China A-shares have tanked; what's next?

AT the time of writing, CSI 300 was down by more than 20 per cent from its peak on Jan 24, 2018, while the S&P500 was down only 4 per cent from its peak on Jan 26. The trigger for the turn in the A-shares' fortune was a combination of a slowdown in domestic growth momentum, when weak economic data started flowing in May, and a rise in Sino-US trade tensions - though we have been expecting the growth slowdown since April.

The market just piled this onto the prevailing worries about deleveraging, defaults and liquidity squeeze.

While the probability of a full-blown trade war (with China retaliating on US President Donald Trump's tariffs on all Chinese exports to the US) remains low at this point, at around 10 per cent in my view, the probability of a resolution is even lower. This means that there is more than 80 per cent probability for long drawn-out negotiations to keep Chinese stocks apprehensive/volatile.