Citi Wealth Insights

The Politburo will meet to wrap up economic work in H1 and set the policy tone for H2 at the end of July. Markets would be eagerly looking for indication about possible policy change from the meeting.

Japan imposed restrictions on exports of three raw materials crucial to South Korea’s semiconductor and display producers. For the first five months of 2019, South Korea sourced 92% of photoresists, 94% of fluorinated polyimide and 46% of hydrogen fluoride from Japan. This makes it difficult to find alternatives, at least in the near term.

In response to colonial-era claims, Japan plans to curb exports on items that are key to South Korea’s core industry and is considering further retaliatory measures including higher tariffs, remittance and visa restrictions.

At the G20 Summit, Presidents Trump and President Xi said the US would hold off on raising incremental new tariffs, while US and Chinese representatives resume work on trade negotiations where they broke off in early May. This outcome was largely in line with market expectations.

In the US, importers and consumers pay directly for the tariffs while in China, exporters pay via declining business volumes and job losses.

Trade negotiations between the US and China have so far followed a strikingly similar pattern with the Plaza Accord. In both cases, talks were precipitated by a large bilateral trade imbalance and a perception of an “unfair” advantage, which were exacerbated by new US administration that pursued tax cuts even as the Federal Reserve was in tightening mode.