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Kristal Insights Mins Read

Will Trump’s Trade War Cause China’s New Black Monday?

What happens when two major economies come riding on their steeds with loaded guns in a typical western gunslingers face-off?

 

Well, one can expect a lot of excitement and action. But, unlike the face-off in the old west, can this have a happy ending? Over the last year, the USA and China have been locked in a trade war which is gaining magnitude with every passing day.

Both countries have imposed tariffs on each other’s goods worth billions of dollars. While there have been constant efforts to negotiate and strike a deal, we are yet to see some de-escalation strategies at work to solve the issues. In fact, the effects of this trade war are not limited to just the US and China. It has impacted businesses around the globe. As experts speculate the possible end to this conflict, both Presidents have threatened to increase the tariffs further in the coming months. If negotiations fail, then how far will this trade war go?

In this piece, we look at the impact of the trade war on China, and the Asian economy at large, with insights from Ruchir Desai, co-manager at our fund partner – AFC (Asia Frontier Capital).

How did the ‘Trade War’ start?

In 2016, when Donald Trump was elected as the President of the United States, he assured the people that he would make America great again. He believed that in the past, many US Presidents had agreed to trade deals which were not fair to the US economy. In fact, Trump has been accusing China of following unfair trade practices as well as intellectual property theft. China, on the other hand, feels that the US President is merely trying to curb the growth of the Chinese economy.

What started as a war of words, soon turned into action when both the US levied a 25 percent tariff on imported Chinese products worth USD 34 billion on July 6, 2018. China responded by imposing a 25 percent tariff on imported American goods worth USD 34 billion too.

A month later, both countries levied a tariff of 25 percent on another list of imported goods worth USD 16 billion.

This was followed by the US imposing a 25 percent tariff on Chinese goods worth USD 200 billion. China responded by imposing the same rate on American goods worth USD 60 billion.

Both countries have threatened to impose new tariffs and hike the current rates in the near future. Trump plans to impose new tariffs on Chinese goods worth USD 300 billion. This would effectively mean taxing all goods imported from China. Beijing will also retaliate to these taxes with tariffs on American imports.

Where is the US-China trade war headed?

While trade tensions between the US and China are not new as they have been competing for global technological and economic dominance, this tariff-war is not going to be good for the economies of both sides. According to a report by Reuters, most economists believe that Trump’s Trade War with China will do more harm than good. The Organisation for Economic Cooperation and Development feels that there can be trade tensions around the world after these tariffs.

US-China-Trade-War-Effects-Kristal.ai
Source: IDC, 2018

The trade war has impacted the APAC region too. Most Asian exporters have witnessed a slowdown in exports. On the other hand, frontier economies in Asia like Vietnam and Bangladesh have seen an increase in exports. The large workforce and lower wages are helping these economies experience a growth of 7.5% and 6.8% in exports respectively. The tariffs have forced US businesses to look for other low-cost locations. If Trump imposes the additional tariff on USD 300 billion worth of Chinese goods as planned, then there could be more investment in countries like Vietnam, Bangladesh, Myanmar, and Cambodia.

How will the trade war affect China?

According to the Institute of International Finance, in the first quarter of 2019, China’s total debt was 304% of its national gross domestic product (GDP). The total debt stands at around USD 40 trillion which is approximately 15 percent of the overall global debt. However, since China’s debt is in its local currency, a debt-inspired meltdown as seen in Turkey or Argentina is highly unlikely. However, the increased tariffs have impacted the exporters in China as well as regular people who depend on the goods/products imported from the US. The increasing costs of doing business are causing a fear in investors’ minds that this could lead to a stock market crash.

So, will Trump’s Trade War cause China’s New Black Monday?

 

China’s Black Monday in 2015

On August 24, 2015, the second-largest economy in the world – China suffered a massive loss. Trillions of dollars were wiped out from stock markets around the globe. In fact, this was the steepest fall faced by Chinese stocks in a single day. The main share index of Shanghai closed at -8.49%. It is believed that investors went on a selling spree as they were worried about the slow growth of the economy.

 

The trade war has led to an economic slowdown in China and its probable effects on the stock markets cannot be undermined. Last year, when Donald Trump imposed the tariffs, the US stock prices rose by around 10 percent. At the same time, the overall Chinese market slumped by 15 percent. In fact, the Shenzhen – a market which represents the exporters and technology companies, fell by around 20 percent.

While the control any government has on stock markets is as good as the control a ship’s captain has over the ocean’s tides, certain policy decisions tend to instill fear in the minds of people leading to a selling spree and causing a stock market crash. However, most Chinese stock traders have started becoming immune to the trade-war noise. A clear indication of this fact came this week when Donald Trump announced that he was planning to further increase the tariffs on USD 550 billion of Chinese goods. Despite such a strong announcement, the Shanghai Composite Index slid only 1.2% at the end of the day. While earlier, such declarations were attracting strong investor reactions, they seem reasonably muted now.

3 Things Every Investor Must Know

In the current global scenario, developed markets can be expected to behave with higher degrees of volatility. Once the US and China come to an agreement, there will be a period of consolidation before the markets become stable again. In the interim, we need to understand that China is too big, and too large a part of the global economy for any shakeups to go unnoticed. With the renminbi cracking seven in a power move, we know we’re in for a protracted economic fight.

So, we asked our friendly expert Ruchir Desai for his views on the repercussions on the global economy. According to him, here are the three things that investors must keep in mind:

**Tensions between China and U.S. will not die down anytime soon. Expect market volatility to continue.

You must start looking at the frontier economies in the Asian markets for diversification. Since these markets have a low correlation to the developed markets, they can offer good returns on investment. For example, Bangladesh has a negative correlation with the MSCI World Index which represents large-cap and mid-cap performance across 23 developed market countries. This negative correlation makes it a good market to invest in.

**Asian frontier markets like Bangladesh and Vietnam will be key beneficiaries of the trade tensions between China and the U.S. due to lower wages and a large workforce and well established supply chains.

The frontier economies in Asia are experiencing rapid growth in exports. Countries like Vietnam and Bangladesh have become the new markets for many businesses in the west due to the availability of manpower and lower costs. As an investor, these markets have the potential to offer good long-term returns.

**Investors will look for more under-researched markets i.e. those that are not impacted by the trade war noise.

Look for under-developed economies which are not impacted by the trade war between the US and China. Countries like Uzbekistan, Cambodia, etc. can be good investment markets.

You can also look at mutual fund schemes like AFC Asia Frontier Fund which focuses on the Asian Frontier markets.

Summing Up

Both countries are constantly making changes to their trade policies to protect their interests and until they reach an agreement, predicting their next moves can be difficult. While the current trends show that China is NOT headed towards a new Black Monday, if panic selling sets in, the markets will definitely crash.

The US and China are also trying to de-escalate the tensions via dialogue but there have been no inroads yet. Most experts feel that these tensions will last a long time and investors should expect high volatility in the markets. Talk to your investment advisor about incorporating a new strategy to account for the US-China trade war and invest wisely.

 

Disclaimer

The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.

Disclaimer

The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.

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