HONG KONG -- The most hostile U.S. policy toward China in a generation has not stopped the gains in Chinese stocks, which have outscored every major market in Asia bar India since Donald Trump's 2016 election triumph -- and analysts expect more is to come whatever the result of Tuesday's presidential race.
While Chinese equities slumped in mid-2018 after Trump launched his first broadsides in a trade war, imposing tens of billions of dollars of tariffs on goods from China, they rebounded as the two nations neared a preliminary agreement. This year, the value of the Chinese stock market has hit a record high as the economy has shaken off the impacts of the pandemic and a stronger currency, with analysts saying recovering corporate earnings should extend the gains.
Since Trump's election win in November 2016, the CSI 300 index of the largest A-share stocks listed in Shanghai or Shenzhen has climbed 41.19%. That makes it the best performing major Asian index for the period, behind the Bombay Stock Exchange's Sensex's rise of 47.8%. The S&P 500 has surged 62.6% in the same time.
In comparison, Japan's Nikkei Stock Average has risen 38.4% and South Korea's Kospi is up 18%, while benchmark indexes in Singapore and Indonesia have declined in the period.
Chinese company earnings are expected to be further supported by Beijing's push to boost domestic consumption, relaxed terms for loans, ready central bank liquidity and market reforms to remove obstacles to foreign investment.
Some of these measures offset the earnings hit from tariffs as well as a liquidity crunch arising from President Xi Jinping's efforts to curb "shadow" lending to de-risk the $45 trillion banking system.
"Shadow banking deleveraging is behind, and credit growth has expanded," said Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong. "The decoupling centers on technology now while the financial integration of China to the rest of the world has increased. At the same time, the cyclical acceleration in Chinese company earnings makes it an attractive opportunity."
While he acknowledges that U.S.-China tensions will endure, Benzimra said ignoring Chinese stocks would mean missing out on a rare growth market.
Getting tougher on China is one of the few U.S. foreign policies attracting bipartisan support. In the run-up to Tuesday's election, Trump has raised the prospect of "decoupling" the U.S. economy from China, while his rival, former Vice President Joe Biden, who has called Chinese President Xi a "thug," has also promised to use tariffs and pledged to "unite the economic might of democracies around the world to counter abusive economic practices."
A win for Trump would mean a continuation of the trade war and efforts to decouple the two economies, said Louis Kuijs, head of Asia economics at Oxford Economics. While a Democratic administration would be "more interested in engagement," a victory for Biden would not imply a "significantly softer overall U.S. policy stance vis-a-vis China on economic issues such as technology and decoupling," Kuijs said.
China is on course to be the only major economy to grow in 2020. A Reuters poll of economists in late October forecast fourth-quarter gross domestic product to rise 5.8% year-on-year, quickening from 4.9% in July-September. Growth is projected to surge to 8.4% in 2021, as the global economy recovers from the health crisis, according to the poll.
Supporting the investment thesis are China's financial sector reforms that have made it easier for foreign investors to deploy capital in the country.
China last year removed the ceiling on quotas for foreign investors to buy stocks and bonds, and China Securities Regulatory Commission Vice Chairman Fang Xinghai said in September plans were afoot to widen the scope of investments allowed in a program linking the Hong Kong and Shanghai stock markets and allow foreign investors to trade more commodities futures products.
It also opened its financial markets this year to allow Wall Street titans such as JP Morgan and Goldman Sachs to take full ownership of ventures in the country, counting on them to provide fresh investments.
These moves have created more transparency in China's markets, helping to reduce the risk premium -- the spread investors demand for taking on the extra risk for backing Chinese stocks -- from more than 10% in 2015 to about 6% now, according to Societe Generale.
While the U.S. election outcome could influence the speed of the decoupling, the direction is not going to change, said Anatole Kaletsky, chief economist at Gavekal Research. Decoupling will spur China to become self-reliant and develop its own technology and trading ecosystem, making it easier for investors to own Chinese stocks and bonds directly, rather than trying to gain exposure through the shares of foreign companies doing substantial business there, such as Apple and Daimler.
"Given the very low institutional exposure to China today, this will drive enormous capital flows into Chinese equities and bonds," he said. "Therefore, the big capital gains in the Chinese equity market this year and the sudden upsurge of interest in the Chinese bond market is probably the start of a long-run trend and not just a speculative bubble."
Foreign investors held a record 2.46 trillion yuan ($354.5 billion) in Chinese stocks at the end of June, up 50% from a year earlier, according to the latest data available from the People's Bank of China. That was still less than 5% of the total market capitalization.
The world's second-largest stock market has added more than $3 trillion since the March trough to hit a record of $10.08 trillion in October, helped by Beijing's policies to encourage trading, a flurry of new listings and the strengthening yuan. This year alone the CSI 300 has registered a 17% gain.
Funds raised from primary and secondary listings across mainland stock exchanges are set to hit $72.4 billion once Ant Group's IPO is completed, compared with $28.5 billion for all of 2019, based on data compiled by Refinitiv.
The yuan has climbed more than 6% from its low in May and is being quoted near its strongest level since July 2018.
"Chinese equity markets are now on a much better footing, mainly supported by a number of factors," said Hong Kong-based David Choa, head of greater China equities at BNP Paribas Asset Management, referring to economic fundamentals, abundant liquidity, reduced leverage and a diverse technology sector.
"We believe that further downside risks may result in buying opportunities for investors looking for longer-term returns from China equities. Even though we do not overlook the short-term risks, we should also appreciate the market opportunity to allow us to invest in long-term competitive businesses at more attractive prices."