China, according to a new report from Goldman Sachs. 
“Goods that were exported before today are grandfathered in to the previous 10 per cent rate,” Goldman Sachs analysts Alec Phillips and Blake Taylor said in a research note on Friday. “In practice, this means most of the tariff increase will not hit until two to three weeks from now, or roughly the amount of time it takes cargo to ship from China to the US.”
The delay may provide an opening for the world’s two largest economies to reach an agreement in the interim, the Goldman analysts said. 
“That said, the fact that the White House has increased the tariff rate suggests that the probability has risen that tariffs will increase on the remaining roughly US$300 billion in imports from China that the US has not yet targeted,” Phillips and Taylor said. 
“President Trump indicated that the paperwork to implement those tariffs is being drafted and we expect a notice could be published in the next two weeks. Implementation would take longer, potentially two to three months.”
The Goldman analysts, however, said they believed an agreement is “fairly likely”, but risks that the US could add tariffs on additional Chinese imports had also risen “somewhat”.
– Chad Bray 


Tariff increase will not hit until two to three weeks from now, Goldman Says

“As financial markets have mostly priced in this outcome, risky asset classes are likely to trade within a range in the short term,” said Khiem Do, head of Greater China investments, global markets at Barings. 
“They are unlikely to trade at much lower levels from last night’s closing prices, because, from a fundamental viewpoint, we believe that today’s tariff decision, while slightly negative, is unlikely to impact significantly on the mild recovery of the Chinese, US and global economies.”
– Shidong Zhang


Barings says US tariff increases already priced in

The trade war will hurt, but will not be detrimental to China’s growth, Chi Lo, Greater China senior economist at BNP Paribas Asset Management, said in an emailed comment. “We still expect non-inflationary moderate growth in China to unfold under continued policy easing in the coming months,” he said.
“The FTSE Russell and MSCI index weight change events will start at the end of this month and continue through the year. The market estimates that these events will attract about US$30 billion of passive rebalancing inflow to China. If the trade war risk subsides again, active inflows may follow. 
“In reaction to the renewed trade war risk, Beijing is more likely to shift policy back to growth protection than to devalue the yuan. This will mean more infrastructure investment, more cuts in banks’ reserve requirement ratio and less hawkish stance on the property sector. 
“In fact, the People’s Bank of China announced on May 6 an RRR cut for 1,000 small rural commercial banks to 8.0 per cent from 11.5 per cent, releasing 280 billion yuan of liquidity to the system for targeted lending to the private sector and small and medium-sized firms. 
“This move and its timing not only underscore our long-held argument that Beijing’s macroeconomic policy had evolved to a structural commitment to economic reforms and debt control, but also shows that the stock market had entered into the PBoC’s policy reaction function.”
– Eric Ng


Trade war to hurt, but not detrimental to China’s growth, BNP Paribas says

Chinese stocks staged their biggest rally in six weeks, with the Shanghai Composite Index rising 3.1 per cent at the close on Friday. The latest comments by Trump have stirred optimism that an agreement will be reached despite the White House proceeding with tariff increases on US$200 billion worth of Chinese imports. JPMorgan Asset Management said a trade deal was still possible, while Barings said Friday’s tariff increases had already been priced in. 
In Hong Kong, the Hang Seng Index has added 1 per cent in latest trading.
– Shidong Zhang


 China stocks hit six-week high amid hopes of trade deal 

“I expect us to enter a phase of uncertainty and volatility in the market, particularly in light of the strong returns over the year to date,” said Fidelity International’s Asia-Pacific head of asset management, Paras Anand. “Central banks are likely to remain accommodative in terms of monetary policy in the near term, which will add support to higher-quality securities across both equities and bonds.”
In China, “speculation is building that we may see further fiscal easing, which in turn, could support infrastructure related sectors”, he said. “Across both our fixed income and equities portfolios, we continue to focus on domestic plays rather than those with direct exposure to trade.”
– Eugene Tang


Phase of uncertainty and volatility ahead, Fidelity International says 

Car sales in the world’s biggest automobile market fell in April, dropping for 11 months in a row. Latest data from the China Passenger Car Association shows sales fell 17 per cent to 1.54 million units last month, following a 12 per cent decline in March and a 19 per cent fall in February. Buyers are delaying purchases as they await potential incentives from the government to revive growth.
– Shidong Zhang


China vehicle sales fall for 11 straight months

“We believe China will retaliate in kind, with US$30 billion worth of tariffs on US goods, the amount that the US has increased tariffs on Chinese goods,” said ING’s Greater China economist Iris Pang. “This could be announced during a regular media briefing in the afternoon. China could also delay this tariff until Vice-Premier Liu He returns to China tomorrow. In any event, this will happen very soon.
“What we expect is that China will apply a mix of tools to penalise the US. First, it will impose higher tariffs on most US goods shipped to China. But this won’t make up the whole amount of tariffs imposed by the US on Chinese goods.
“Second, it will make life more difficult for US companies operating in China, possibly by stepping into M&A deals in China.
 
“However, we do not expect China to sell US Treasuries. This is a tool that China will save as a last resort, and it may not even be used in the unlikely event of a breakdown in the trade negotiations.”
– Eugene Tang


Beijing will use ‘mix of tools to penalise the US’, ING says

Bank of America Merrill Lynch economists and strategists have forecast that China will continue its economic stimulus policies until a trade deal is reached.
In a report on Thursday, analysts led by global economist Ethan Harris said: “If short-term uncertainty from trade combines with a soft patch in domestic growth data, it could open the window for further monetary easing, including faster credit expansion and potentially RRR [required reserve ratio] cuts.
“On top of that, a consumption subsidy programme is likely to be implemented to stimulate the economy soon, along with other temporary fiscal help, such as deferred tax payments. To stabilise growth and boost confidence, China is also likely to adopt more measures to promote faster infrastructure investment growth … and support the property market verbally.”
In a scenario of brinkmanship, which the bank defined as US tariffs increasing to 25 per cent while negotiations continue, they expect “Chinese equities to sell off the most, although we would be overweight on sectors that could benefit from stimulus measures, [e.g.] consumer, building materials”.
– Yujing Liu


 China to keep stimulus on until trade deal reached, BAML says

The Hang Seng Index advanced 0.8 per cent to 28,550.24 at the close on Friday, trimming its weekly losses to 5.1 per cent. The Hang Seng China Enterprises Index, or the H-share gauge, also rose 0.8 per cent.
Sunny Optical Technology Group and Sino Biopharmaceutical were the gauge’s biggest gainers, rising at least 5 per cent.
– Shidong Zhang


Hang Seng Index follows Chinese stocks higher

“State fund buying may be boosting financial stocks,” said Zhang Gang, a Beijing-based analyst at Southeast Securities, according to Bloomberg. “The brief slump at the reopen obviously reflected the latest tariff news.”
– Eugene Tang


Stocks Blog: China stocks hit six-week high amid hopes of trade deal

Talks between Chinese Vice-Premier Liu He and US officials, including Robert Lighthizer, the country’s top negotiator, and Treasury Secretary Steven Mnuchin, will resume on Friday morning EDT Trump says a trade deal with China may still happen after Xi sent him a ‘beautiful letter’

Talks between Chinese Vice-Premier Liu He and US officials, including Robert Lighthizer, the country’s top negotiator, and Treasury Secretary Steven Mnuchin, will resume on Friday morning EDT

Trump says a trade deal with China may still happen after Xi sent him a ‘beautiful letter’