"Trump Trade" is not just next week, this is the most anticipated time in the Chinese market

The 2024 U.S. presidential election is approaching, with the "Trump trade" continuing to heat up. We have summarized the key issues that the market is most concerned about. In terms of the election situation, it is crucial to focus on the control of Congress at present. If the Republicans sweep the election, the pressure on China from the U.S. may become more significant.

For the financial markets, Trump has various mechanisms to push for tariffs on China, with the second quarter of next year being a higher probability window. However, both the incremental source of funds in the current market and the domestic policy environment are significantly different from 2018. If Trump returns, it is unlikely to change the short-term direction of the A-share market. More attention needs to be paid to the structural impact on external demand-related sectors, key industries, and the financial industry.

Furthermore, global asset classes may continue in the direction of the current "Trump trade." In terms of geopolitical landscape, the world may see a state of "continual small conflicts and rare large conflicts," with the intensity of conflicts such as Russia-Ukraine and Israel-Palestine escalating first and then gradually subsiding towards resolution. "Returning to the Asia-Pacific" remains a policy focus for Trump.

With the 2024 U.S. presidential election approaching, the expectations are about to become reality. We have summarized eight common questions about the subsequent processes and impacts, providing forward-looking judgments.

Question (1): What are the important upcoming milestones to watch for?

We believe that in addition to the formal voting, attention should be paid to the new president's cabinet team nominations in November-December and the president's inaugural speech in January of the following year.

The official voting day for the 2024 U.S. presidential election is November 5th. Typically, mainstream U.S. media can basically determine the election results on the election day evening. For example, in the 2016 election, around 2:30 am the day after the election day, major U.S. media outlets declared that Trump had reached the threshold of 270 electoral votes and won.

In November-December of that year, the elected candidate usually gradually nominates cabinet members to enrich the governing team, providing more observation windows for policy ideas and implementation scales. In January of the following year, the U.S. will hold the inauguration ceremony for the new president, where the inaugural speech may contain crucial policy commitments with certain policy priorities and urgency.

Afterwards, a series of policies may be intensively implemented through presidential executive orders. Domestically, China will convene the 12th session of the Standing Committee of the National People's Congress from November 4th to 8th, and the Central Economic Work Conference is expected to be held in December, focusing on policy adjustments to external changes.

Question (2): Which combination of "President + Congress" results would be more favorable for China's external environment?

We believe that if Trump wins and there is a Republican sweep, policies like tax cuts under Trump may be more easily implemented, and the Congress's hawkish stance towards China will be stronger, potentially increasing external pressure on China.

Apart from the presidential election, the turnover of the U.S. Congress also requires close attention. According to RCP's polls (as of October 27th), the Republicans have a majority advantage in the Senate, but the House of Representatives is still uncertain. If Trump wins the election, and there is a Republican sweep in Congress, policies like Trump's tax cuts may be more easily implemented, and the Congress's hawkish stance towards China will be stronger, potentially increasing external pressure on China If Trump wins but forms a "divided Congress," the game between the two parties and two houses may become more intense, which may to some extent restrain Trump's energy on foreign policy.

Question 3: If Trump wins, what is the potential timeline for the implementation of tariffs on China?

We believe that Trump has multiple options to push for the implementation of tariffs on China, with the second quarter of next year being a higher probability potential window.

In terms of the process, if Trump wants to impose tariffs on China, he can do so in three ways: the fastest way is to invoke the International Emergency Economic Powers Act (IEEPA) to impose tariffs on China, as it does not require an investigation or approval from Congress. The power of the IEEPA can be invoked by the president at any time and can be implemented quickly.

For example, on May 30, 2019, Trump announced that he would use the IEEPA to impose a 5% tariff on all goods imported from Mexico, gradually increasing it until "Mexico takes effective action to alleviate the illegal immigration crisis," with a planned implementation date of June 10, 2019 (but later suspended).

A more moderate approach is to impose tariffs through Section 301 investigations, which also do not require approval from Congress but involve investigations and hearings, usually taking about six months. For example, during the first term, Trump mainly imposed tariffs on China through Section 301 investigations, initiating the investigation in August 2017 and gradually releasing lists of goods subject to tariffs by March 2018, taking about half a year.

The slowest way is to revoke China's most favored nation status, which requires approval from Congress, is a more cumbersome process, and has a limit on the tariff rates that can be imposed. According to U.S. customs data, the average tariff rate for non-most favored nations in the U.S. is 42%. The time to implement tariffs may vary depending on the method used, and we believe the second quarter of next year is a key observation point for whether tariffs will be implemented.

Based on our previous simple estimates, assuming a 60% tariff on China does occur, directly dragging down our country's exports by about 8.3 percentage points, the drag on economic growth is about 0.9 percentage points. Of course, if we further consider that Chinese companies may bypass trade restrictions through ASEAN, Mexico, and other countries, the ultimate drag on our country's overall exports and economic growth may be less than the estimated value above.

Question 4: If Trump returns, will it change the direction of the A-share market?

We believe that the incremental source of funds in the current market and the domestic policy environment are significantly different from 2018, and Trump's return will not change the market trend.

Looking back at Trump's previous term, during the China-U.S. trade friction, the A-share market was under pressure. However, we believe that the current market environment is significantly different from 2018, and Trump's return will not change the upward trend of the market. On the one hand, in terms of the source of incremental funds, unlike the institutional investor-dominated environment in 2018, the current market is characterized by active funds represented by individual investors continuously entering the market From an objective perspective, there are certain differences in information focus between individual and institutional investors, with the logic of fundamentals relatively weakened, and more attention given to the expected catalysts of policies and events. Even if Trump returns, bringing significant pressure on fundamentals, it is difficult to completely change the trading enthusiasm of individual investors. Instead, they may pay more attention to policy expectations in areas such as self-controllable technology, leading to greater elasticity in growth styles in the short term.

On the other hand, in 2018, the A-share market faced dual internal and external pressures from the China-US trade friction and financial deleveraging policies, with a clear shift in domestic policies only occurring in the fourth quarter of 2018, leading to a market turnaround. Currently, the shift in domestic policies precedes external pressures, and the rising external pressures will only further enhance the necessity of policy efforts to hedge, especially fiscal and domestic demand-related policies are worth anticipating.

Question (5): If Trump returns without changing the overall market direction, are there structural changes worth noting?

We believe that attention should be paid to the structural impact of Trump's policies on areas related to external demand, as well as technology, new and traditional energy, pharmaceuticals, automobiles, and defense industries, and selectively avoiding sectors highly dependent on the US market.

On one hand, there is a need to periodically focus on the structural impact of export pressures on areas related to external demand. Looking at the dependence of various sectors' exports on the US market, sectors such as the automotive industry chain, new energy, and semiconductors have relatively low dependence on the US market, and the trend of upgrading export structures will not change. However, traditional labor-intensive sectors have a relatively high dependence on the US market.

Nevertheless, companies with overseas production capacity have relatively controllable risks, and Trump's threats to companies going global and re-exporting are objectively difficult to materialize. On the other hand, attention should be paid to the structural impact of Trump's industrial and sanction policies on key industries. In the technology sector, the US's domestic and foreign technology policies rarely fluctuate with elections, and both the catalysis of US industrial policies and China's policy enhancements in self-controllable technology will continue.

In the energy sector, it is expected that Trump will find it difficult to abolish the inflation reduction act, but still have a certain short-term negative impact on new energy development. However, in the long run, China's position in the industrial chain will be more stable. Whether oil prices will be significantly bearish, the realization of energy expansion plans, and their relationship with congressional control will become more apparent.

In the pharmaceutical sector, Trump's emphasis on biosecurity issues is significantly higher than that of Biden and Harris, requiring attention to potential disturbances. In the automotive sector, as the automotive industry increasingly involves national security and union forces, the feasibility of Trump's so-called allowance for Chinese companies to build factories in the US is questionable. However, the "springboard" of Mexico's production capacity may not face extreme risks in the short to medium term.

In the defense industry, unlike Biden's "compete without conflict" tone towards China, Trump's confrontational diplomatic style is more pronounced, leading to potentially more frequent event-driven catalysts. In the dividend sector, during periods of sustained external tensions, the market may also reflect temporary risk aversion sentiments.

Question (6): If Trump returns, is it possible for foreign investment restrictions on China to be further tightened?

We believe that the strategic benefits of Trump's push for related measures are not high, and the probability of extreme risks occurring in the short to medium term is limited. Looking back at Trump's previous term, he initiated disputes surrounding Chinese concept stocks, signed investment bans on some Chinese companies, and caused disturbances in the secondary market. The Biden administration, on the other hand, generally believes that the strategic significance of the game around the secondary market is limited, and pays more attention to investments by US dollar funds in sensitive areas in the primary market.

Of particular note is that the US Congress had previously introduced many draft bills attempting to restrict US investments in China. However, Patrick McHenry, the Republican Chairman of the House Financial Services Committee, played a crucial role in blocking the passage of related bills, leading us to speculate that it may be because McHenry represents the interests of major financial capital.

However, according to CBS reports, McHenry will retire in the upcoming congressional turnover. Whether his successor will have the ability to suppress the hawkish stance towards China in Congress and prevent the introduction of related bills remains to be seen. Overall, we believe that the strategic benefits of Trump's push for related measures are not high, and the probability of extreme risks in the short to medium term is limited.

Question (7): How will the global asset trading logic be affected if Trump returns?

We believe that the current major asset classes have begun to price in the "Trump trade." In the event of a Republican sweep, we expect US stocks to relatively benefit, US bonds to be relatively bearish, the US dollar to strengthen relatively, and gold prices to have more catalysts.

With the increasing possibility of Trump's return, global financial markets are gradually pricing in the expected impact of Trump's policies. In terms of US stocks, if Trump returns and his tax reduction policy is implemented, it may further improve profit expectations. In particular, the financial sector may benefit from Trump's tendency to relax regulations, while cyclical sectors may benefit more from economic stimulus.

Regarding US bonds, the long-term debt and deficit expansion brought about by Trump's tax cuts, as well as the inflation effects of policies such as immigration control and tariffs, may prematurely end the current rate-cutting cycle or continue to pressure US bonds. In terms of the US dollar, if Trump's policy combination is implemented, non-US currencies may face devaluation pressure due to trade frictions, potentially pushing the US dollar index higher.

As for gold, if Trump takes office, global investors' concerns about the long-term sustainability of US debt, the pursuit of non-US currency systems, and the escalation of short-term geopolitical uncertainties brought about by Trump's inauguration may all contribute to pushing gold prices. In terms of oil, although Trump emphasized in his campaign platform that he would expand traditional energy extraction, the high and difficult-to-reduce marginal extraction costs of current US shale oil may not prompt oil and gas companies to increase capital expenditures rapidly in the short term. Whether this can be promoted through congressional subsidy bills still remains uncertain.

Question (8): How will the global geopolitical landscape and multiple hot conflicts evolve if Trump returns?

We believe that the global geopolitical landscape will present a state of "continual small conflicts and rare large conflicts," with the intensity of conflicts between Russia and Ukraine and Israel and Palestine possibly escalating before gradually moving towards a resolution, while the Indo-Pacific region and policies towards China may still be core concerns for Trump.

Firstly, "transactional thinking" and "isolationist thinking" are the core manifestations of Trump's diplomatic approach. Under this thinking, we believe that the future global geopolitical landscape will exhibit a state of "continual small conflicts and rare large conflicts." Under the "transactional thinking," Trump may continue to practice "security hostage-taking" to pressure allies to maintain U.S. dominance. Constrained by security demands, allies may choose to passively follow in the short term, making it difficult for large-scale conflicts to erupt.

However, under the "isolationist thinking," with the intensification of U.S. policy swings and the decline in global control, power vacuums and order imbalances may be more evident in more regions globally, leading to frequent localized geopolitical conflicts with strong sustainability. Even if Trump wins and successfully "mediates" the conflicts between Russia and Ukraine and Israel and Palestine in the short term, global geopolitical risks are unlikely to diminish in the long term.

Secondly, regarding the conflicts between Russia and Ukraine and Israel and Palestine, we expect that there will be no ceasefire foundation before the new president takes office. If Trump wins, the conflicts between Russia and Ukraine and Israel and Palestine may gradually move towards a resolution after he takes office, but there may be a process of increasing conflict intensity followed by a decrease.

Thirdly, the Indo-Pacific region and the policy towards China may still be a core concern for Trump. In his first term, the Trump administration has already promoted the "Indo-Pacific" concept or emphasized the "Indo-Pacific" strategic vision on different occasions, viewing China as the primary strategic concern in the Asia-Pacific region. However, in his context, ally coordination is only a means to achieve the goal of "America First," and does not imply that expanding and strengthening alliances is the primary objective.

Article Author: Yang Fan (S1010515100001), Yao Yuan, Wei Sian, Source: CITIC Securities Research, Original Title: "Overseas | U.S. Election Preview: Policy Process and Market Impact"