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Trump’s trade war has China’s stocks, currency taking a beating while the US market soars

Matt Linden

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SHANGHAI (Reuters) – It’s barely six months into a broadening Sino-U.S. trade war, and the fallout has already driven China’s stock markets into the same league as debilitated emerging markets such as Turkey, Argentina and Venezuela.

With around a 20 percent loss so far in 2018, Shanghai’s stock market <.ssec> has joined the crisis-hit trio among the world’s four worst performers. In stark contrast, the technology heavy U.S. Nasdaq index <.ixic> is one of the world’s biggest gainers, up about 15.5 percent.

While some analysts say the rest of the world remains complacent about how disruptive a trade war could get between the two biggest economies – with their deep and long production supply chain – the accusation could not be leveled at investors in Chinese markets, which have been hemorrhaging.

Besides the headline drop in share values, China’s currency has fallen sharply and share transaction volumes have shrunk. Money managers are preferring cash over investments and investors have dashed into the safety of lower-yielding government bonds.

“I’ve seen hedge funds sitting on 10 billion dollars of cash or equivalent and waiting to get back into the market,” said Chi Lo, Greater China economist at BNP Paribas Investment Partners, adding the uncertainty and lack of confidence could drag on for a few months.

And the war may have only just begun. China and U.S. President Donald Trump’s administration have so far only kicked off tit-for-tat tariffs on $50 billion of each other’s imports. Trump has said he is prepared to tax the entire roughly $500 billion of Chinese products that the United States imports annually.

Lo, at BNP Paribas Investment Partners, fears China’s economic growth could slip next year to 6.2 percent, the slowest since 1990, as the full impact of the tariffs kicks in.

UBS Securities estimates a full-blown trade war would wipe out profit growth at major China-listed companies, and the blue-chip index <.csi300> could fall to 3,000 points in its worst-case scenario, which is around 7 percent below current levels.

Heading for NASDAQ

According to data from Shenzhen Qianhai Simuwang Fund Distribution Co, hedge funds’ stock holdings in their investment portfolios on average has dropped to a three-year low of 52.6 percent, down from this year’s peak of 70.3 percent in January.

A Reuters survey showed a similar trend in the mutual fund industry, where equity fund managers slashed suggested exposure to stocks to 66.9 percent in August, compared with 76.9 percent a year earlier, while recommended cash holdings rose to 23.1 percent from 13.1 percent.

And the anxiety is not just limited to trading floors. The mid-year earnings season revealed the heavy pall of uncertainty in corporate boardrooms across China.

Aluminum makers Jilin Liyuan Precision Manufacturing Co Ltd and Yinbang Clad Material Co Ltd said their overseas sales have been reduced to zero. Tongrun Equipment Technology Co , a Chinese maker of power transmission and control equipment, forecast its nine-month profit would be somewhere between “-20 percent and 30 percent”, a wide and uncertain range spawned by the worries over tariffs.

Some companies are refusing to give out earnings guidance.

“If we paint a gloomy picture, investors would panic,” said Liu Jieling, investor relations official at motor equipment exporter Zhongji Innolight Co . “If we express optimism, the reality could unfold otherwise.”

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