Maybe you’ve heard … the U.S. is embroiled in a trade war with China. Which means it may be a good time to evaluate Chinese stocks.
This is no small war. According to The New York Times, Chinese investment in America has plummeted as much as 90% since President Trump took office.
But how does the increasingly tense economic relationship between China and the U.S. affect the stock market? Does it pose a threat to traders … or does it create opportunities?
Turns out, the answer to both questions is yes.
So given the volatility of the situation, it’s super important to do your homework before buying stock in any company that could be affected by the trade war. When the rules of the economy change, you have to be able to adapt with them.
Let’s take a closer look at the trade war and how it’s affecting stocks. Then I’ll evaluate whether I think certain so-called Chinese stocks to watch are actually worth the time.
Table of Contents
- 1 What Are Chinese Stocks?
- 2 The U.S.-China Trade War
- 3 Chinese Stocks: Deal or No Deal?
- 4 The Lowdown on Chinese Stocks
- 5 In Closing
What Are Chinese Stocks?
That’s easy … Chinese stocks are stocks offered by Chinese companies.
But in the context of the trade war, when people refer to ‘Chinese stocks,’ they’re likely referring to a greater variety of stocks. This could include stocks that are both Chinese- and U.S.-based, that could be affected by the trade war.
In terms of the China-based stocks, a lot of these companies are traded on U.S. exchanges, so you can buy and sell shares on your chosen trading platform, whether it’s through a broker or on the StocksToTrade platform.
But perhaps more important than what Chinese stocks are is why so many eyes are on them right now.
The U.S.-China Trade War
Yup, we’re in a trade war with China.
Tensions have been mounting since 2016, before President Trump even took office. He had a real beef with Chinese trading practices, to say the least.
In 2017, the U.S. started imposing tariffs on Chinese products — lots of them. According to the BBC, about $250 billion, actually.
China didn’t just sit back and take it, though. They imposed tariffs of their own, ranging between 5%–25% on over $100 billion of U.S. products, including medical equipment and coal.
By 2018, the tit-for-tat trade war caused a lot of Chinese stocks to drop. The Shanghai Composite slumped almost 25%.
There are signs that something could give. In June, President Trump and Chinese President Xi Jinping met at the G20 summit regarding the trade war, and some progress was made … A Chinese state-run agency released a statement announcing both presidents agreed “to restart trade consultations between their countries on the basis of equality and mutual respect.”
But just as U.S. and China trade negotiations started again, President Trump announced tariffs on a further $300 billion worth of Chinese goods. The move caused turmoil in markets around the world. U.S. stocks dropped sharply.
China quickly struck back, allowing the yuan to rise above the psychologically important 7-to-the-dollar ratio. Again, markets reacted negatively. On August 5, the Dow Jones Industrial Average and S&P 500 both dropped 2.9%. The Nasdaq dropped 3.47%.
After the U.S. treasury accused Beijing of currency manipulation, the roller coaster ride continued. On August 6, when the yuan stabilized, markets reacted positively across the board.
But for the moment, Chinese stocks are still pretty cheap. Chinese stocks are currently the cheapest in 20 years, relative to the S&P 500.
That might not last, though. The sector could be set to move really soon, once the agreement details are worked out.
So, of course, lots of traders want to know: Are there still any Chinese stocks to watch?
Chinese Stocks: Deal or No Deal?
Before getting into the stocks, a little anecdote…
Recently, my student Mike “Huddie” Hudson interviewed me, and we really got into whether your trading style should change during a trade war.
While it’s necessary to adapt to the market, there are certain things that I like to keep the same. So I don’t change my inherent approach to trades. I still wait for great charts and my picture-perfect setups.
Ultimately, when it comes to trading, I don’t care about the Chinese economy itself. What I really care about is the market’s reaction. We can learn something from some Chinese stocks, so let’s take a quick look at a few that are getting a lot of attention.
I’m not saying that I believe in any of these companies, but they could benefit if and when the U.S. and China come to an official agreement. And the trend that bigger companies follow could give an indication of what might happen with lower-priced stocks, too.
But then again … they could also get crushed, depending on the deal (or lack thereof). So for me, it’s not worth the risk/reward.
Alibaba (NYSE: BABA)
Often called ‘the Amazon of China,’ this is China’s biggest e-commerce site, and it’s growing.
Alibaba is a stock with tremendous growth potential. In spite of the trade war, it reached an all-time high in June 2018. While it dropped as the trade war escalated, that doesn’t mean it’s over and done for.
E-commerce hasn’t slowed down a ton in China, and the stock is still up significantly this year — even with the trade war.
Take a look at the Alibaba two-year chart:
Like I said, I’m not hugely interested in Chinese stocks right now … and definitely not in high-priced stocks like Alibaba. But looking at this leader’s price action can give an indication of the market’s tone for lower-priced stocks, too.
Baozun (NASDAQ: BZUN)
This is a module that lets users set up an e-commerce store. It lets non-Chinese brands set up a presence in China, and that means access to Chinese shoppers.
Like many other companies, Baozun has been affected by the trade war. But it’s hard to say how it’s been affected directly.
Because it’s in the unique position of dealing with products coming in from outside of China, it may be suffering even more than some other companies.
After experiencing highs in June 2018, it traded for as much as $62 per share. In the latter half of 2018, shares traded for as little as $30. But it’s been slowly climbing back up the charts.
Here’s the two-year chart for Baozun:
And because of its small size, it could have great growth potential.
With a market cap of $3.4 billion, it’s nowhere near the size of a company like Alibaba. So a stock like this could experience bigger and faster swings based on news than some of the giants.
China National Offshore Oil Company (NYSE: CEO)
China National Offshore Oil Company (CNOOC for short) is a big energy company, with a market cap of $74.98 billion.
The company deals with the development and production of crude oil and natural gas. They primarily serve China but operate in other parts of Asia, Africa, North America, South America, Oceania, and Europe.
Trade war or not, the need for oil and gas isn’t going anywhere. And China is only growing, so its needs are bound to become even greater.
Take a look at the two-year chart for CNOOC…
More food for thought: If China needs to start relying on its own resources rather than depending on the U.S., a stock like this could experience growth.
While CNOOC has long-term debt, it’s in line with its competitors, and it has a decent balance sheet.
Tencent Holding (OTCMKTS: TCEHY)
Tencent is a big company for the OTC markets. With a market cap of $433.09 billion, it’s a hugely valuable tech company with fingers in many different pies — social media, gaming, e-commerce, internet, music services … the list goes on (and on).
In 2018, like just about every other stock in China, it experienced some big losses.
The two-year chart for TCEHY below tells the story…
But this company is undoubtedly growing and starting to creep back up. It’s not quite to the highs it experienced before things crashed in 2018 when it traded for over $60. But its progress is slow but steady. At the time of this writing, it’s trading for about $45.
There are other considerations with a company like this, including the Chinese government’s strict regulations on online gaming and new competitors cropping up all the time.
However, with a strong distribution system in place and what seems like a streamlined development process, a company like this could stay strong through the trade war — and continue to grow after.
Weibo (NASDAQ: WB)
Dubbed ‘the Chinese Twitter,’ Weibo is a growing social media network with all sorts of different modules for users to share.
Company stock prices peaked in early 2018, but (surprise, surprise) it’s been on a downward trajectory ever since.
Here’s the two-year chart for Weibo…
But the company’s news has been positive: during 2018, active users continually grew, and they have improved financially every year since going public.
In 2014, they had a $65 million loss. By 2018, they turned a $571 million profit. With solid financials like these, it’s not surprising that some traders are watching its progress.
The Lowdown on Chinese Stocks
If you ask me, the biggest problem with the trade war is this: it creates a black hole of unpredictability. This goes for both the market at large and for individual sectors.
Example? Consider rare-earth metals (a group of elements utilized for consumer electronics, medical equipment, and military uses).
In that interview with Huddie, I shared how some rare-earth metal companies including Rare Element Resources Ltd (OTCQB: REEMF) and Texas Mineral Resources Corp. (OTCQB: TMRC) are up right now. That’s because China’s ‘threatening’ to hold back rare earth metals.
But really, that’s just hearsay and rumor. And the U.S. government is already seeking alternatives in Africa.
Even so, China still controls the majority of the world’s processing facilities for these metals, so even if the U.S. finds another source, it won’t be an immediate switch. So if China lives up to that threat, the whole sector can feel the effects.
This is one example of how much is unknown with Chinese stocks. Because there’s no definite resolution to the trade war yet.
However, a mutually beneficial agreement that will improve relations between the countries could have a positive effect on stock prices in China.
So is it worth it to buy stocks from China? Maybe.
There are potential opportunities … The trade war has driven down Chinese stock prices, and a resolution to the trade war could bring them back up.
But for me, they’re mainly a no. Right now, there are still too many unknowns, including what the solution will be and how quickly it will come along. So for now, it’s important to adapt to the market, watch the stock’s price action, and always be sure to do your research before executing a trade.
Wouldn’t you love to be the type of trader who can easily adapt to changing market conditions? There’s a way you can become that trader — study.
I created my Trading Challenge to help all of the traders who asked me for advice after I hit the public eye thanks to my TV appearances and following my hedge fund experience.
I had to learn a lot of things the hard way … So I figure why not help new traders benefit from what I’ve learned over the past 20 years?
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How has the trade war affected your trading? How are you adjusting your strategies to the tariff tensions? Leave a comment and let me know!