US LNG exports surge but will buyers in China turn up?
Investing.com – Ongoing U.S.-China trade negotiations in London could potentially impact financial markets, particularly in China, according to analysts at Capital Economics, who on Tuesday highlighted two key areas of focus in the discussions.
The first aspect is the potential impact of a trade agreement or progress towards one on China’s equity market. China’s equity market has been underperforming globally since "Liberation Day".
However, Capital Economics does not anticipate a major rebound due to possible trade advancements. They point out that the tariff impact on China’s equities has not been particularly significant, with domestic policy playing a more critical role.
They also cast doubt on the possibility of the US fully retreating from its position, which may limit any relief rally.
While a broad market rally may not be in the cards, eased access to high-end semiconductors, a topic reportedly on the negotiation table, could potentially benefit China’s tech stocks. However, Capital Economics advises caution here as well.
They note that while the 2018 trade war did lead to a drop in valuations relative to global counterparts, the more significant dip occurred during subsequent regulatory actions by China’s authorities starting around late-2020.
The recovery of these tech stocks partly reflects a softer policy approach, and a belief, fueled by DeepSeek, that Chinese tech firms can compete in the artificial intelligence race without reliance on US semiconductors.
Capital Economics believes these stocks will continue to perform well, provided the authorities maintain their supportive approach. While access to US chips might not be a key factor, it could provide marginal benefits.
The second area of focus is the potential implications of the trade talks on the renminbi, China’s currency. Exchange rates have reportedly been a topic of discussion in negotiations with other Asian countries.
The renminbi has remained relatively stable against the US dollar recently, but it is weaker than it was a few years ago, especially in trade-weighted terms. This coincides with a surge in China’s goods exports, a point of contention with the US.
However, Capital Economics does not expect China to agree to let its currency appreciate significantly as a result of any agreement with the US. They cite China’s reluctance to be seen as being influenced by US foreign exchange policy, and concerns about the health of the manufacturing sector, given its recent capacity expansion.
One potential solution could be fiscal stimulus, which theoretically could boost both China’s domestic economy and exchange rate.
However, Capital Economics does not believe China’s authorities see much need for this, based on last year’s fiscal policy discussions. They would be surprised if China’s stance on this issue has changed significantly.
They anticipate that symbolic offerings to the US, like agreed purchases of specific US goods, are more probable. In this scenario, Capital Economics predicts that the renminbi is more likely to weaken slightly against the dollar over the remainder of this year.
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