Kamala And Trump Will Continue China De-Risking. Does That Make China A Turn-Off To Wall Street?

Whether it’s Kamala Harris or Donald Trump at the helm of U.S. foreign policy in January 2025, one thing is likely: the continuation of a strategic decoupling from mainland China. That means Chinese companies outsourcing to or investing in factories in Southeast Asia and maybe even Mexico to keep their market share in the U.S.  It could come at a loss to the Chinese labor force, setting the table for all sorts of potential problems as China and the U.S. go through a nasty divorce.

"The presidential election is viewed as pivotal for China investors," said Shain Vernier, Financial Analyst of HowToTrade.com. "Many are concerned about the prospects of extensive tariffs from another Trump. But think a Harris administration will be more passive regarding trade wars and related policies," he said.

The No. 2 economy is holding out, but slowing down. The real estate sector, a driver for domestic consumption and employment, is in trouble again.

Shenzhen Anju group, a Shenzhen-based state-owned-enterprise, said it will begin buying apartment buildings and convert them into affordable housing. This could help alleviate the supply of 48,974 apartments for sale, totaling 5.16 million square meters, which is equivalent to two years of inventory, according to a KraneShares' daily post on China on Thursday, called China Last Night. Guangzhou said on May 30 that the city was adopting a “purchase instead of construction model” -- so Shenzhen is following in that city's footsteps. The idea is to soak up inventory, stabilize housing prices, and restore consumer confidence. Real estate stocks rose just over 1% on Thursday morning, though it does not appear Chinese developer credit default swaps tightened on the news. The market still does not like their debt.

June PMI data from China shows that employment indices are all in decline for the fifth straight month. A housing slump has construction jobs falling the lowest level since the start of the pandemic in February 2020. Services are also weak, with the services PMI sub-index hitting 46.3, the lowest level of 2024. Anything under 50 signifies a contraction.

Manufacturing employment has been falling for 16 months despite China exporting whatever it can make to wherever in the world will buy it.

China investors are not being rewarded for buying the dips.

The iShares MSCI China MCHI ETF is down 27% over the last five years. XTrackers China CSI-300, best known as the China A-Shares ETF ASHR is down around 11%.

Not that the overall emerging markets indexes were making you rich, but the iShares MSCI Emerging Markets EEM is up over 3.5% in five years, and the reason it is that low is because of China dragging it down.

Even China tech has underperformed.

The KraneShares China Internet KWEB ETF is down 4.3% year-to-date, down 15.5% over the last 12 months and down 33% over the last five years. 

China EV manufacturer Nio NIO is down over 75% in the last 12 months, and also down year-to-date. (It’s up 19% over five years, though.)

The China automotive sector is being hammered by the White House, with the Biden administration slapping high tariffs on Chinese EVs in May and Trump hinting he would tariff Chinese EVs made in Mexico coming into the U.S. duty-free thanks to the USMCA trade agreement.

China Risks “Skewed Towards Further Escalation”

Figure the geopolitical headwinds for China will not improve under Harris or Trump. At best, investors and businesses will have to cope with the status quo.

Trump and his team, centered on USTR Robert Lighthizer, have focused on China “decoupling” - reducing the absolute level of trade deficits by using tariffs. Biden and his team – many of whom will share similar thinking of Harris's advisors – are focusing tariffs on so-called climate change policy goods like EV-related goods and solar, two sectors China dominates.

Since the Trump-era tariffs began in 2018, China's exports to the U.S. have declined but have gone up in Vietnam, Mexico, and other Asian markets to compensate.

Exports remain the bright spot for China’s economy, though this has not translated into stock market gains.

In an Aug. 2 report by Barclays Capital, economist Jian Chang said that China’s rising exports to the rest of the world minus the U.S. were signs of resilience against the West’s “trade war”. However, Chang skews the risk meter in favor of  "further escalation."

She managed to find some positives there.

From Barclays’ report:

• China semiconductor exports are rising, surpassing Taiwan, tied with India and approaching the leader – Korea
• Chinese companies are expanding and investing in overseas markets to gain global market share amid geopolitical tensions and slowing domestic growth
• Chinese manufacturers have enhanced their export competitiveness of high-tech products, supported by a decade of industrial upgrading, technological innovation, and customer-centric approaches, as seen from their shipping more high-end/high-tech products.

China’s closely watched Politburo meeting of the CCP's A-list ended on July 30 with leadership acknowledging the difficulties and challenges facing the economy, including geopolitical risks, insufficient domestic demand, and the difficulties in going from old growth drivers like real estate to new growth drivers. They called for “maintaining strategic determination,” Chang wrote from her offices in Hong Kong.

“That implies that the authorities will refrain from actions that might rekindle the old growth model fueled by rapid credit growth,” she said. “The July meeting fell short of offering big stimulus.”

At this point, investors are in China because it’s the second-largest economy in the world. Sectors from tech to healthcare and consumer have not impressed.

However, U.S. foreign direct investment into Chinese manufacturing broke a record in 2023, hitting a total $59.31 billion, up from the 2022 record of $56.56 billion, according to the Bureau of Economic Analysis.

Based on these numbers alone, it does not look like any real decoupling or derisking is going on at all.  

"Despite tensions, traders and investors are still very optimistic about China because they have confidence in China’s central bank's commitment to economic growth," said Vernier. "Traders have to recognize that China is not a small economy solely reliant on exports. In terms of investment themes, traders particularly value China's capacity to operate at scale and at a lower cost. It may be beneficial to continue focusing on Chinese manufacturers of EVs and solar, two sectors China currently dominates," Vernie said.

Geopolitical tensions have not been kind to China solar.

Jinko Solar JKS, which also manufactures solar panels in Florida, is down over 45% both year-to-date and over 12 months. It's down just over 3% in five years.

By comparison, American solar giant First Solar FSRL is up 20% YTD, 5.8% in 12 months, and looks like cryptocurrency over five years, rising 224%.

Worth noting: publicly traded Chinese solar companies run the risk of being banned from receiving tax credits under the 2022 Inflation Reduction Act.

So China has problems – yet despite restrictions on capital into certain types of investments (like defense company stocks, or certain tech products being restricted for sale by U.S. companies to Chinese companies), FDI is flowing. China investors are rummaging through what looks like the political rubble. Some are finding that the decoupling and derisking narrative has not been so bad for China. These are the sectors to look into.

China’s third quarter started weaker following lackluster second-quarter growth. Barclays is keeping with its 4.8% GDP forecast for 2024, which is just under Beijing’s 5% target line.

*The writer is an investor in the KraneShares China Healthcare (KURE) ETF.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.