Trump’s China Tariffs Trigger Selloff

The Dow Jones Industrial Average fell 2.9% and the S&P 500 Index declined 2.5% on Thursday, as President Trump instructed his US Trade Representative to levy $50 billion of tariffs on Chinese imports.

At the time of writing, the Shanghai Composite is down 3.4%, with Japan's Nikkei index sliding as much as 4.5%.

The US administration revealed plans to impose tariffs on Chinese imports under the Section 301 trade action, targeting products including aerospace, information and communication technology and machinery (full details will only be available at a later date).  

In response, China announced plans for reciprocal tariffs on 128 US products, which had an import value of US$3 billion in 2017, include wine, fresh fruit, dried fruit and nuts, steel pipes, modified ethanol, and ginseng. Those products could see a 15% duty, while a 25% tariff could be imposed on US pork and recycled aluminium goods.

In Citi’s view, it is worth noting that:

(1) the scale of the US tariffs is smaller than expected — the indicated 25% tariff targets $50-60bn of imports (rather than targeting $50-60bn of tariffs), which means about $12.5-15bn of tariffs (0.08-0.1% of China’s GDP);

(2) there will be a period of consultation with US businesses and negotiation with China before the final determination of tariffs, likely 45-60 days later;

(3) the Chinese retaliation thus far has also been milder than feared, with no announcement on soybean or aircraft imports from the US, for instance, and the Chinese have clearly stated a preference for resolving disputes ‘via dialogue’.

Implications

While Citi analysts retain the view that China is willing to negotiate and is likely to offer concessions, uncertainty and the fear of escalation will likely hold back market sentiment in the short run.

Even if the two countries engage in a trade war, Citi analysts believe China is well positioned to withstand the shock.

China equity market’s direct US exposure is relatively low. Among HK-listed names, sectors with the highest US revenue exposure include Textiles (19%), Furniture & Household Durables (17%), Auto Components (15%), and Tech Hardware (15%).

Given the near-term uncertainties, Citi analysts prefer to stick to domestic demand-driven sectors for now. Citi analysts favour insurance, healthcare, Internet, large banks, new energy-related materials and property consolidators.

Asian FX: While trade tensions could hurt RMB sentiment, Citi analysts do not believe that Chinese authorities will look to retaliate with a currency devaluation. In case pressure escalates, the PBoC may apply measures such as reintroducing the counter-cyclical factor to contain RMB bearishness and prevent renewed outflow pressure. CNY being managed against a basket of currencies also provides a buffer, as potentially JPY and EUR outperformance could cushion against a risk selloff.

The currencies most at risk may be those of the small-open North Asian markets - KRW and TWD. But a rise in generalized risk aversion could even spread further. For instance, the most vulnerable currencies in Asia are IDR, INR and PHP, which face current account deficits and a dependence on external portfolio flows.

Citi analysts expect that MYR and THB should be relatively shielded from pressure, while the region’s traditional safe haven SGD may be hurt as the prospect of a trade war raises the risk that expected MAS tightening is delayed.