The MSCI China index is now trading at a P/E of 10.2 for 2020 with earnings for this year of over 20%. The on-going trade war explains the difference.  The A-share factor in the MSCI index doubled from 5% to 10% by end May and this brings the A-share weight in the powerful MSCI Emerging Markets index to 1.7%.

On the trade front, we may not see a short-term fix yet to strike a trade deal and we have seen US exports to China drop 29% so far this year as China diverted the purchase from the US to elsewhere. Efforts are being made and the G20 meeting that took place in Osaka showed encouraging signs of willingness to improve terms from both sides of the table.

China will end ownership limits for foreign investors in its financial sector in 2020, a year earlier than scheduled and China will further open its manufacturing sector, including the auto industry.  That the trade war is taking its toll is seen from various economic indicators like for instance Chinese retail sales, with growth hitting a 16-year low earlier this year.

The official purchasing managers’ index stood at 49.4 in June, the same as in May and the fourth consecutive month it has been below the expansionary level of 50 as US imports from China fell by 13.9% in the first quarter while imports from Vietnam rose by 40.2%, which tells a story.  The US rate outlook is expected to give the Chinese government more room to ease credit.

Source: Open Door Investment Manageemnt Ltd, GAM