What Banks Think Will Happen in U.S.-China Negotiations
As investors remain on edge in anticipation of Chinese retaliation for last week’s U.S. ramp-up in the trade war, economists and market strategists are scattered in their predictions for the path ahead.
It’s anyone’s guess as to whether the U.S. and China smooth things over by the time Presidents Donald Trump and Xi Jinping could meet on the sidelines of the G-20 summit gathering in Japan at the end of June. Speculation is rife over what an agreement would look like, and, importantly, how it would be enforced.
While an immediate tit-for-tat tariff acceleration was absent from China in response to the U.S. announcement Friday, the consensus is more solid around further policy stimulus from China to juice growth in a particularly high-pressure environment.
Here’s how analysts at banks across Asia see the way forward in U.S.-China negotiations, and what it means for markets and the economy:
"Base case: We assume temporary re-escalation in trade tension,” wrote Morgan Stanley economists including Deyi Tan. “Renewed U.S.-China trade tension raises the question of whether it could thwart any nascent recovery" in Asia excluding Japan, they said. "Growth risks are skewed to the downside. Our base case is for a gradual recovery. We see trade tension as temporary and continued talks/market weakness prompt both sides to reach a deal."
"Trade tensions will continue to keep the U.S. dollar firm against emerging Asian currencies," wrote FX strategist Philip Wee and rates strategist Eugene Leow at DBS. "It is uncertain if negotiations will resume to get the trade deal back on track." While there’s speculation that Trump and Xi will meet around the G-20 summit in June, "the U.S. has started preparations to hit the remaining $300 billion of Chinese goods with a 25% tariff."
Australia & New Zealand Banking Group
“While we hope for the best, our baseline case is now for the U.S. and China to fail to reach a deal, meaning tariffs will get raised on the remainder of Chinese exports to the U.S.,” and ANZ’s Asian currency forecasts are “under review,” Khoon Goh, head of Asia research, wrote in a note. “China views the economic cost of a no deal to be more tolerable than the political cost of acceding to U.S. demands.”
Oversea-China Banking Corp.
"The sudden unexpected collapse is a surprise. However, it does not mean the end of U.S.-China trade talk," wrote Tommy Xie, OCBC’s head of greater China research. “Change is the only constant in trade talk, unfortunately. Market will continue to be driven by headline news going forwards."
There are three options China may consider to counter the impact of tariffs, including yuan depreciation, monetary policy easing and fiscal stimulus, he said. "We think China is unlikely to engineer 25% depreciation to counter the impact of tariffs as the cost of capital outflows amid the shrinking current account surplus may outweigh the benefit of supporting exports. This also suggests that monetary easing and fiscal stimulus will play a bigger role.”
JP Morgan Chase Bank
With an earlier-than-expected economic recovery in the first quarter and reduced policy buffers, "we expect Friday’s tariff increase will not lead to a material policy response -- instead policy will likely be fine-tuned,” wrote Sin Beng Ong, JPMorgan Chase & Co.’s chief economist for Southeast Asia. The policy reaction could include a symbolic tariff increase or expansion of tariffs for imported goods from the U.S., an accelerated roll out of fiscal subsidies to support consumption, further cuts to banks’ reserve-requirement ratios and credit easing, and "perhaps most important, a weaker yuan, with the year-end USD/CNY forecast now at 6.80 from 6.65 previously."
"Authorities’ support for equities, signaling via yuan fixing and intervention, monetary policy measures and liquidity actions will be monitored closely for cues on asset price action," wrote Citi analysts on the EM Asia team. In addition to possibilities for further talks ahead, "USTR’s potential launch of investigation/public comment period for tariffs on the $325 billion of Chinese imports and report/comments on exchange rates will also be monitored."
Maybank Kim Eng Research
"China’s response to retaliate to U.S. action was ‘restrained,’ suggesting it is still seeking to seal a deal by withholding countermeasures for now,” say Maybank analysts Suhaimi Ilias, Chua Hak Bin, and Lee Ju Ye.
"Last week’s actions point to stimulus and mitigation to domestic economy," they said, citing a cut to the amount of cash that some county-level rural commercial lenders must hold as reserves, the release of 280 billion yuan ($40.8 billion) of funds for SME funding and speculation that Chinese state funds propped up stocks. "However, risk of a full-blown trade war has increased and will be a major negative shock to the global/regional economy."
©2019 Bloomberg L.P.