Monday, 9 July 2018

(The Edge Financial Daily) Global markets wary of US-China trade war

Tit-for-tat slapping of tariffs could escalate any time

KUALA LUMPUR: Global markets, including Malaysia’s, are keeping a close eye on how quickly the tit-for-tat slapping of tariffs could escalate now that the US-China “trade war” has been launched.

“China knows that it can initially respond by matching the US in kind. However, given the difference in the size of trade with US, Beijing would quickly run out of room and would be forced towards an asymmetric approach,” said Huang Juin Hao, a senior portfolio manager at Affin Hwang Asset Management.

China could resort to domestic policy tools to try to cushion the blow to affected industries, and it could also seek to band with the European Union, Japan, Canada and other countries similarly affected by US tariffs on the external front, he told The Edge Financial Daily.

“This would buy time for China to raise the dispute with the WTO (World Trade Organisation) for a resolution,” he said, adding that buying opportunities would arise should China move towards this approach.

Last Friday, the long-dreaded “trade war” got off the ground as the US imposed tariffs on US$34 billion (RM137.36 billion) worth of Chinese goods, prompting the Chinese to respond with retaliatory duties on US products.

At a press conference in Beijing, China’s foreign ministry spokesman Lu Kang defended the retaliatory tariffs on US goods owing to the US’ “unfair” trade actions.

Chinese state media agency Xinhua said the list of products hit by China’s 25% tariffs would not change from what was announced in June.

Huang believed the pace of escalation will be key. As China opted to respond in the first round of tariffs, the ball is now back in US President Donald Trump’s court, said Huang, who observed that the US had initiated Section 301 trade action against China several times in the past, in 1991, 1994, 1996 and 2010.

On each occasion, both parties managed to reach a resolution.

But will Trump prove to be a different kettle of fish?

He had announced that tariffs would be imposed on US$50 billion of Chinese goods initially. As the tariffs on the first US$34 billion took effect last week, another US$16 billion worth are expected to be imposed over the next two weeks.

Trump had also raised the ante, threatening to impose additional duties on another whopping US$500 billion of Chinese goods should Beijing retaliate against the US.

Notwithstanding the loud threats, some are of the view that the trade war will not significantly impact the stock market as most of the latest developments have already been priced in.

An analyst at a local investment bank, who wanted to remain anonymous as he was not an authorised spokesman, said: “If you look at the stock market, which has been on a downtrend on a regional basis, most of these have been priced in. Of course, it remains a concern, but I believe it’s more of a kneejerk reaction than a sustained bear market.

“The Chinese are obviously looking at the alternatives that they have based on the timing of their response. Unlike the June announcement, this time it seems Beijing is looking at some of the impact on the economy if the trade war escalates further.”

As the threatened tariffs took effect last week, Chan Ken Yew, the head of research at Kenanga Investment Bank Bhd observed that the stock market decline was not confined to Malaysia as investors around the world became more circumspect.

Rakuten Trade Sdn Bhd head of research Kenny Yee believed any decline will be short-lived and that investors will eventually return to Asia given its superior economic growth over the past 10 years.

The online equity broker expects to see foreign funds return by the fourth quarter.

Much remains up in the air. The tariffs imposed on Chinese goods could just be the beginning as Trump had also threatened to slap tariffs on some of the US’ long-time allies, such as the European Union, Japan and even Canada.

Trade protectionism was the centrepiece of his presidential election campaign, and he had floated the idea of imposing tariffs as high as 45% on imports from China.

While it is two years later than expected and of a smaller quantum, investors and traders are likely to be second-guessing his next moves, especially with the midterm election lurking in November.