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Can China Survive Trade War as Stocks Crawl Into Bear Market?

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On Jun 25, shares of U.S.-listed Chinese companies plummeted on reports of the White House planning to curb Chinese investments in U.S. companies involved in certain technologies. On Jun 26, the benchmark Shanghai composite officially entered the bear market. Trade war fears have been taking its toll on China’s stocks as the Chinese government is striving hard to protect the economy.

In this connection, China’s central bank on Jun 24 said it will release as much as 700 billion yuan ($107 billion) into the financial system by reducing the amount of deposits majority of the banks are needed to hold. Understandably, the Chinese government’s concerns revolve around its economy that is weakening faster than expected, fueled by fears of a trade war with the United States.

China Stocks Enter Bear Market Territory

The Shanghai Composite Index fell 0.5% at close on Tuesday, declining 20% from its January peak. This is its lowest level in two years and Chinese stocks are now officially in the bear market. China’s stocks have lost almost $1.6 trillion since January, which is more than the size of Canada’s economy. Another loss of 6% in market cap would dethrone China as Asia’s biggest stock market. The smaller Shenzhen composite had entered the bear territory in February. 

Trump seems to be the new dragon in China! Goes without saying, trade war fears with the United States have made investors jittery, leading to huge selloffs. The recent decline comes in response to news of White House planning to curtail Chinese investments in U.S. technology companies. Although China’s president Xi Jinping has retaliated with counter tariffs on $34 billion worth of U.S. goods that come to effect on Jul 6, tension is sky-high.

This saw shares of U.S.- listed Chinese companies declining sharply on Monday. Understandably, the tech sector has been one of the biggest victims of this trade spat, with shares of all major Chinese tech giants falling sharply. On Monday, shares of U.S.-listed Chinese companied tanked 3.4%, their steepest collective decline March.

Chinese streaming giant iQIYI, Inc. (IQ - Free Report) was the biggest loser, declining 9.4%. Shares of IQ have declined 18.5% in the last five days. Other tech companies like Alibaba Group Holding Limited (BABA - Free Report) , Baidu, Inc. (BIDU - Free Report) and JD.com, Inc. (JD - Free Report) have declined 7.2%, 5% and 5.3%, respectively, in the same time frame.

That’s not all. Shares of Bitauto Holdings Limited (BITA - Free Report) declined 1.1%, while Sohu.com Limited (SOHU - Free Report) fell 6.5% in the last five days. Baidu has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

China Building Wall Around its Economy

Trade war fears cease to ease with the United States and China slapping tariffs and counter tariffs on each other. This certainly has been taking its toll on China’s economy. The Chinese economy put up a robust performance last year, growing 6.9%. The momentum continued at the beginning of 2017 but economists believe that signs of a slowdown have started showing. And this has heighted because of the ongoing trade spat.

On Sunday, China’s central bank announced that it will be releasing 700 billion yuan ($107 billion) into the country’s financial system by reducing the amount of deposits banks are required to hold. The banks have been freed to use this money to help small businesses and heavily indebted companies.

Understandably, China is struggling to curb huge debts taken by companies that have over the past decade been hurting the economy. This certainly is thwarting growth and China now plans to help these companies by steering loans. Moreover, this comes at a time, when China is already fearing that tariffs imposed by the United States will hurt is ailing economy.

Summing Up

The White House’s recent announcement that it plans to curb Chinese investment in U.S. technology companies is taking its toll on shares of tech companies. This finally saw the Shanghai Composite Index officially entering in the bear territory. China, understandably, is making every effort to balance the situation by releasing more money into its financial system to bail out the heavily indebted companies.


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