Bucking the Public’s Confirmation Bias on Chinese Stocks

Head of Equity Strategy
Follow Jeff Weniger

Does the “global trade war,” quotation marks intentional, spell doom? It depends on your silo.


The 2009 American Recovery and Reinvestment Act poured some $787 billion of stimulus into the system, while China’s coincident crisis-era package dumped a $586 billion package on top.1 Central banks added trillions in bond purchases for the trifecta.


But some people may have missed the boat. Who? Those who couldn’t get past their ideological differences with the last U.S. president, who made some of them think the global financial crisis would lead to a perpetual depression. Distorted reality costs money, and what happened with Obama’s detractors is now happening in the Trump administration. Some proportion of the public, including many on Wall Street, are letting their political views with respect to President Trump get in the way of arithmetic.


That can create opportunity for the sober observer.


What is one mistake investors are making? Prognosticating “global trade war” doom.


Global Trade War?


2018 has witnessed nothing but improvement in relations between China and Japan, nothing but improvement in relations between Japan and Europe and, arguably, nothing but improvement in relations between the U.S. and both Mexico and Canada, at least compared to this past summer.


Some global trade war this is, with major foreign leaders jumping over each other to prove their free market bona fides.


“We must promote trade and investment, liberalization and facilitation through opening up—and say no to protectionism.” — Chinese President Xi Jinping, 2017


“It is also quite vital that we keep on raising high the flag of free trade.” — Japanese Prime Minister Shinzo Abe, 2017


“We believe multilateral cooperation can add value for everyone, and that’s why we’re advocating global trade that is as free as possible and which is based on common rules.” — German Chancellor Angela Merkel, 2018


The truth is that Trump is calculating that Americans have finally hit a wall on the status quo with respect to China. Regular people on the street may not know the specific trade numbers, but they know where the knock-off purses come from, they know now about wanton intellectual property theft and, most disconcertingly, cyberwarfare.


In reframing the argument about global trade, does anyone care that Japan, China and South Korea are sitting at the table with one another for trilateral trade talks?2 How about the big August trade deal between Japan and the EU? Talk about large economies.


While market angst is focused on the Trump administration’s “global trade war,” most of the planet is actively making deals, in direct contrast to the meme of global internecine tariff warfare.


And China’s Scythe on Taxes


While markets react to headlines, China’s fiscal stimulus continues apace. Some investors appear to be missing the good in hoping for Trump to prove an economic failure. One such “good” is the total revolution happening in China’s personal income tax code, shockingly ignored by so many. Figure 1 shows the $435 tax cut that the average white-collar Chinese worker, earning $13,608 a year, is set to witness. There’s more too if we count mortgage, student loan and child deductions (figure 1).3


Figure 1: Proposed China Personal Income Tax Example, Average White-Collar Worker

Proposed China Personal Income Tax Example


That comes on the heels of this spring’s 1% cut in value-added tax (VAT) rates. Combined with income tax relief, we count $103.8 billion in cuts this fiscal year alone (figure 2).4


Figure 2: VAT + Personal Income Tax Cuts, 2018 Amount

VAT Personal Income Tax Cuts 2018 Amount


Granted, there are offsets. For example, Beijing is also vaguely promising reductions in social insurance premiums, but that may be more than offset by the tax authority’s ratcheting up of collections efforts this year. The result could be a net tax hike on this front.


Nevertheless, figure 3 shows the decade-long effect of Chinese President Xi Jinping’s tax cuts on the VAT and personal income fronts. At slow-to-fast growth rates, the cumulative 10-year estimate is $1.04 trillion to $2.05 trillion, straddling both sides of Trump’s $1.5 trillion package that sent stocks higher in 2017.


Figure 3: Cumulative 10-Year Total, Xi Tax Cuts (Using WisdomTree’s $103.8bn Calculation for 2018)

Cumulative 10-Year Total Xi Tax Cuts


Meanwhile, we present figure 4; China’s exports to the U.S. have been shooting higher in a largely uninterrupted fashion for most of this century.


Figure 4: Annual Chinese Exports to the U.S.

Annual Chinese Exports to the US


The Play


Our dedicated China ETFs are the WisdomTree ICBCCS S&P China 500 Fund (WCHN) and the WisdomTree China ex-State-Owned Enterprises Fund (CXSE). The former hits broad China with a 9+% earnings yield and tracks China’s S&P 500.5  The other one, CXSE, tosses out companies that have more than 20% of their equity owned by Beijing.


While the mass of investors focus on “global trade wars,” few observers are noting Chinese fiscal expansion or, for that matter, big trade deals being signed right now. There’s your edge, contrarian reader.





1Sources: Congressional Budget Office, Publication 49958, Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output in 2014. Chinese stimulus data by The Economist, China Seeks Stimulation, 11/10/08.

2Source: Laura Zhou, “China, Japan and South Korea Aim to Speed Up Talks on Free-Trade Agreement to Counter U.S. Tariffs,” South China Morning Post, 9/22/18.
3Average white-collar worker income calculated by Zhaopin Ltd., a career platform similar to Monster.com, as of end-2017. Tax cut calculations by WisdomTree, using the PBoC’s tax proposal that is likely to become law in October.
4See source data beneath Figure 1.
5Sources: Bloomberg, WisdomTree, as of 10/24/18.

Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. The Fund focuses its investments in China, including A-shares, which include risk of the RQFII regime and Stock Connect program, thereby increasing the impact of events and developments associated with the region, which can adversely affect performance. Investments in emerging or offshore markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. The Fund’s exposure to certain sectors may increase its vulnerability to any single economic or regulatory development related to such sector. As this Fund can have a high concentration in some issuers, the Fund can be adversely impacted by changes affecting those issuers. The Fund will be required to include cash as part of its redemption proceeds, which introduces additional risks, particularly due to the potential volatility in the Chinese market and market closures. The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit, and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs. Please read each Fund’s prospectus for specific details regarding the Fund’s risk profile.

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About the Contributor
Head of Equity Strategy
Follow Jeff Weniger
Jeff Weniger, CFA serves as Head of Equity Strategy at WisdomTree. In his role, Weniger helps to formulate the firm’s stock market outlook by assessing macro and fundamental trends. Prior to joining WisdomTree, he was Director, Senior Strategist at BMO, where he worked in the office of the CIO from 2006 to 2017. He served on the firm’s Asset Allocation Committee and co-managed the firm’s ETF model portfolios for both the U.S. and Canada. In 2013, at the age of 32, Jeff was chosen as the youngest member of BMO’s Global Investment Forum, which collected the firm’s top global strategists to formulate the firm’s official long-term outlook for investment trends and markets. Jeff has a B.S. in Finance from the University of Florida and an MBA from Notre Dame. He has been a CFA charterholder and a member of the CFA Society of Chicago since 2006. He has appeared in various financial publications such as Barron’s and the Wall Street Journal and makes regular appearances on Canada’s Business News Network (BNN) and Wharton Business Radio.