1. Newsroom
  2. Initial thoughts on Trump’s new tariff threats
Menu
Expertise 06.05.2019

Initial thoughts on Trump’s new tariff threats

Initial thoughts on Trump’s new tariff threats

President Donald Trump has raised pressure on China to strike a trade deal by threatening a possible increase of tariff to 25% (from 10%) on $200bn worth of Chinese exports to US by Friday (May 10). He may also consider extending a new 25% duty on another $325bn worth of Chinese products.


Trump pressuring China

This is an abrupt turn of events as media reports from both sides up to end of last week have suggested that trade talks were progressing closer to a deal.

All the evidence suggests that 90%-95% of the trade issues were done with the remaining issue related to the ‘enforcement mechanism’. Also still under negotiation is how much tariff should be rolled back and to maintain to ensure that China obliges to the agreement down the road. The threat tactics used by Trump may not work on China.

This is because putting a gun against Beijing’s head to cut a deal at the final hours is a dangerous proposition that may roll back the entire trade negations, particularly at this point, where China seems to have achieved some growth stabilization, as opposed to the sharp economic downturn it faced, when US tariffs were first imposed in the summer of 2018.

The good news, though, is that China has officially announced that its US trip of some 100 Chinese officials scheduled on Wednesday (May 8) will still go ahead. Instead of an outright cancellation and confrontation, there is still a good chance for more negotiations to prevent additional tariff impositions abruptly by Friday.

New successive cuts to RRR

This morning, China announced the long-awaited targeted reserve requirement ratio (RRR) cut to rural and small banks as a clear response from Beijing to counteract the negative trade news.

Effectively, the newly targeted RRR cut will average about 20-30bps to a lower level at 8%. This suggests that monetary policy will likely stay expansionary should external pressure from trade re-emerge as the main drag on the economy again.

Still room to stretch out

As of writing, Chinese and Hong Kong equity indices were down about 3%-7% and CNH/USD depreciated by as much as 1% while Chinese credits have widened mildly. For MSCI China, valuation has become marginally stretched before today’s slide. This comes with price-earnings (P/E) multiples just above past five-year average of 12x, but still below 2018’s January peak at 14.5x. A return to the December’s low of 9.5x (when economic deceleration was in full force) should be an extreme case especially in view of China’s policy easing has already produced some stability to the economy.

In the worse-case scenario of trade deal evaporation, we suspect that market will return to the situation in 2H/18, in which investors would look for China’s policy easing to gauge the economic and earnings outlook.

On this, we see China should still have room to stretch out monetary and fiscal stimulus in 2H/19 versus the current plan to tame down the former policy after the 1Q/19 hefty liquidity injection. The economic consequence may be a later concern as emergency measure takes priority.

The central bank has fixed CNY/USD weaker by 0.0183 or 0.27% at the open this morning after last week’s long holiday. The RMB is likely to have more near-term downside risk with the fading of political goodwill on the currency around the trade negotiation.

Market insight

CHAN-Anthony_150x150.jpg

Anthony Chan
Chief Asia Investment Strategist

Expertise

Swiss & Global Equities

Why Swiss equities now? This market offers equity investors the stability and agility they need to navigate this volatile period. 

Read more
Expertise

European Equities

European equities offer unrivalled opportunities in terms of breadth of sector and market exposure.

Read more

Actualités les plus lues

Expertise 01.10.2020

Covid-19: Restez informés avec l'UBP

Depuis l’apparition du coronavirus, l’UBP accompagne et soutient ses clients dans le contexte inédit de cette crise sanitaire mondiale. La Banque vous informe régulièrement de l’adaptation de ses dispositifs aux règles de précaution fixées par les autorités et partage avec vous les dernières analyses de ses experts sur les conséquences de la pandémie pour l’économie mondiale et les marchés financiers.

Expertise 30.06.2020

Nouvelles perspectives d’investissement 2020 de l’UBP

L’économie globale à la croisée des chemins
Expertise 24.06.2020

Market turmoil brings new opportunities for pragmatic investors

March 2020 was difficult time for many investors, as COVID-19 spread across Europe and the US, leading to sharp sell-offs in fixed-income credit markets. While such market turbulence is not to be welcomed, its occurrence can create opportunities.


A lire également

Expertise 02.12.2020

Swiss Small and Mid-Cap Equities – Consistent value creation

The Swiss economy has once again proven its resilience during the Covid-19 pandemic, as reflected by year-to-date outperformance in the Swiss equity market and also its small and mid-cap segment. 

Expertise 26.11.2020

Univers des petites capitalisations européennes: des étoiles montantes

Les petites entreprises – une formidable source d’opportunités de croissance

Expertise 24.11.2020

Des joyaux cachés parmi les SMID Caps suisses et européennes

Les sociétés de petite et moyenne capitalisation («SMID Caps») affichent traditionnellement des taux de croissance et des rendements supérieurs sur le long terme en comparaison des grandes capitalisations. Il est en effet plus facile de générer une croissance dynamique à partir d’une plus petite structure. Par ailleurs, les SMID Caps suisses et européennes offrent généralement aux investisseurs une exposition idéale aux grandes tendances de croissance séculaires.