Trump's TikTok flip-flop and what it means for Chinese stocks

By Chris Matthews

The former president's rhetoric on China was tougher than his actions, experts say

It has been a rough couple of years for investors in China, but the world's second largest economy has begun to show signs of resurgence.

The MSCI China index MCHI has outperformed the S&P 500 SPX over the past month as valuations in the U.S. have sparked a debate over whether we're seeing the formation of an equity bubble, leading some analysts to argue that investors should take a another look at leading Chinese companies as an inexpensive alternative to those in the U.S.

'[W]hen Trump gets involved, his view can swiftly change votes and support on Capitol Hill with the Republican conference.'Henrietta Treyz, Veda Partners

The threat of a new China trade war looms over these arguments, as polling shows Donald Trump with a slight edge in the race with incumbent Joe Biden to win the White House in November. Yet China market experts say that a second Trump trade war may grab headlines but won't substantively affect the performance of the country's top companies.

A case in point is the former president's sudden reversal on the effort to force Beijing-based ByteDance Ltd. to sell TikTok or face a ban in the U.S. ByteDance isn't publicly traded, but Trump's positions on the company could signal his attitudes toward China policy more broadly.

Trump said his reason for flip flopping on a proposed measure he supported when in office is that it would benefit Facebook (META), an entity he characterized as "an enemy of the people" in a Monday interview with CNBC.

Critics from across the political spectrum, including former Trump adviser Steve Bannon, have pointed out that Trump's change of heart came shortly after a meeting with billionaire ByteDance investor and conservative donor Jeff Yass.

Trump said he has never discussed TikTok with Yass.

The House of Representatives has scheduled a vote on the legislation Tuesday after the bill was voted out of committee on a bipartisan, 50-0 vote.

"In our view, this bill has all the makings of something that could pass the House and Senate and be signed by the White House swiftly, but, in a twist that shouldn't come as a surprise anymore, Trump has decided to step into the fray and has encouraged opposition to the bill," wrote Henrietta Treyz, director of economic-policy research at Veda Partners, in a Sunday client note.

"Absent Trump's involvement in the situation we would put 75% odds on this bill becoming law, but ... when Trump gets involved, his view can swiftly change votes and support on Capitol Hill with the Republican conference," she added.

While there are many reasons to be skeptical about the Chinese economy more broadly, experts surveyed by MarketWatch argued that the sort of bilateral tariffs imposed by Trump on China aren't a major headwind for Chinese companies.

"The impact of tariffs on trade with China won't be all that great," said Carl Weinberg, a longtime China watcher and chief economist with High Frequency Economics.

He added that the Biden administration's new restrictions on high-tech exports to China are more effective, given that Chinese companies have proven adept at avoiding U.S. duties by exporting products indirectly through, for example, Mexico.

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A recent analysis by the Financial Times found that just as direct trade with China and the U.S. has declined, exports from China to Mexico and from Mexico to China have soared.

"The U.S. is the world's biggest consumer of stuff; China is the world's biggest producer of goods," Robin Brooks, former chief economist at the Institute of International Finance, reportedly told the FT. "One way or another, these two forces have to meet."

The continued interconnectedness of the U.S. and Chinese economies calls into question the idea that, by investing in U.S. stocks, one is avoiding exposure to China, according to Brendan Ahern, chief investment officer at KraneShares, which offers several China-focused ETFs.

"If you want to avoid China in your portfolio, sell Apple (AAPL), sell Boeing (BA), sell Exxon Mobil (XOM), sell Tesla (TSLA)," he said. "All these companies are highly geared toward China."

Indeed, many companies in the red-hot semiconductor space rely heavily on China for revenue: Qualcomm (QCOM), Monolithic Power Systems (MPWR) and Western Digital (WDC) derive more than 40% of their revenues from China, and each has outperformed the S&P 500 over the past year, according to FactSet.

The yawning gap in sentiment between Chinese and U.S. stocks can be illustrated by the fact that the 32 companies held in the Krane Shares China internet ETF KWEB, which include firms such as Alibaba and Tencent, have a combined market capitalization of $1.1 trillion, $700 billion less than Amazon.com Inc. (AMZN), despite the fact that these companies in aggregate generate more revenue, cash flow and earnings per share than Amazon does, Ahern noted.

It is important for investors to take heed of the negative sentiment weighing on Chinese stocks but also to be aware that the longer-run outperformance by U.S. stocks isn't a permanent state of affairs, according to Xinchen Yu, an emerging-markets strategist at UBS.

He told MarketWatch that investing in foreign companies provides important geographic diversification for U.S. investors, and he expects Chinese stocks to slightly outperform other emerging markets this year. He recommended looking for high-dividend-yield stocks in China, such as utilities or companies that are owned in part by the Chinese government.

The risk associated with a potential Trump win in November and the prospect of subsequent new trade restrictions on China bear watching, but, according to Brian McCarthy, chief strategist at Macrolens and veteran China investor, far more important is Chinese domestic policy.

"Trump's strategy was to use a credible threat to try to force China to make policy changes, but he capitulated in 2019, and I think we can question just how credible the threat is," he told MarketWatch.

In 2020, as Trump positioned for his failed re-election run and just weeks before the COVID-19 virus caused major disruptions to the global economy, Trump used the threat of increased tariffs to strike a deal with China wherein it agreed to purchase $200 billion in exports by the end of 2021.

Capitol Report (June 2020): Trump asked China's Xi to buy U.S. farm products to help him win re-election, Bolton book says

Also see (June 2020): Bolton book adds urgency to Trump bid to depict himself as a China hawk and to paint Biden as a Beijing apologist

China only ended up buying 58% of the exports it had promised - not even enough to reach the level of its imports Trump started the trade war.

"Trump proved in his first term ahead of an election that he was unwilling to go the distance," McCarthy said. "A stark decoupling with China would cause a global recession and perhaps threaten something worse. So I'm skeptical that Trump would really be willing to go the distance on that."

From the archives:

Does Trump's trade war court American humiliation?

Trump will soon end the trade war with China because he doesn't really care about winning it

Escalating U.S.-China trade war threatens global economy, poses Trump re-election risk

Trump's unwinnable trade war with China

The trade war is over - and the winner is China, writes Howard Gold

-Chris Matthews

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03-11-24 1539ET

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