The world’s second largest economy rapid decline from a trade war could impact all the countries that trade with it. Donisanu said while the Chinese stock market has been losing ground because of trade war fears, the canary in the coal mine for a trade war that slams global growth would come if the U.S. stock market breaks down.
“The negotiation really is being drive by the U.S. The direction and tone of where we can go with this trade war or no trade war…is being driven by the U.S.,” he said. The big concern is what happens if the U.S. were to move ahead on its 10 percent tariffs on $200 billion in Chinese goods.
But Donisanu said aside from the trade concerns, mainland China still has appeal. “We think the fundamentals remain intact for emerging markets in Asia and for emerging markets as a whole,” said Donisanu, adding Wells views emerging markets more favorably as valuations have declined.
BlackRock strategists this week said they see the greatest opportunities in emerging Asian markets, but a possible China slowdown or trade disruptions are a risk. “Economic reforms, improving corporate expansion in the developed world is another positive. Risks include a further sharp rise in the U.S. dollar, trade tensions and elections,” they wrote.
They said the economic backdrop is encouraging. “China’s growth and corporate earnings are solid. We like selected Southeast Asian markets but recognize a faster-than-expected Chinese slowdown or disruptions in global trade would pose risks to the entire region,” the strategists noted.
As the trade tensions heated up, the People's Bank of China has cut some reserve requirements to boost lending.
"The PBOC has been taking steps that the point is we’re seeing a central bank that is stepping in during a period of softer economic growth to really help juice the economy and provide that buffer from a rapid deceleration in growth that had be a concern going into 2018," Donisanu said.
Strategists say the fear is that trade skirmishes will stall business decisions and weight on sentiment.
"It's traded that's weighing on business sentiment so the PBOC is really just stepping in making credit easier to obtain to cushion the decline in their economic growth rate, " Donisanu said.
China's currency has become a subject of much speculation as it quickly slid recently to the lowest levels since November. The move sparked talk that China could intentionally devalue the yuan to gain an upper hand if more tariffs were put on its exports.
“Markets are playing a bigger role in the movement in the yuan but in terms of whether policy makers would put measures in place that would weaken the yuan further further to punish the U.S. We already heard from Beijing. That is not something they’re willing to do,” he said.
Many currency strategists say China would not use the remnimbi as a weapon. “We continue to think a competitive devaluation scenario is unlikely because a sharp depreciation could reignite speculative capital outflows, which would be counterproductive by tightening financial conditions,” wrote Dylan Riddle of IFF. “Instead, we see recent RMB weakness as a reversal of excess strength, with perhaps a side-signal that recent trade tensions are unwelcome.”