The American bank JP Morgan downgraded both the Chinese currency and its equities market. The downgrades are back of an expected full-blown trade-war between U.S and China. The bank believes things will get worse for Chinese stocks in 2019 even though they have severely underperformed this year. All this comes back of the heel of the Chinese government instructing local journalists not write anything negative about the economy.

JP Morgan (JPM US) has over last couple of days lowered its yuan estimates and downgraded Chinese stocks. The downgrades are due to the bank expecting a full blown trade war between China and US. Bloomberg quotes JP Morgan;

“JPMorgan has adopted a new baseline that assumes a U.S.-China endgame involving 25 percent U.S. tariffs on all Chinese goods in 2019. A weaker yuan becomes part of the new equilibrium.

“Looser Chinese monetary policy ensures that the U.S. dollar will become an ever-higher yielder versus the renminbi for the rest of the cycle,”

JPM believes that China’s central bank will seek loser monetary policy to counter all the U.S. tariffs. They believe that as the Yuan loses its values, it will pull down other Asian currencies which can pull down the Asian economies growth as well. The bank base-case scenario is now a full-blown trade war between U.S. and China. JP Morgan writes;

A full-blown trade war becomes our new base case scenario for 2019. There is no clear sign of mitigating confrontation between China and the U.S. in the near term.

With the risk of a full-blown trade-war the bank lowered its guidance on Chinese stocks as well. Since President Trump’s first approval of tariffs on Chinese goods the Chinese stocks are down almost 20% whilst U.S. equities are up over 10%.

Source: Bloomberg

JP Morgan is the latest of various banks to lower their estimates for China. Morgan Stanley, Nomura and Jefferies have all lowered their guidance earlier this year.

Chinese markets are closed this week, but there are several Chinese focused ETFs investors can look at. MCHI US, FXI US, and KWEB US are the big three ones. MSCH is for the general Chinese market. FXI focuses on large-cap stocks, and KWEB on internet stocks.

The above three ETFs, in percentage terms YTD.

Source: Bloomberg

This all comes post the Chinese government late last week instructing journalists not write “anything negative” with regards to certain economics topics. NY Times writes;

■ Worse-than-expected data that could show the economy is slowing.

■ Local government debt risks.

■ The impact of the trade war with the United States.

■ Signs of declining consumer confidence

■ The risks of stagflation, or rising prices coupled with slowing economic growth

■ “Hot-button issues to show the difficulties of people’s lives.”

“It’s possible that the situation is more serious than previously thought or that they want to prevent a panic,” said Zhang Ming, a retired political science professor from Renmin University in Beijing.

As professor Ming points out. The economic situation might be worse than what the markets think. Subsequently, despite underperformance of the Chinese market, further escalation of trade-war can lead another leg down.