Free trade is hurting America and its workers, Donald Trump assured a few days ago in Detroit. And
China is hurting them the most, he added, “They break the rules in every way imaginable.”
While this statement might sound ridiculous to many, Trump is not alone in this sentiment. Major candidates, politicians and
analysts have warned about the economic and jobs costs of the trade with China. That's right — Mexico is no longer our scapegoat;
it’s China now.
In a recent article, FiveThirtyEight’s Andrew Flowers looked into the reasons behind the shift in
the debate away from the North American Free Trade Agreement (NAFTA) and toward China.
Related Link: China's
Quantum Leap Toward Unhackable Communications
For starters, a majority of economists now assure that the effect of the NAFTA on the U.S. labor market was not particularly
large. In fact, some have even argued that the effect of the NAFTA on U.S. workers’ income has been slightly positive. Is it
possible that the NAFTA (which, by the way, means "fuel" in Spanish) fueled the jobs market?
On the other hand, trade between the United States and China has become increasingly imbalanced. Between 1991 and 2007, the
amount the United States spent on Chinese goods became almost eight times higher, with the deficit reaching $336 billion in
2015.
Source: FiveThirtyEight
“Until recently the prevailing view among
economists was that cheaper Chinese imports — shoes, toys, furniture — gave more purchasing power to consumers, and that economic
benefit outweighed some factories being shuttered,” Flowers explained.
However, this position has changed in recent years. Recent studies have suggested that more than 2 million jobs were lost (some
estimates even ascend to 3.2 million) in the United States between 1999 and 2011 due to the rise in trade with China. Other
economists have also argued that the Chinese trade is largely responsible for falling wages in the United States.
Even pro-trade experts have had to acknowledge the negative impact of Chinese trade on the U.S. economy. From their view,
Chinese products were made “artificially cheap” in the United States (and American products, expensive in China) on the back of an
undervalued yuan, and this lead to the great trade deficit we have today. “Meanwhile, China’s membership in the WTO limits the
U.S.’s ability to retaliate,” Flowers added.
China Getting More Expensive
China finally announced the much-expected link between the Hong Kong and Shenzhen exchanges late Tuesday. This means that, on
the one hand, foreign investors will be able to buy Shenzhen stocks, while on the other hand, Chinese investors will be able to
access Hong Kong stocks.
However, the arriving investors might be late to the party; the upside potential seems to be already priced in. According to
data from Absolute Strategy Research, Shenzhen is the most expensive among major stock markets in the world, trading at over 20
times forward earnings — only New Zealand boasts such valuations.
Related Link: Shenzhen Connect And
Its Impact On Chinese ETFs
It is true that Shanghai-traded stocks remain cheap but…who wants them? Shanghai is dominated by low growth companies, many of
which have questionable business and accounting practices, experts have said. On the other hand, the Shenzhen offers high growth
but unattractive valuations. Actually, while stocks trade at an average of 25.7 times earnings expected for the next 12 months,
“the median company trades at an eye-watering 67 times trailing earnings,” a Wall
Street Journal article read.
However, when adjusted for expectations, Shenzhen and Shanghai look to boast very similar valuations, Kinger Lau, chief China
equity strategist at Goldman Sachs estimated.
“To justify buying into New China at these prices, investors need to think not only that the country will be able to shift to a
consumption-driven economy, but also that it will happen faster than is already priced in. Given the financial and political
difficulty of managing the decline of the old and indebted state-owned industries, that requires a lot of faith,” author James
Mackintosh concluded.
On The Move
The HANG SENG INDEX (INDEXHANGSENG: HSI) gained 0.98 percent on Thursday trading, the SZSE COMPOSITE
INDEX (SHE: 399106) lost 0.05 percent, and the CHINEXT PRICE INDEX (SHE: 399006) slipped 0.3 percent.
Chinese ETFs were on the rise on Thursday:
- The iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI) gained 0.81 percent.
- The iShares MSCI China Index Fund (NASDAQ: MCHI) was up 0.59 percent.
- The iShares MSCI Hong Kong Index Fund (ETF) (NYSE: EWH) rose 0.26 percent.
- The SPDR S&P China (ETF) (NYSE: GXC)
spiked 0.84 percent.
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Disclosure: Javier Hasse holds no interest in any of the securities or entities mentioned above.
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