The US presidential election is attracting attention. At 2 pm Beijing time, all voting on election day has ended. As of now, Trump is temporarily leading in key swing states. Although the results have not been released yet, the RMB exchange rate has already taken the lead in reflecting. At 14:35 this afternoon, the offshore Chinese yuan fell more than 900 points against the US dollar, breaking below the 7.19 mark.
In terms of exchange rates, institutions believe that Trump's victory will put pressure on the Chinese yuan. But fundamentally speaking, regardless of who is elected, it is expected that the US dollar will decline from its current level. Experts say that under the combined resonance of interest rate cuts and seasonal foreign exchange settlement demand, the pressure of RMB depreciation will be significantly reduced at least by the end of this year and the beginning of next year.
In terms of the stock market, institutions believe that if the short-term downside risks have been fully taken into account, they may consider increasing their holdings in Chinese stocks. Based on the stock market performance during Trump's first term in office, experts believe that the long-term upward trend of A-shares and Hong Kong stocks will still be "dominated by me" in the future. Experts also suggest that there is no need to overestimate the impact of the US election on A-shares.
How does the US election affect the volatility of the Chinese stock market?
UBS stated that the US election results may exacerbate short-term volatility in Chinese stocks, however, short-term fluctuations also create long-term opportunities.
The valuation of Chinese stocks is already at a relatively low level, and in the event of Trump's victory, the Chinese government may actively increase policy stimulus. Due to the significant decline in US China trade volume during Trump's first term, the US revenue exposure of MSCI China Index constituent stocks is less than 5%. It is expected that Trump may seek to negotiate with the Chinese government and ultimately limit the scope of tariffs to specific areas, "UBS said.
Therefore, UBS expects that once the decline in Chinese stocks against Trump's victory news reaches double digits, short-term downside risks have been fully taken into account, and it may consider increasing its holdings in Chinese stocks.
Looking back at the performance of A-shares and Hong Kong stocks during Trump's first term in office, the cumulative gains of the CSI 300 and Hang Seng Index during Trump's four-year tenure reached 43% and 11%, respectively, "said Wen Bin, Chief Economist of Minsheng Bank. The first reason is that the valuations of A-shares and Hong Kong stocks were relatively low before Trump took office; Secondly, the improvement of corporate profits and the stability of economic fundamentals still form a trend of "self centeredness", especially the Shanghai and Shenzhen 300 Index, which relies on the long-term profits of core high-quality enterprises to form a value investment trend.
Wen Bin believes that the long-term upward trend of A-shares and Hong Kong stocks in the future will still be dominated by me. Overall, although Trump's presidency will have a negative impact on A-shares and Hong Kong stocks as a whole (including tariffs, rising inflation expectations leading to a decrease in Federal Reserve easing, etc.), the trend driving factors of China's capital market will still depend on its own economic growth and corporate development.
He also stated that the valuations of the Shanghai and Shenzhen 300 and Hang Seng Index are still relatively low, similar to the situation when Trump took office at the end of 2016. With the increasing attention of the capital market under policy protection, the Chinese economy is expected to form a virtuous cycle of "stock market rise ->wealth effect ->stimulating consumption ->corporate profit recovery ->stock market rise".
Wu Chaoming, Chief Economist of Caixin Financial Holdings, believes that there is no need to overestimate the impact of the US election on A-shares. From a fundamental perspective, the turning point of domestic economic growth is emerging, and the certainty of a positive economic recovery is high. From a funding perspective, the A-share market is active in trading and has ample liquidity; From an emotional perspective, the domestic stock market in 2024 has partially digested the impact of the US election, especially with the "Trump trade" entering the middle and later stages, which may have limited disturbance to A-shares.
Trump's victory puts short-term pressure on the Chinese yuan, leaving room for the US dollar to decline
How did the Chinese yuan exchange rate perform during Trump's first term in office? Wen Bin introduced that during the Trump administration, the appreciation of the US dollar was limited, with only a cumulative appreciation of 0.1% in the first three stages. The exchange rate of the Chinese yuan, whether against the CFETS basket of currencies or the US dollar, experienced limited depreciation during the first three years of Trump's presidency, with amplitudes of 1.1% and 3.6%, respectively.
Mainly because in the 2015 currency reform, the RMB exchange rate had already released depreciation pressure ahead of schedule and had sufficient flexibility, which prevented a significant depreciation during the Trump administration. Subsequently, the RMB exchange rate also experienced two rounds of "first rising and then falling", playing a significant buffering role in the imposition of tariffs.
Wen Bin believes that Trump and his team have a rather contradictory attitude towards the US dollar itself. There may be differences in the long-term and short-term impact of Trump's presidency on the US dollar. The US dollar index may have short-term support, but in the long run, it may actually be under pressure. During the interest rate cut cycle, the overall direction of the US dollar index's future volatility and weakness may not change, but if Trump eventually takes office, the US dollar index will receive some short-term support
From the impact of Trump's past policies, it can be seen that the renminbi exchange rate is still bearish. "Wen Bin also stated that in the short term, under the resonance of interest rate cuts and seasonal exchange settlement demand, the pressure of renminbi depreciation will be significantly reduced at least by the end of this year and the beginning of next year. After Trump takes office, it is likely to cause significant fluctuations in the Chinese yuan again.
UBS believes that in terms of foreign exchange, Trump's victory will put pressure on the Chinese yuan.
Regardless of who wins the election, from a fundamental perspective, the overvaluation of the US dollar, the narrowing of its interest rate advantage relative to other currencies, and the huge fiscal and current account deficits of the United States will all put pressure on the US dollar. UBS also stated that it is expected that the US dollar will be stronger in the event of Trump's election, as there may be more stimulus policies, possible interest rate hikes, and potential tariffs, all of which will provide support for the US dollar. However, regardless of who is elected, it is expected that the US dollar will decline from its current level.