Trade War Reality Greets Chinese Traders on Return From Break

As Chinese traders return from their Lunar New Year break, they are greeted with a harsh reality: the ongoing U.S.-China trade war. The conflict, which began in 2018, has had a significant impact on Chinese firms, particularly those with higher exposure to the U.S. market. In this article, we will explore the impact of the trade war on the valuation of Chinese firms and compare it to the overall market performance. We will also discuss how non-state-owned firms in China have responded to the trade war compared to state-owned enterprises.



The trade war between the U.S. and China has had a significant impact on the valuation of Chinese firms. An event study conducted by researchers found that Chinese exporting firms that were most affected by the new U.S. tariffs suffered larger valuation declines than other firms. Among those most affected, those that were R&D-intensive suffered significantly less severe declines. The study also identified a channel that allowed R&D-intensive firms to better absorb the trade shock: their production efficiency improved amidst the trade war, due to enhanced operational efficiency and lower operating costs. Furthermore, numerous R&D-intensive Chinese companies acquired U.S. firms in response to the trade disruptions.

In contrast, the overall market performance during the trade war was mixed. While the U.S. stock market fell 11.5 percent on days when tariffs were announced, amounting to a $4.1 trillion loss in firm equity value, the Chinese stock market experienced both gains and losses during the same period. For example, the Shanghai Composite Index rose by 2.5 percent in 2018, while the Shenzhen Composite Index fell by 14.3 percent in the same year. This suggests that the impact of the trade war on Chinese firms' valuations was more pronounced than the overall market performance.

Non-state-owned firms in China have responded differently to the U.S.-China trade war compared to state-owned enterprises (SOEs). According to a study, among firms most directly affected by the new U.S. tariffs, those that were R&D-intensive suffered significantly less severe declines in valuation. This is because R&D-intensive firms were better able to absorb the negative exogenous shock of the trade war due to their enhanced operational efficiency and lower operating costs.



The underlying reasons for these differences can be attributed to several factors, including innovation and adaptability, market orientation, and government support. Non-state-owned firms, especially those that are R&D-intensive, tend to be more innovative and adaptable. They are better equipped to find alternative markets, products, or production methods to mitigate the impact of tariffs. Additionally, non-state-owned firms are often more market-oriented and focused on meeting customer demands, allowing them to quickly respond to changes in market conditions caused by the trade war. Lastly, while state-owned enterprises may receive more government support, this support may not always translate into better resilience during a trade war. In contrast, non-state-owned firms may have to rely more on their own resources and adaptability, which can lead to greater resilience in the long run.

In conclusion, the trade war between the U.S. and China has had a significant impact on the valuation of Chinese firms, particularly those with higher exposure to the U.S. market. Non-state-owned firms in China have shown greater resilience during the trade war due to their focus on innovation, adaptability, and market orientation. As Chinese traders return from their Lunar New Year break, they must be prepared to face the harsh reality of the ongoing trade war and make informed investment decisions accordingly.