Analysts predict limited long-term effects as growth remains stable, say investors overreacting

Chinese stocks plunged on Tuesday on fears related to the rapidly escalating trade tensions between Washington and Beijing, but economists said investors were overreacting as the impact of the trade war will likely be limited and China will maintain steady and healthy economic growth.

The benchmark Shanghai Composite Index ended down 3.78 percent, falling by 114.08 points to 2907.8. The Shenzhen Component Index tumbled 5.31 percent and the ChiNext startup index fell 5.76 percent.

The sell-off followed the Trump administration's threat on Monday that it would impose 10 percent tariffs on $200 billion of Chinese goods, a move Beijing labeled as "blackmail", to which it would respond in kind.

"A-share investors overreacted on Tuesday to the trade tensions, as China and the US are still in the bargaining stages," said Li Xunlei, chief economist at Zhongtai Securities Co Ltd. "Donald Trump's decision will largely harm US consumers' benefits, so I think there might be compromise between the two sides."

"Even if the worst happens, the impact could be limited," he said.

Li said China's exports to the US in 2017 accounted for less than 20 percent of the nation's global exports that year, and the impact will only be a decrease of 2 percent to 3 percent if US President Trump's threats are seen through.

According to data from the General Administration of Customs, China's exports increased 8 percent year-on-year to $2.26 trillion in 2017, with the nation's exports to the US totaling $429.7 billion.

Li said China's economic fundamentals are strong, which will be crucial for the development of the A-share market in the medium and long term.

China's GDP growth remained stable in the first quarter, up 6.8 percent year-on-year. From January to April this year, the total profits of large-scale industrial companies reached 2.13 trillion yuan ($328 billion), an increase of 15 percent over the previous year, according to data from the National Bureau of Statistics.

Liu Feng, chief economist of China Galaxy Securities Co, said besides the rising trade conflict between the US and China, liquidity concerns caused by unicorn companies and debt defaults could be other reasons behind the stock market slump.

"Investor sentiment has been low recently, but they will regain confidence as soon as China's industrial production and consumption show the nation's strong economic resilience," Liu said.

According to Liu, China's consumption structure is seeing a significant transformation, as people are largely purchasing services, and the service industry is playing an increasingly important role in China's economy.

Liang Hong, chief economist of the China International Capital Corp Ltd, said that investors were panic selling on Tuesday because of the trade war initiated by the US and also due to China's deleveraging moves.

"Investors released their negative emotions on Tuesday, and we believe it's a good time for medium and long-term investment," Liang said.

Thomas Fang, head of China equities at UBS AG, said many overseas institutional investors are showing more enthusiasm than domestic players in the A-share market. He said they are optimistic about China's fundamentals and the attractive price-earning ratios of A shares.