JAKARTA (TheInsiderStories) – The United State (U.S) – China dispute over trade and technology transfers continues to escalate, a credit negative for Chinese companies, said Moody’s Rating Services on Tuesday (07/08).

As the U.S expands its list of Chinese products subject to tariffs, a growing number of rated Chinese companies will likely be affected through the production value chain.

In the latest development, the Office of the U.S Trade Representative (USTR) said on 1 August that it is considering raising to 25 percent from 10 percent the proposed tariffs on US$200 billion worth of Chinese imports, and is extending the public comment period.

China responded by proposing tariffs on U.S goods worth $60 billion. These announcements are in addition to tariffs the two countries have already implemented and proposed.

In July, at the direction of U.S President Donald Trump, the USTR had published a proposed list of Chinese products worth $200 billion on which to impose 10 percent tariffs.

The list is in addition to two separate lists the USTR published previously: $34 billion of Chinese goods subject to a 25 percent tariff that went into effect on 6 July; and $16 billion of Chinese goods subject to a 25 percent tariff that will go into effect at a to-be-determined date following public hearings on July 24-25.

The $200 billion list expands the categories of rated companies exposed to the U.S tariffs. It includes more commodity-related products and components used in consumer appliances and electronics than the other lists.

Rated Chinese companies in commodity-related industries are likely to feel an increasing effect through the global value chain. That is because the prices of commodities are likely to become more volatile as the trade dispute escalates and hits a wider range of commodities.

The effect of the tariffs will be amplified because companies that use the higher-tariff and therefore higher-cost commodity products as raw materials will gradually diversify or change the sources of these products to suppliers outside China, the US, or both.

The resulting changes in demand for and supply of certain commodities across borders will likely cause fluctuations in pricing, which will in turn lower the predictability of companies’ revenue and cash flow generation.

It is difficult to forecast the magnitude of commodity-price volatility or to quantify the effect on companies. Companies with a well diversified customer base such as COFCO (Hong Kong) Limited (A3 stable) and the national oil companies will be more sheltered from the indirect impact because no individual customer accounts for large percentage of revenue.

These companies are situated toward the upstream of their respective value chains and further away from finished products. These factors will also shelter the companies because their customers do not sell products or provide services that are directly exposed to the higher U.S tariffs.

Given the wide range of Chinese products the U,S is targeting, component manufacturers for consumer appliances and electronic products such as computers, computer accessories, and video and audio equipment will also see an indirect effect.

We estimate about 30 percent of China’s total exports to the U.S in 2017 were consumer appliances and electronics, based on data from the U.S Census Bureau. These products have an aggregate value of around $170 billion.

Most of the products from rated component manufacturers, such as Kangde Xin Composite Material Co., Ltd. (Ba3 review for downgrade), Sunny Optical Technology (Group) Co. Ltd. (Baa2 stable) and AAC Technologies Holdings Inc. (Baa1 stable), are not directly exposed to the proposed and implemented tariffs.

However, if their downstream customers are affected because they export the listed products to the U.S, we expect these customers to respond to higher tariffs partly through price compression along the value chain. We believe the effects of this compression will take some time to surface, and we will monitor the potential effect on the rated companies.

Rated Chinese e-commerce companies have low exposure to the tariffs. Cross-border sales typically account for less than 5 percent of revenue for JD.com,Inc. (Baa2 positive) and Vipshop Holdings Limited (Baa1 stable). Even for Alibaba Group Holding Limited (A1 stable), which has a global sourcing platform, cross-border sales are less than 10 percent of its total revenue.

The portion of revenue directly related to US trade is a fraction of the 5 percent -10 percent revenue exposure (direct and indirect) we estimate the company has to the U.S. We expect Alibaba can diversify its revenue exposure to other regions relatively easily.

Additionally, the 5 percent – 6 percent depreciation of the renminbi during the past few months makes Chinese exports less expensive versus competing suppliers in other countries. That will lessen the effect of the U.S tariffs on Chinese companies.

But, as highlighted above, the potential for higher tariffs and the resulting higher product prices to reduce demand for Chinese products is increasing as a risk. These escalations in the dispute could have a negative impact on investment and economic growth in China and the U.S, which would spill over to Chinese companies in a wide range of sectors.

Written by Staff Writer, Email: theinsiderstories@gmail.com