China stock rally belies talk of financial fragility
21 July, 2018
China’s “currency is dropping like a rock,” President Trump said this morning on a CNBC interview, while the RMB stabilized on foreign exchange markets and Chinese stocks rallied. In early New York trading, the most liquid Chinese ETF (ticker FXI) rose about 1.5%. Chinese financials rallied sharply overnight.
Chinese stocks lost ground during the past several months, but the retreat has been orderly compared to 2015, after China devalued a then overpriced RMB.
The cost of hedging the large-cap Chinese stock ETF now stands around 20%, compared to nearly 60% in August 2015.
China has eased monetary policy (which requires some depreciation of the RMB) and is debating an additional fiscal stimulus. Evidently the market believes that China can increase domestic demand fast enough to replace any foreign demand lost to US tariffs. President Trump today threatened to slap tariffs on all $500 billion of Chinese exports to the US, but it remains to be seen whether the White House really wants to impose stiff price increases on smartphones, computers, and household appliances, which comprise most of Chinese exports to the US.