So far, I have not considered the threat of a trade war between the U.S. and China as a major challenge for China’s stock market and economy. Moreover, the risk of a trade war has recently diminished, at least according to a May 20 statement by U.S. Secretary of the Treasury Minister Steven Mnuchin suggesting the face-off over trade is "on hold." However, I regard the agreement between the two sides as weak, and believe it constitutes more a letter of intent rather than a binding deal.

Virtually anything could bring the battle over bilateral trade back to the fore, including indirect developments. Financial markets around the globe including China’s stock market have become more nervous and are displaying increasingly distinct reactions to bad news compared with just six month ago.

China’s domestic A-share market has lost almost 10 percent over the past three months, a fact largely unnoticed by Western investors. In parallel, Chinese companies listed on the Hong Kong stock exchange also recently fell to the lowest level for four months. This is not a good starting point amid rising global nervousness, and in light of the fact that rhetoric about a U.S.-China trade war could easily reappear.

If voters should start to desert Trump’s camp, I expect him to turn up the trade rhetoric towards China in a bid to rally the cause.

I expect U.S. President Donald Trump to revert to tough rhetoric against China as and when he needs to strengthen his ratings on the domestic front. Although there is still almost half a year until the mid-term elections in the United States, they have already started to figure in Trump’s thinking.

Naturally, President Trump would like to maintain the Republican majority in both chambers on Capitol Hill in Washington D. C. Based on the polls and election models I have seen so far, the Republicans will continue to hold the majority of the Senate. But the majority in the House of Representatives is currently in the danger zone, and forecasts suggest a close-run race is in the offing.

If voters should start to desert Trump’s camp, I expect him to turn up the trade rhetoric towards China in a bid to rally the cause. One could argue that the agreement with North Korea could provide the required pre-election fillip, but my bet is that events this week in Singapore and subsequent dealings between Washington DC and Pyongyang could actually open the door to heavier rhetoric against China. Why? Because even President Trump realizes that he needs international allies.

Setting the scene to make a nuclear-free Korean Peninsula, establishing diplomatic relations and perhaps even partly opening the borders could provide Trump with the diplomatic space he requires to restart hard-line talks with China. In addition, Trump’s core voters love this line as it matches the narrative that China is responsible for pilfering their jobs.

Simply put, the mood among core Republican voters is of great significance, and the mid-term elections will play an important indirect role in how Trump for example acts towards China. The tax reform in the United States was designed to increase disposal income among households in the lower part of the middle-class, very specifically this year and into 2019. It is the usual tactic of any government in a democratic country ahead of an important election.

But President Trump’s tax handout is being eaten up by rising oil prices. The price of crude has risen so much that the tax cuts for the middle class in the U.S. are being offset by higher costs for petrol at the pump. It may sound like small margins, but they are bigger than many believe – and in the mid-term elections, these razor-thin margins could well swing the key seats in the House.

Another example of what might prompt Trump to set about trade war tweeting is the trade balance itself.

All one of Trump's advisers need do is show the president the data on the U.S. trade balance with China and there will undoubtedly be an explosive reaction. In the early part of 2018, the deficit is even wider than it was in the same period of 2017.

However, if the U.S.-China trade debate itself was the only variable it would not seriously affect the stock market. The U.S. government could probably succeed in securing major from Beijing if it tried hard enough, on paper at least. But these will have to be transformed into reality, and China can only affect the equation on the import side.

But Trump wants more than that -- it’s the jobs his voters want back to the U.S. But such an outcome can only be achieved through development of the U.S. economy, which is outside China’s remit. I still regard it more likely that production lines move from China to Vietnam, Laos and other ASEAN member countries.

This would reduce China’s trade surplus and reminds me that back when the U.S. complained about Japan’s huge trade surplus towards the United States – it was largely reduced because China took up the slack. In addition, exports now only count for approximately 18 percent of China’s GDP. Just over a decade ago, when exports accounted for around 35 percent of China’s GDP, the threat of a trade war carried significantly more weight. Now, China has done a much of the work required to rebalance its economy towards domestic consumption, and the threat of a long, drawn-out spat over tariffs does not loom quite so large.

In light of this capacity to steadfastly absorb Trump's threats, and amid the abovementioned underlying nervousness in the global financial markets, the mere risk of a renewed U.S.–China trade dispute compels my attention.

The leading domestic A-share index in Shanghai now hovers around 3,000 points, an important psychological threshold. As Chinese investors are primarily momentum-driven in their expectations, my impression is that many still expect a further decline in the stock market. The argument is therefore not a “value” consideration, just a belief that we can expect downside risk of a further 8-10 percent fall in the stock market.

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Editor: David Green