Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Steven Mnuchin didn't need much wiggle room. When asked at his Senate confirmation hearing if he'd recommend naming and shaming China if it began to manipulate the yuan again, the U.S. Treasury secretary nominee confidently shot back: "I would."

But why would he even need to brand China a currency manipulator? Beijing is unlikely to revive a strategy it gave up in 2014. The People's Bank of China is hemorrhaging foreign reserves to keep the yuan from tumbling amid record capital outflows, and those who wanted the country to be punished in the past, like C. Fred Bergsten, founder of the Peterson Institute for International Economics in Washington, believe the idea is now "outdated as well as dubious legally".

Even President-elect Donald Trump has decided against labeling China a manipulator on his first day in office. Now he wants to talk to Beijing first.

Still, investors can't afford to breathe easy. A $347 billion annual trade deficit with China packs enough cause for mistrust, including an Armageddon scenario in which the U.S. slaps a 45 percent tariff on Chinese-made goods. That, according to Morgan Stanley, would cause an 8 percent slump in earnings of companies in the MSCI China Index this year, compared with the bank's base-case expectation of 8 percent growth.

War Games
Morgan Stanley's scenarios on what a U.S.-China trade war may mean for the MSCI China Index in 2017
Source: Morgan Stanley

A full-blown trade war and the status quo aren't the only scenarios. Milder skirmishes are also possible. And so is what Morgan Stanley calls a "grand bargain," in which Beijing gets state-owned companies to buy more from America, and the Trump administration goes easy on the People's Republic.

In that case, the MSCI China Index gets an EPS boost of 1 percentage point over Morgan Stanley's present estimate, and companies like ZTE Corp., China Petroleum & Chemical Corp., PetroChina Co., CRRC Corp., Cosco Shipping Holdings Co., Fuyao Glass Industry Group Co., Qingdao Haier Co., Alibaba Pictures Group Ltd., Wanda Cinema Line Co. and IMAX China Holding Inc. end up as winners.

For now, investors seem to believe the cheerier outlook. At least, they don't discredit it. A market capitalization-weighted index of the companies selected by the Morgan Stanley strategists is slightly higher now, in yuan terms, than it was at the time of Trump's Nov. 8 election victory.

Trade Triumph
After an initial bump post Donald Trump's election win, the fortunes of companies in China that would benefit from smooth trade with the U.S. are starting to turn up again
Source: Bloomberg
Note: Custom market capitalization weighted index of CRRC, Sinopec, PetroChina, Wanda Cinema Line, Qingdao Haier, Alibaba Pictures, Fuyao Glass Industry, IMAX China, ZTE and Cosco Shipping.

Nor are options trades on benchmark Chinese indexes reflecting any risk of a showdown. If everyone believed a plunge was coming, investors would have to assume much more downside risk than they are at present.

A spat is still possible. Even if Trump refrains from naming China a currency manipulator, there's always the danger he would impose a "major" border tax on American firms that manufacture overseas to sell in the U.S. But with Mnuchin saying Trump isn't suggesting a border tax, maybe investors will get lucky, and an all-out trade war will never come to pass.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Andy Mukherjee in Singapore at

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Katrina Nicholas at