23 July 2019
Hong Kong stocks took a beating in recent sessions, along with equities elsewhere, amid fears of a US-China trade war. Photo: Bloomberg
Hong Kong stocks took a beating in recent sessions, along with equities elsewhere, amid fears of a US-China trade war. Photo: Bloomberg

Stock market selloff: Why we needn’t be too pessimistic

The stock market selloff has gone on further in Hong Kong and in mainland China. The slide can be attributed to two factors, apart from a downdraft from external bourses, primarily Wall Street. 

The US-China trade war is one of the two triggers of the latest market selloff.

Washington is trying to thwart Beijing’s Made in China 2025 plan, which focuses on ten emerging tech industries. If successful, China will be able to challenge the dominance held by US as the world’s tech power.

There are reports that China has now barred overt promotion of the Made in China theme, as Beijing has realized the merits of keeping a low profile.

We should not be overly pessimistic about the trade war. China and US, as a matter of fact, are deeply interconnected in economy and trade.

Take iPhone as an example. When iPhones are exported from China to the US, they contribute to China’s trade surplus. But Apple, a US entity, would make very handsome profit from the sales of these gadgets.

China’s trade surplus is closely tied to American corporate profits. Given this, US sanctions on China will also undermine the US economy. Hence, we shouldn’t expect the trade war to go to the extreme.

Some netizens have come up with this scenario. Even if US imposes 25 percent tariff on all Chinese goods, China can offset 5 percent from weakening yuan, 10 percent transferred to consumers, and 5 percent from organic growth.

In addition, Chinese exporters China can also open up new markets in Europe, Russia, South America, Africa, etc, to make up partially for the loss. So it is far from the end of the world.

Deleveraging is the other trigger for the market downturn. We’ve seen more credit defaults, and some Chinese companies are struggling to issue new bonds. Some local government financing vehicles are also on the verge of bankruptcy.

It’s reported that China Development Bank has halted funding for new shantytown redevelopment projects. All these news have made investors nervous.

Deleveraging is a must to fight rampant shadow-banking and off-balance-sheet lending, so Beijing must press on in order to ensure the safety of the financial system.

That said, Beijing can always adjust the pace of deleveraging to avoid excessive economic pressure.

This article appeared in the Hong Kong Economic Journal on June 28

Translation by Julie Zhu with additional reporting

[Chinese version 中文版]

– Contact us at [email protected]


Hong Kong Economic Journal columnist

EJI Weekly Newsletter

Please click here to unsubscribe