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Our China Exposure Index weights together US-listed firms that derive a large proportion of their revenue from China, and would therefore be most sensitive to retaliatory sanctions in a trade war. As tensions have escalated recently, the index has fallen to such an extent that the relative share prices of firms with significant exposure to China is the lowest it has been in more than a year. If, like us, you believe that Mr Trump will win this game of chicken then this may be a good buying opportunity.
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As we outlined in a longer note earlier this week the US may well be right to levy tariffs on imports from China. Although China exports a lot more to the US than vice versa, and stands to lose more from a further escalation in trade tensions, it has shown no sign of backing down so far.
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In fact, with Donald Trump now threatening to levy tariffs on a further $200 billion worth of imports (more than total US annual exports to China), China has threatened non-tariffs measures, which could be damaging for businesses in the CEI. But the US holds its own non-tariff cards, such determining the fate of Chinese telecoms giant ZTE, which it can use to exert pressure on China to abide by its WTO obligations.
The US does not import a huge amount more from China than it does from the euro area. The difference in the US/Euro area and US/China bilateral trade deficits (the dots in the chart below) is due to the amount that the US exports to each region. There is scope for the US to increase its exports to China. Investors may be less confident that the US will win the game of chicken with China than they were six months ago, but ultimately we think that the US will be able to extract concessions from China, which would be beneficial for firms in the CEI.
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