China Financials Sector:What does a Trump presidency mean for the China Financials?
What’s new:A Trump presidency could spell more trade protectionism, aggressive spending and tax cuts, and closer US-Russia ties -all of which we see having economicimplications for the China Financials sub-sectors.
What’s the impact:Interest rates. Onthe one hand, after the initial knock-on surprise, Trump’sproposedtax cuts and infrastructure spending could lead tothe Fed raisingrates. Such a move would affectthe yield spread between China and the US, while China’s capital outflows area continued policy concern. On the other hand, closertiesbetween Trump and Putin, as well as the US energy majors’ influence on the Republicans,couldbring an end to this period of depressed oil prices. In turn, faster-than-expected capacity cuts incommodity-related sectors domesticallycould lead to inflationary pressure in China.Therefore, in terms ofChina’s monetary policy, we see lessscope for further easing. Or even further, the trajectory of monetary policy could changeearlier than current market expectations.
Exchange rate.Trump has been particularly vocal in blaming China for job losses in the US and is a keen proponent of heavy tariffs to “stop China from cheating on international trade”. We think that protectionism will put pressure on the CNY rate, leading to further and more rapid depreciation. At the same time, higher interest rates in the US or a revival of US manufacturing would also argue for CNY depreciation.
What we recommend: For the China Banks, a stabilisation or recovery in market interest rates would likely help the lacklustre NIM trend. However, more protectionism could lead to a deterioration in the asset quality of small-and-medium-sized companies related to export sectors.
For the China Insurance companies, the trajectory of market interest rates in China should help prevent further declines in the new money investment yield. Ultimately,interest-rate normalisation would likely help normalise their stock valuations relative to the current super-bearish levels.
For the China/HK Securities firms, we see no direct impact on China business. Their offshore operations couldsee some positives, as CNY depreciation could lead to more overseas M&A involvingChinese corporates. The possibility of a reduced US geopolitical presence in the EU and emerging markets (as well as “Belt and Road” regions) could present more opportunities for Chinese corporates,though rising protectionism andbroader geopolitical uncertainties could amplify political, regulatoryand operational risks.
For other diversified financials(consumer finance, P2P, leasing companies), a rise inborrowing costsin the economy should lead to greater demand for non-bank lending,while also increasingbalance-sheet concerns.
How we differ: Rather thanviewing a Trumppresidency as a simple black swan incident, we see slight positive implications for the China Financials.
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