Uncertainty in trade relations has been a major factor roiling global stock markets during the first half of 2019. The SHCOMP has wiped off more than one-third of its gains since the beginning of 2019 due to the escalation of trade tensions between the U.S. and China. So what's the impact from the trade war on the Chinese mainland stock markets?

It is challenging to find a definitive answer. While taking a brief look at the market history, there have been three episodes in the history when Chinese exports to the U.S. dropped as deeply as or deeper than they do now — during the 2001 U.S. recession, 2008 global financial crisis, and the significant slowdown in 2016 after the stock market bubble burst.

Some analysts say the market's response to the trade war is less severe than that during the previous episodes. So far, Chinese exports to Europe, now a larger part of China's foreign trade than the U.S., have remained resilient. The market seems to be pricing in only the slowdown of Chinese exports to the U.S., while anticipating exports to other regions and countries will be stable.

In the meantime, earnings growth recovered significantly during Q1, showing evidence that China's short economic cycle has started to turn around. The fact is echoed by the Tobias Adrian from the International Monetary Fund who said China has managed to sustain a relatively high growth rate.

"Our forecast for this year and for next year are growth rates above 6 percent. The overall leverage ratio has stabilized in China and the leverage ratio in some parts of the financial system is declining. This is very good from a financial stability point of view," he added.

Optimism in the Chinese economy is also reflected in investors' interest in China's stock market. MSCI last month increased the weighting of A-shares in its indexes to 10 percent, a move likely to trigger more than 80 billion U.S. dollars of fresh foreign capital inflows. Both FTSE Russell and S&P Dow Jones Indices will start adding Chinese stocks to their global benchmarks.

Some say this is a game changer. Henry Fernandez, CEO of MSCI said they may increase the weight of A-shares in the index to 20 percent according to customers' feedback. Meanwhile, the long-awaited Shanghai-London Stock Connect went alive in a step to deepen global connectivity for both markets.

Guodu Securities consultant Yang Zongning commented that the moves are supporting China's financial market.

"Whether it's MSCI or the Shanghai-London Stock Connect – they will all help regulate the A-share market. From this perspective, these two mechanisms will be beneficial for China's stock market regulation," he said.

The market appears to have priced in the base case of the trade war, but the probability of the risky scenario is rising. What can we do? Prepare for the worst and hope for the best. Short-term noises can be overwhelming, but we continue to believe in the long-term stability and prosperity of the Chinese financial market.