It appears Chinese investors aren't sure what to make of the trade tariffs blast from U.S. President Donald Trump. And I don't blame them.
It doesn't help that Twitter is banned in China and discussion of Trump's tweets is difficult if you can't point to what you're discussing. People with access to VPNs (which China also is doing its best to bar) get insight into foreign news, but for the average investor, Mr. and Mrs. Chan, there's little to go on.
This may explain why Chinese stocks have recovered from their one-day shock on Monday. The CSI 300 index fell a modest 1.4% on Wednesday. But Shanghai and Shenzhen stocks remain above the lows they set at the start of the week in response to Trump's weekend tweets that the United States would install hefty tariffs on Friday.
All the official response out of China has been, basically, "He's bluffing."
It's pretty clear he is not bluffing, at least about the tariffs hitting on Friday. Too late now. Nevertheless, the Chinese delegation, 100 or so strong, will be visiting Washington on Thursday and Friday, steered by Vice Premier Liu He.
Let's hope those discussions go well. We appear to have reached a similar situation that the U.S. delegation met with in North Korea, where talks broke down, and the United States rushed off with nothing accomplished. Now we have missiles crashing into the Sea of Japan once again.
To be honest, we do not know what the 10 rounds of Sino-U.S. talks so far have established or even discussed because there have been no official briefings about their contents. The murmurings by U.S. Treasury Secretary Steve Mnuchin have been that the talks have been "constructive" (at the end of March) and that they have been "productive" (at the start of May).
So we rely on leaked information about what's been going on. Most recently, my former employer, Reuters, reveals that China backtracked in a 150-page draft sent to Washington late on Friday on just about every aspect of the trade deal that had been discussed and agreed to so far.
It seems Chinese President Xi Jinping himself is behind these changes. He reportedly told the trade talks team that what they brought to him was not acceptable. "I'll be responsible for all the possible consequences," he said, the South China Morning Post reports.
That makes eminent sense, as I said when I appeared as a guest on RTHK Radio 3's drive-time morning business show, MoneyTalk, here on Wednesday morning. You can click here to see the Facebook Live episode - yes, you can now appear on the radio!
Mnuchin, thought to be more dovish on China trade, and U.S. Trade Representative Robert Lighthizer, the hawkish trade "bad cop," had concurred in public statements on Monday that China had backtracked, which brought on Trump's tweets and tariffs.
Liu and the Chinese spokesperson for the Foreign Ministry, Geng Shuang, have been playing this as all part of the "process of negotiation," as Geng said on Wednesday. It's the "Art of the Deal," in Chinese.
Xi appears to have told the negotiators that there's no way China is going to change its laws to accommodate the United States. This means the talks are going nowhere, because Lighthizer in particular is insisting on enforcement methods and penalties if China does not follow through on its commitments. It's a smart demand, given all of China's failings to follow through before when accessing the World Trade Organization and more.
Both Trump and Xi are emboldened by stronger-than-expected economic figures for the first quarter. U.S. growth hit 3.2%, the best start to a year in four years. Chinese GDP grew by 6.4% for the first quarter, with imports and exports both up almost double-digit percentages in March. There's a pleasant symmetry there. And stocks in both nations have responded.
However, both Trump and Xi also would love a trade deal to happen. They don't want to deliver the harm to their own economies that a sustained trade war between the world's two largest economies would produce.
Although China has little it can do on the tariffs front because it's already taxing just about all U.S. imports at a higher rate, there's plenty it can do on the regulatory and administrative side. Chinese policy can change overnight. How far does China need to be pushed before it, say, revokes the license that allows U.S. carmakers to manufacture vehicles in China under joint ventures?
And if North Korean dictator Kim Jong-un is back to missile tests again, China always has the nuclear option of starting to sell U.S. Treasuries. That would tank the U.S. dollar and cause global economic fallout.
One Australian Chinese business contact of mine believes China's measured response is mature, rather than startled.
"I think Trump, as a narcissist, would get joy out of having the ability to affect the share market this way and will do something again," she says. "Now to see how China will react."
"In my opinion, the Chinese will actually respond like adults, winning alliances for long-term gain, while Trump has been acting like a spoiled brat."
There's something to that. But I do think the Chinese are underestimating and downplaying how serious Trump is about walking away from these talks, just as he did walk away from the North Korea talks in Hanoi at the end of February.
So I'll rephrase my assessment from Monday that this looks like a buying opportunity for Asian equities. This looks like a long-term buying opportunity for Chinese equities, in particular, which still have farther to fall if pessimism sinks in with Chinese investors again.
They have been the world's best performers this year, because Chinese business and investor sentiment turned positive thanks to the trade "progress." But these are thoroughly sentiment-driven stock markets in Shanghai and Shenzhen. They will likely give back still more of their 36.9% gains. The CSI 300 now stands up 21.8% so far this year.
We'll know more when Liu leaves Washington on Friday, when the new tariffs should already be in place. What's next?
As Trump is fond of saying, in rough paraphrase, "Anything could happen. Or nothing. We'll see."