Home Investor Corner Escalating US, China Technology and Trade War Adds Storm Clouds

Escalating US, China Technology and Trade War Adds Storm Clouds

IHS Markit: US-China Trade War Escalates Again as Truce Collapses
IHS Markit Predicts President Donald Trump’s decision to hike US tariffs from 10 percent to 25 percent on US$200 billion of Chinese imported products will hit Chinese exporters hard. Photo by TheInsiderStories.

JAKARTA (TheInsiderStories) – The combined impact of the United States (US) – China technology war and the escalating US-China trade war is clouding the outlook for the Chinese economy amidst signs that domestic economic growth momentum also softened in April, according to IHS Markit in its official statement today.

“Weak Chinese industrial production and retail sales data for April highlight the downside economic risks to the Chinese economy in 2019 from moderating domestic demand combined with the impact of the escalating US-China trade war,” said Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit, today (05/16).

With private consumption has become an increasingly important growth engine for the Chinese economy in the past five years, the significant slowdown in the pace of retail sales growth in April is a key concern, he adds.

On 15 May 2019, US President Donald Trump signed an executive order that will ban US firms from using telecommunications equipment made by firms that are deemed to pose a national security risk.

While no country or company is specifically named in the executive order, it is expected to result in a US ban on the use of equipment made by many telecommunications companies from mainland China once the order is implemented by the US Department of Commerce. This follows just days after the US Federal Communications Commission rejected an application by China Mobile to provide communications services in the US.

Many recent Chinese M&A proposals for acquisition of US technology companies have also been rejected by the Committee on Foreign Investment in the United States (CFIUS), a US government interagency committee that reviews the effect of such proposed M&A deals on national security. The heightened US regulatory restrictions have resulted in a collapse of Chinese M&A acquisitions in the US during 2018 and early 2019 by deal value.

Adding to the downside risks for China’s export sector, the US government announced on 13 May that another tranche of US tariff measures against China is under preparation, with a 25 percent tariff planned to be imposed on a further USD 300 billion of Chinese products that are exported to the US. This next tranche of US tariffs would be another significant negative shock to China’s export sector.

Biswas sees it is not a realistic strategy for China to try to mitigate a 25 percent tariff by allowing further sharp declines in the yuan. A key priority for the Chinese government since 2015 has been to stabilize the exchange rate and prevent large capital outflows, in order to protect its foreign exchange reserves. Furthermore, if the US assesses that there has been significant currency manipulation, countermeasures could be applied by ratcheting up the tariff rates on Chinese imports to even higher rates.

Confronted with increasing downside risks to the economic outlook, IHS Markit advice Chinese policymakers need to roll out further fiscal and monetary policy stimulus measures to ensure that GDP growth in 2019 reaches the target range of 6.0 percent to 6.5 percent that was set by the Chinese government in March in its annual Government Work Report presented by Premier Li Keqiang.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com

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