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Investing.com -- U.S.-China trade negotiations currently taking place in London have the potential to influence financial markets, particularly in China, according to analysts at Capital Economics.
In a note on Tuesday, the firm highlighted two crucial questions for consideration.
First, the analysts ponder the potential boost an eventual "deal" could provide to China’s equity market, noting its underperformance since "Liberation Day."
However, Capital Economics cautions against expecting a significant turnaround, stating, "We wouldn’t bank on a big turnaround thanks to any potential trade breakthroughs."
They emphasize that "the tariff shock to China’s equities hasn’t actually been especially large, with other factors such as domestic policy more important."
Furthermore, they "doubt that the U.S. will back off completely," which is likely to "restrain any relief rally."
While an easing of access to high-end semiconductors could offer a boost to China’s tech stocks, Capital Economics suggests not to "expect too much there, either." They note that the "bigger plunge" in tech valuations occurred during subsequent crackdowns by Chinese authorities, not solely due to the 2018 trade war.
Second, Capital Economics examines the implications of the talks for the renminbi. While acknowledging that "some discussion of exchange rates" would not be surprising, they "would be surprised, though, if China agreed to allow its currency to appreciate much as a result of any ’deal’ with the U.S."
This is said to be partly because "China’s authorities are unlikely to want to be seen to be dictated to by Trump on FX policy."
More importantly, they "suspect they’ll be concerned about the health of the manufacturing sector given its massive increase in capacity lately."
The analysts consider fiscal stimulus as a potential way to balance domestic economic growth and exchange rate appreciation, but believe China’s authorities’ "calculus hasn’t changed much" on this front.
They anticipate "symbolic offerings to the U.S. (such as agreed purchases of certain U.S. goods) are much more likely," leading them to suspect the renminbi’s "more likely path... is to weaken slightly against the dollar over the rest of this year."
