China's Currency and Equities Facing U.S. Protectionism

(Reuters) – China's currency and equities will bear the brunt of a protectionist shift in the U.S. and are seen trading sensitively to the election's trade and foreign policy implications.

Impact of Election Results

Investors say a win for Donald Trump, particularly if accompanied by a Republican sweep of Congress, is expected to squeeze the yuan and shares in export sectors.

A victory for Democrat Kamala Harris is likely to result in opposite trades. Here are how investors see markets moving:

Dollar/Yuan Predictions

China's currency is tightly managed. Still, or perhaps because of that, it is expected to fall if the U.S. hikes tariffs on Chinese goods. Analysts see it sliding to 7.3 per dollar or beyond should Trump – who promises dramatically higher tariffs – win the presidency, especially if Republicans control Congress and the White House.

In the lead-up to polling day, the currency has come under pressure, with exporters reluctant to sell dollars. This could lead to a rebound if Harris wins office, driving the yuan towards 7 per dollar or below.

In the longer run, the exchange rate will be driven by the significant gap between U.S. and Chinese yields that is likely to persist regardless of the election outcome and by the trade policy actually imposed by any incoming administration.

Stock Market Dynamics

China's equity market is recovering from a years-long slump as authorities promise to address weak consumption and a downturn in the real estate sector.

While the election is peripheral to that recovery, it will likely drive price moves in export or sanctions-exposed sectors. Defence and telecom stocks may receive a boost from a Trump victory, as investors seek sectors likely to benefit from state support or those paying generous dividends.

Textile, computer, machinery, and home appliance makers would likely be sold, according to analysts at Huatai Securities. However, since both Democrats and Republicans share a general antagonism towards China, markets may not react dramatically until concrete policy changes are announced.

Offshore Assets

Hong Kong stocks and U.S.-listed depositary receipts may be more volatile as they tend to be traded by foreigners who want to bet against Chinese assets.

Index futures and stocks, like Hong Kong-listed China internet companies, have retraced almost half their recent gains and are likely to be vulnerable if investors short to hedge against election risks. Selling in Hong Kong could also pressure the Hong Kong dollar or widen the premium of mainland stocks against Hong Kong-listed counterparts.