The US presidential election is attracting attention, with all votes ending at 2pm Beijing time on election day. As of now, Trump is temporarily leading in key swing states. Although the results are not yet out, the Renminbi exchange rate has already reacted. At 2:35 pm today, the offshore Renminbi against the US dollar dropped more than 900 points intraday, breaking below the 7.19 mark.

Regarding exchange rates, institutions believe that a Trump victory will put pressure on the Renminbi. However, from a fundamental perspective, regardless of the election outcome, it is expected that the US dollar will decline from its current levels. Experts suggest that with the combination of interest rate cuts in trading and seasonal demand for foreign exchange settlement, the depreciation pressure on the Renminbi is expected to significantly ease by the end of this year or the beginning of next year.

In terms of the stock market, institutions believe that if the short-term downside risks have been fully priced in, it may be worth considering increasing positions in Chinese stocks. Combining Trump's first term stock market performance, experts believe that the long-term upward trend in A-shares and Hong Kong stocks still remains dominant. Some experts also suggest not overestimating the disturbance of the US presidential election on A-shares.

How will the US presidential election affect the volatility of the Chinese stock market?

UBS Group indicates that the outcome of the US presidential election may exacerbate short-term fluctuations in Chinese stocks; however, short-term turbulence is also brewing long-term opportunities.

"Chinese stock valuations are relatively low. In the event of a Trump victory, the Chinese government may actively increase policy stimulus. As the trade volume between China and the US significantly decreased during Trump's first term, US revenue exposure among the MSCI China Index constituents is less than 5%. It is expected that Trump may seek negotiations with the Chinese government, limiting tariffs to specific areas," stated UBS Group.

Therefore, UBS Group expects that once the drop in Chinese stocks due to the news of Trump's victory reaches double digits, and if the short-term downside risks have been fully priced in, it may be worth considering increasing positions in Chinese stocks.

"Looking back at the performance of A-shares and Hong Kong stocks during Trump's first term, the cumulative gains of the CSI 300 and the Hang Seng Index reached 43% and 11% respectively over the 4-year period of Trump's administration," said Minsheng Bank's chief economist Wen Bin. The reasons cited are, firstly, that prior to Trump taking office, A-shares and Hong Kong stocks had relatively low valuations; secondly, the improvement in corporate profits and the stable economic fundamentals continued to drive a trend of 'me-first' market movement, especially with the CSI 300 Index relying on the long-term profitability of core high-quality enterprises to form a value investment trend.

Wen Bin believes that the long-term upward trend of A-shares and Hong Kong stocks will still be 'me-first.' Overall, although Trump's presidency is expected to have a negative impact on A-shares and Hong Kong stocks (including tariff hikes, rising inflation expectations leading to reduced Fed stimulus, etc.), the driving factors of the Chinese capital markets will still depend on its own economic growth and corporate development.

He also mentioned that currently, $CSI 300 Index (000300.SH)$ and $Hang Seng Index (800000.HK)$ valuations remain relatively low, similar to the situation when Trump took office at the end of 2016. With increased market attention under policy support, the Chinese economy is expected to form a virtuous cycle of 'stock market rise → wealth effect → consumer stimulation → corporate profit recovery → stock market rise.'

Wu Chaoming, chief economist of Caixin Financial Group, believes that there is no need to overestimate the disruption of the U.S. presidential election on A-shares. 'From a fundamental perspective, the domestic economic growth has shown initial signs of a turning point, with a high degree of certainty in the improving economic trend; from a financial perspective, the A-share market is active in trading, with ample liquidity; from a sentiment perspective, the domestic stock market in 2024 has partially absorbed the impact of the U.S. election, especially as the 'Trump trade' has entered the later stages, limiting the disturbance to A-shares.'

Trump's victory puts short-term pressure on the RMB, with room for the USD to probe lower.

How did the RMB exchange rate perform during Trump's first term? Wen Bin introduced that during Trump's tenure, the USD had limited appreciation, with only a cumulative increase of 0.1% in the first three phases. The RMB exchange rate, whether against the CFETS currency basket or the USD, experienced limited depreciation in the first three years of Trump's administration, with magnitudes of 1.1% and 3.6%, respectively.

Mainly due to the exchange rate reform in 2015, the RMB exchange rate had already released its depreciation pressure in advance and had sufficient flexibility, resulting in no significant depreciation during Trump's presidency. Subsequently, the RMB exchange rate also experienced two rounds of 'first appreciating and then depreciating,' which played a significant buffering role in response to tariff imposition.

Wen Bin believes that Trump and his team's attitude towards the USD itself is quite contradictory. The short-term impact of Trump coming to power on the USD may differ from the long term, with the USD index possibly having short-term support but long-term pressure. "In a rate-cutting cycle, the overall direction of the USD index shaking and weakening in the future may not change, but if Trump eventually takes office, the USD may receive a certain degree of short-term support."

"Looking at the impact of Trump's past policies, the bias towards the RMB exchange rate remains bearish," Wen Bin also stated that in the short term, under the resonance of rate-cutting trades and seasonal currency conversion demand, the pressure of RMB depreciation is expected to significantly ease by the end of this year and the beginning of next year. Subsequently, after Trump takes office, it is highly likely to cause significant fluctuations in the RMB exchange rate.

UBS Group believes that in the forex field, Trump's victory will put pressure on the RMB.

"Regardless of the election outcome, from a fundamental perspective, the USD's high valuation, the narrowing advantage of interest differentials compared to other currencies, and the huge twin deficits in the U.S., both fiscal and current account deficits, will all exert pressure on the USD," UBS also stated that in the scenario of Trump's election, the USD is likely to be stronger due to potential stimulus policies, possible interest rate hikes, and potential tariffs, all of which will support the USD. However, regardless of the election results, the expectation is for the USD to decline from its current levels.

Editor/Rocky