Chart of the Shanghai Composite (SSEC) vs the S&P 500 (SPX) – China Stocks Double Returns of U.S. Stocks – Source: TheTechnicals.com and TradingView

U.S. stocks had a third consecutive down day on Wednesday (March 6, 2019) since the S&P 500 (SPX) hit its year-to-date high at the major 2816 resistance level earlier in the week. Some have attributed this recent faltering of the U.S. market rally to uncertainty over the prospects of a successful U.S.-China trade deal.

Soaring China Stocks

Meanwhile, Chinese equity markets have continued to soar with little hesitation. The benchmark Shanghai Composite (SSEC) index is a broad-based China equity index that covers all stocks traded on the Shanghai Stock Exchange. And it’s up a whopping 24% year to date. This is no small feat for an entire major index, especially within the span of just over two months. In contrast, the S&P 500, which is the most common benchmark for U.S. stocks, is up “only” around 11%. This is less than half the level of performance seen in Chinese stocks year to date.

Rising U.S. Trade Deficit with China

Exacerbating this discrepancy was a U.S. Commerce Department report released on Wednesday. The report revealed that the U.S. trade deficit with China hit its highest level ever in 2018. And the overall U.S. deficit also hit a 10-year high in 2018, despite President Trump’s highly protectionist trade stance.

This report comes at a critical time, just as Trump and Chinese President Xi prepare to negotiate terms of a comprehensive trade deal. A successful outcome of such a deal would prevent additional wide-sweeping tariffs from being imposed on both sides of the Pacific.

U.S.-China Trade Agreement Likely

Reports also surfaced on Wednesday that Trump is pushing for closure on a U.S.-China trade agreement. Trump’s motivation is reportedly to boost equity markets and eventually bolster his own chances of re-election in 2020.

What May Happen Next?

The U.S. trade deficit with China has risen to record levels. This simply means that Chinese exports to the U.S. exceeded U.S. exports to China by the highest amount ever. Clearly, China has significantly more to gain by securing a solid bilateral trade agreement than the U.S.

Therefore, if there is indeed a successful trade outcome in the next several weeks, China stocks could see an even bigger boost than the U.S., potentially widening the “spread” even further between U.S. and Chinese stock markets.