The fresh round of protective tariffs and damaging rhetoric’s has put the world unnervingly close to a all-out trade war. While still a tail risk, the current escalation and lack of amnesty indicates that the probability of a China-US trade conflict has increased meaningfully.
When the US government announced its final list of tariffs, China retaliation action came quickly proclaiming tariffs 'of the same scale and same intensity'. The US then responded comprehensively with wider array of tariffs on additional $400 billion Chinese exports. Neither side has backed down since then.
In reality, so far Trump's actions against China has been limited to approximately $50bn. Which is timid given the medias hype. However, given the wide gap between US demands and China’s concession, it’s unlikely that a agreement will be reached near-term. We continue to forecast a less harmful outcome, with calmer heads prevailing. Yet damage to trade, investment and confidence has already been done. US-China critical relationship with the global supply chains indicates there has been a knock-on effect regionally.
The Chinese economy outperformed in 2017 and in Q1 2018 but has slowed since. Domestic demand provided strong support for GDP growth at 6.8% y/y, yet recently weakness in consumption and investments has begun to erode momentum.
Pressure exerted by US-China trade tensions will further weigh on headline growth. Its likely growth has already peaked and will continues to slow printing 6.7% y/y in 2018. In reaction, PBOC is poised to ease monetary policy with RRR cuts and managed policy rates. Amid uncertainty, trade conditions and financial reforms are likely to proceed with caution but not reverse.
Looking forward, US-China trade frictions remain the major drag on the Chinese economy even without escalation. However, the impulsiveness of President Trump’s trade policy and negotiation tactics, US investment restrictions, and China’s reaction could aggravate the situation from both sides. Potentially aggregating the situation beyond trade. Fear of a trade war, weakness in current account inflows and slowdown in growth have all exaggerated capital outflows.
The CNY fall of 1.50% year-to-date is unlikely to stop any time soon.
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