Equities 2 minutes to read

Why Chinese shares rallied into the tariffs

Michael McKenna

Head of Editorial Content, Saxo Bank

Summary:  Why are Chinese shares raising sharply when tariffs are set to go into effect at midnight?


The US is holding the line, with higher tariffs set to go into effect as of 12:01 a.m. tomorrow. The rise from 10% to 25% will affect $200 billion in goods. Beijing has stated that it “deeply regrets” the tariff hike, and intends to retaliate with trade measures of its own.

Against this grim backdrop, the Shanghai Composite gained 3.1% while Shenzhen posted a 4%-plus rally.

Why?

Although we currently live in an inverted world in which dramatic price falls can find support via their own sheer unpalatability, with central banks releasing the doves whenever things grow too unsteady, the reasons behind today’s Chinese rally are more prosaic.

As MarketWatch via the Associated Press reported this morning, the tariff hike will not apply to goods that left Chinese ports ahead of the Friday deadline. As such, the three-to-four-week transit time to US ports creates what a Goldman Sachs report released yesterday called “an unofficial window, potentially lasting a couple of weeks, in which negotiations can continue… [this] generates a ‘soft’ deadline to reach a deal”.

On top of this technicality, the latest statements from China’s commerce ministry showed signs of optimism, with vice-premier Liu He commenting that “it is hoped the US and Chinese sides will meet each other halfway.”

In today’s Morning Call, Saxo Head of Equity Strategy Peter Garnry termed the transit time-related window “a grace period,” with Saxo Head of Commodities Strategy Ole Hansen adding that the delay between tariff imposition and its effects on US consumers is longer still.

Saxo Chief Economist Steen Jakobsen has long maintained that even if a deal is reached, it would likely prove antilcimactic given the fundamental opposition between the US’ and China’s structural needs.

Contemporary markets, however, are more than willing to grasp at straws and call them green shoots, so today’s rally is less of a surprise than it may appear.
CSI 300 (daily via 03188:xhkg ETF, source: Saxo Bank)

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.