Chinese stock-market investors are cheering Trump’s softened tone on tariffs

Optimism over a potential trade deal between the two largest economies in the world is helping to support markets on both sides of the Pacific Ocean with stocks in China rallying along with their peers in the U.S.

The Shanghai Composite SHCOMP, +1.84%  gained for a third session Wednesday and the Chinese yuan USDCNY, -0.1993%  firmed against the U.S. dollar after President Donald Trump toned down his rhetoric against China. The news has also bolstered U.S. stocks SPX, +0.35% with major indexes trading at 2019 highs

Trump said Tuesday that he may not insist on a March 2 deadline in bilateral talks if the two countries are close to a compromise. The U.S. is slated to hike tariffs on $200 billion worth of Chinese imports on that date if no agreement is reached, according to the Associated Press. 

The positive reaction to the possibility of a detente between the two economic superpowers underscores the impact that trade has had on the global markets, amid fears that a prolonged standoff could further weigh on economic growth beyond China and the U.S. 

China, the world’s largest exporter, has already felt the sting of relentless trade tensions with its gross domestic product growing 6.6% in 2018, the slowest since 1990.

While the pace of China’s economic expansion is nothing to scoff at, for a country with such a huge effect on international trade and economy, any hiccup could ripple across the globe.

Meanwhile, the trade war, a slowdown in China, tightening corporate credit conditions and U.S. politics are all “tail risks” that investors should be on the look out for, according to Michael Hartnett, chief investment strategist, at Bank of America Merrill Lynch.

The strategist had recently said that weak Asian export cycle is dragging the world into an earnings recession and only China can fix it

China’s exports fell 4.4% year-over-year and imports dropped 7.6% in December while exports from Korea, a popular barometer for global trade, slid 5.8% in January and imports shrank 1.7% in January.

ReadFor the U.S. stock market, a trade-war win may be a hollow victory

To be sure, a resolution on the trade front will be welcomed by investors in China where stocks have plunged to multiyear lows in recent months. The Shanghai Composite sank to its lowest level since November 2014 in January after slumping 25% last year while the Shenzhen Composite 399106, +1.87%  also tumbled to a four-year low in October. Both have reclaimed some lost ground with the Shanghai index up 9.1% and the Shenzhen has gained 9.6% so far in 2019. 

MSCI China MCHI, +0.42% a benchmark for exchange-traded funds associated with the country, also has recovered from a 20% drop in 2018 to rise 12%.