Risk assets are once again pursued by investors on the first of July after the recent G20 summit declaring a suspension of the U.S.-China trade war. The three major U.S. stock indices have since went up, with the S&P 500 index increasing by 0.67%, NASDAQ 100 index increasing by 1.18% and the Dow Jones increasing by 0.68%. A slow-down in the U.S.-China trade war has also greatly favored the Chinese currency Renminbi (RMB). On the morning of July 1, the inter-bank foreign exchange market has reported a RMB 6.8400 to US$ 1 exchange rate, a 283-points increase from the previous closing price. Earlier, offshore Renminbi had passed RMB 6.82, which represented a huge 500-points jump. Market leaders believe that more promising signs will emerge, and the short-term rise of the Chinese Yuan will continue to happen. On the same day, the Shanghai Composite Index rose by 2.2% and the Shenzhen Composite Index increased by 3.85%. The Asia market has also been recovering as well with a 2.13% increase in the Nikkei-225 index and a 1.52% increase in Singapore's FTSE index. It should also be noted that major markets in Europe has experienced growth of more than 1% as well.
As the situation gradually improves, the prior gloomy forecasts of the market is expected to take a turn for the better, and the revaluation of RMB assets such as the RMB currency will happen accordingly. At the same time, as the Federal Reserve's Monetary Policy begins to show signs of change, the external pressure on RMB's depreciation is expected to be further alleviated. By looking at the capital flows based on a report by the Institute of International Finance (IIF), there will be a significant increase in the amount of funds into China and other emerging markets. This may indicate that investors are expecting a large inflow of global funds into emerging markets. As China has one of the largest emerging markets, this reconfiguration of global funds will bring in more external investments into the country. Together with the inclusion of RMB assets in multiple international indices and an increase in the proportion of imports, the inflow of overseas funds will increase substantially. These factors will effectively reduce the short-term stress on the RMB's exchange rate, which will in turn increase the attractiveness of China's capital market.
Witnessing growth on the first day of the second half of 2019 is a good sign for the Chinese stock market. A huge increase in the country's foreign capital is definitely a positive twist for a market that has been under long-term pressure and uncertainty. Without a doubt, the unpredictability of the U.S.-China trade war has greatly affected the global stock market. The huge fluctuations in the stock market has also shown that the trade war initiated by the U.S. is an uncompromising man-made disaster. Multiple losses have been caused by the disruption of globalization, protectionism and suppression of competitors, as well as the cancellation of business contracts by regulatory measures. However, having a slight decrease in market repression does not necessarily mean it will lead to a series of continuous market recoveries. According to Anbound's researchers, the future direction of the stock market is at the hands of several factors: (1) The global economy, (2) The final trade agreements of U.S. and China, (3) The possibility of another destructive intervention on the global market by the U.S., and (4) The recovery rate of the global economy when faced with a set of challenges.
In other words, although the short-term uncertainty has been relieved, the long-term trade friction between China and the U.S. will continue to persist. The trade relationship between these two countries may deteriorate again, and this will lead to unprecedented fluctuations in the market. If the leaders of China and the U.S. can successfully reach a mutual agreement, the unpredictability of this trade friction will be removed from the equation. If this happens, the market can pay more attention to the basic elements that affect a stock market such as value gains. Any future prospects of the global economy will again become the main long-term factor affecting any stock market trends. It is crucial to note that many roadblocks such as rapid globalization, overproduction, excess capital and the change in American society faced by China and other major economies in the world cannot be overcome in such a short time. If there is a failure in global cooperation or the U.S.-China trade relationship continues to deteriorate, the world will expect to encounter more serious market volatility.
Together with an excess global liquidity, there is a high probability that overseas funds will actively allocate RMB assets. From the perspective of stock investors, the Chinese stock market will become one of the world's largest stock markets in 2019. Hence, as multiple phases of improvements in the external environment continue to surface, regulatory authorities should put greater emphasis on the stock market's market-mechanism and resolve any challenges that inhibit the stock market's growth in order to preserve its health and stability.
With increasing global market turmoil and capital flows, Anbound is reiterating the importance of China to increase its development of the bond market. The stability and scale of a bond market will attract and accommodate international capital to improve balance of payments and finance China's economic development. With a cut in interest rates by the Federal Reserve and the countercyclical adjustment by the People's Bank of China, China's bond market has experienced short-term improvements. However, China's bond market will still encounter long-term risks, especially credit risks faced by small/medium-sized banks and private enterprises that are caused by the collapse of Baoshang Bank. Not only is there a need to loosen liquidity levels in order to ease the stratification of short-term liquidity alone, but elements like establishing a default mechanism and implementing reforms to the interest rate market in order to drive marketization of the bond market is needed to solve the problem of a sliding economy and the stratification of structural credit.
The World Bank estimates that emerging markets will contribute over two-thirds of global economic growth over the next five years, and they will become an important part of any investors' portfolios. Due to an increase in international capital flows, it is crucial to maintain the stability of the Chinese market and accelerate financial market reforms. With that, it will be conducive to the continuous development of China's capital market, which will in turn create an "oasis effect" in the middle of a global market-wide turmoil.
Final analysis conclusion:
In a nutshell, the integrity and credibility of the capital market has been temporarily restored due to a short-term suppression of U.S.-China trade war in a period of excess capital and less-restrictive global liquidity. In the long run, however, we will need to maintain geo-economic, economic and geopolitical stability, all of which are important factors that determines the growth of capital markets. Faced with multifaceted variables, China needs to move towards the future and strengthen the Chinese market by developing and expanding its financial market. Moreover, the expansion of the bond market should also be among China's top priority.
