Linlin Yang
Yan Yan
Belle Chang
Since 2018, escalating US-China trade tensions have disrupted global supply chains and reshaped economic interdependence. In this insight, we examine outperforming industries and analyse changes in China’s onshore and offshore equity markets through flagship indices like the FTSE China A50 and FTSE China 50.
- Continued US-China trade tensions and tariff increases have weakened the trade interdependence between China and the US. Key goods like furniture, toys, footwear, and sports equipment highlight mutual trade reliance. For products such as optical and medical instruments, China's exports to the US were higher, but the US's dependency on China was low. These could be the sectors in China that see more negative impacts if extra tariffs are imposed.
- During heightened trade tensions in 2018, FTSE China A50 Index and FTSE China 50 Index, two flagship indices, experienced lower drawdowns compared to the corresponding All Cap Indices. The two indices are reliable proxies for the onshore and offshore markets. Both demonstrated more favorable capture ratios than the All Cap Indices. Their valuation and profitability profile has improved since 2018.
- By industry, Financials contributed most positively to both the onshore and offshore markets over the past one year and past 10 years. Aside from Financials, Industrials and Consumer Staples contributed the most to the onshore index while Technology led for the offshore index. The diversification in industry structure across these indices provides varied investment opportunities in both onshore and offshore markets for investors.
US-China trade tensions since 2018 and the subsequent tariff increases have affected the interdependence between China and the US. As a result, both the US’s share in China’s exports and China’s share in US imports declined as a result. This derisking trend has persisted ever since. Tariff imposition remained while trade and investment disputes continued during Biden’s administration. As Exhibit 1 shows, the US’s share in China’s total exports fell further from 29% in 2018 to 21% in 2023. Likewise, China’s share in US total imports dropped from 22% in 2018 to 14% in 2023.
The trade dependence between China and the US has been declining, and should the US impose up to a 60% tariff on imports from China during President Trump’s next Administration, the trend could dampen further. This trend not only causes shifts in overall international trade and global supply chains from an economic perspective but also impacts individual industries. In the sections below, we delve into the impacts on industries in terms of both international trade and equity markets.
Exhibit 1: China’s exports to US vs US’s imports from China
Source: UN Comtrade, Wind, FTSE Russell. Based on exports and imports data of 2023, 2019 and 2018 fully year. Please see the end for important legal disclosures.
Which sectors are most at risk?
To begin with, we breakdown China’s exports to US and US’s imports from China by commodities, to see what products these two countries have higher dependency on each other. These products could be negatively impacted if extra tariffs are imposed.
As shown in Exhibit 2, products such as furniture, toys, sports requisites, footwear, and headwear are trade goods that China and the US rely on each other for the most. These types of products could not only hurt China's exports but also cause potential reinflation in the US if tariffs are imposed. The US would need to source these products elsewhere or produce them domestically, which can be more costly. Among China's total exports of miscellaneous manufactured goods (including furniture, toys, games, and sports requisites), 28% were shipped to the US in the full year of 2023. 48% of the total miscellaneous manufactured goods that the US imported were from China.
As for products such as optical and measuring equipment, medical instruments, and food and beverages, China's exports to the US were higher, but the US's dependency on China's manufacturing of these products was low. These could be the sectors in China that see more negative impacts if extra tariffs are imposed.
Exhibit 2: China’s exports to US vs US’s imports from China – by major product type
Source: UN Comtrade, FTSE Russell. Based on exports and imports data of 2023 full year. Sector classification is based on HS code, industries in brackets are based on ICB classification. Please see the end for important legal disclosures.
The impact of trade tensions in 2018 on China equity
Before discussing what industries could be more negatively impacted going into 2025, it is important to look back the historical pattern during the trade tension in 2018. We investigate the performance of two All Cap Indices – FTSE China A All Cap Index and FTSE China All Cap Index. Basic Materials, Consumer Discretionary and Technology, which are sensitive to exports or were a policy focus during the 2018 trade tension, experienced the largest drawdowns in both onshore and offshore markets (Exhibit 3). In contrast, Utilities, Energy, Real Estate and Financials were least impacted. There were discrepancies in some industries, such as Telecommunications. The onshore market had higher weight in Telecommunications Equipment stocks, which are more vulnerable to trade tensions, while the offshore market had more Telecommunications Service Providers, which generate revenue primarily from the domestic market.
Overall, the offshore market experienced a smaller drawdown compared to the onshore market due to the higher proportion of export-reliant companies in the onshore market, the greater sensitivity of the onshore market to trade tensions and their potential impact on the Chinese economy, and the more diversified investor base for the offshore market. During this period, the flagship indices for onshore and offshore Chinese markets, the FTSE China A50 Index, and the FTSE China Index, had lower drawdowns compared to the corresponding All Cap Indices.
Exhibit 3: China onshore vs offshore performance in 2018
Onshore performance is represented by the FTSE China A All Cap Index and its industry level indices, offshore performance is represented by the FTSE China All Cap Index and its industry level indices. Source: FTSE Russell. Data date December 31, 2017, to December 31, 2018. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Decline in onshore and offshore market valuations compared to 2018 trade tensions
How has the current market environment changed compared to 2018? Compared to the valuation levels at the onset of the trade tension in 2018, both onshore and offshore valuations have declined, suggesting that the downside risk is low this time around. From the perspective of ROE, the profitability of both markets has improved, placing them in a more favorable position. Overall, the combination of lower valuations and improved profitability underscores a more advantageous market compared to 2018.
Exhibit 4: Trailing P/E ratio vs ROE of China A50 and China 50
Source: FTSE Russell. Data as of November 29, 2024. Past performance is no guarantee of future results. Please see the end for important legal disclosures
FTSE China A50 Index and FTSE China 50 Index: Reliable proxies for the onshore and offshore Chinese stock markets
Apart from the lower drawdowns in 2018, downside capture ratios of FTSE China A50 Index and FTSE China 50 Index are consistently less than 1 in the recent 3 years, demonstrating that both indices experienced smaller declines compared to the All Cap Indices. Furthermore, they can keep pace with the market during upward trends, as evidenced by their upside capture ratios being greater than 1, effectively capturing the gains of the rising market in the recent 3 years.
Exhibit 5. Upside and Downside Capture Ratios of FTSE China A50 and FTSE China 50
| Capture Ratio | FTSE China A50 Index | FTSE China 50 Index |
|---|---|---|
| Upside | 1.02 | 1.1 |
| Downside | 0.93 | 0.97 |
Note: Benchmark for FTSE China A50 Index is FTSE China A All Cap Index (in CNY). Benchmark for FTSE China 50 Index is FTSE China All Cap Index (in CNH). Source: FTSE Russell. Data as of November 29, 2024, three years of historical data was used. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Performance Drivers of FTSE China A50 Index and FTSE China 50 Index
Having analysed the performance characteristics of the two indices, the next questions is: What industries are the main performance drivers of each index? Conducting a return decomposition can offer deeper insights.
Not surprisingly, Financials has been one of the main performance drivers for both indices due to the high weights of large banks. However, aside from Financials, FTSE China A50 Index and FTSE China 50 Index have different return drivers. For the onshore index, Industrials was the main contributors in the short term (past one year), while Consumer Staples led in the long term (past 10 years). For the offshore index, Technology has been a significant return contributor in both the short term and the long term. The difference in return drivers between the onshore and offshore underscores the importance of considering both when investing in China.
On the other hand, Health Care was the industry that lagged in both onshore and offshore markets, and in both the short term and the long term. The trend is like what we discuss in the above section. China’s exports of healthcare-related products were more dependent on the US than the US’s dependency on China for such products. Hence, further imposition of tariffs on Chinese healthcare commodities could have a more negative impact on China’s Health Care stocks.
Another trend we observe is that the sources of returns were more diversified in the short term compared to the long term for both the FTSE China A50 Index and FTSE China 50 Index. This reflects the diversification in the industry structure of both indices, which allows investors to gain more varied access to the onshore and offshore Chinese markets by tracking both indices.
Exhibit 6. Return Decomposition of FTSE China A50 Index
Source: FTSE Russell. Data as of November 29, 2024. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Exhibit 7: Return Decomposition of FTSE China 50 Index
Source: FTSE Russell. Data as of November 29, 2024. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Conclusion
The US-China trade tensions and subsequent tariff increases since 2018 have significantly impacted the trade dynamics between the two nations, leading to a persistent derisking trend. This has resulted in a decline in the US's share of China's exports and vice versa, with potential further reductions if additional tariffs are imposed. But industry, consumer and healthcare goods are exposed to higher downside risks.
While the All Cap Indices for both China onshore and offshore equity saw significant drawdowns during 2018, the flagship indices – FTSE China A50 Index and FTSE China 50 Index – demonstrated lower drawdowns and more favorable capture ratios. By industry, in addition to Financials, Industrials and Consumer Staples contributed the most to the onshore index while Technology driven returns for the offshore index. The diversification in industry structure across these indices provides varied investment opportunities in both onshore and offshore markets for investors. Overall, when compared to 2018, both the onshore and offshore markets offer more attractive valuations and improved profitability nowadays.
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