China economy, yuan under pressure amid trade tensions with US

02 July 2018 06:30 Source:ICIS News

SINGAPORE (ICIS)--China’s export-oriented economy will be hit hard by escalating trade dispute with the US, which has been battering the yuan ahead of the implementation of new US tariffs on $34bn worth of Chinese goods on 6 July.

The de facto trade war between the world’s two largest economies is jeopardising China’s transition into a consumption-led economy given the consequent steep yuan losses against the US dollar, analysts said.

Manufacturing activities in Chinese industries showed signs of easing in June, with the country’s June purchasing managers’ index (PMI) falling to 51.5 points from 51.9 in May. Export orders posted a lower reading of 49.8, indicating a contraction.

China’s pace of economic expansion had been slowing down for six years until 2017, when a faster growth of 6.9% was registered. This year, the government is targeting a lower number of 6.5%.

The world’s second-biggest economy may miss this year's target amid the US-China trade row, resulting in GDP growth hitting its lowest in 38 years, Chinese brokerage Shengwan Hongyuan Securities said in a research note.

The US’ initial levies are expected to shrink China’s exports by $7bn, and translate to a 0.05 percentage point hit on the Asian giant’s economic growth, it said.

Washington announced on 15 June the imposition of 25% tariffs on $50bn worth of Chinese goods. The first wave – covering 818 products with a value of $34bn – will take effect on 6 July, while tariffs on another $16bn of Chinese goods to be applied later after soliciting public comment.

Beijing retaliated by proposing to impose the same tariff rate against US goods worth $50bn, to which the US responded with a threat of further tariffs on $200bn of Chinese goods that will include a wide swath of oil and petrochemical products.

While such tit-for-tat moves will hurt both economies, China will be harder hit as it is an export-oriented economy and it will take time for it to find substitute markets to replace the US, which accounted for about a fifth of China’s overall exports in 2017.

As the US is targeting China’s aerospace, information and communication technology, and robotics and machinery industries, major blows will be felt in sectors such as electronic devices, electrical equipment, and mechanical equipment manufacturing, Shengwan Hongyuan Securities said.

But side-effects on other sectors will also be significant. For example, rubber and plastic product manufacturing is anticipated to encounter a 0.12% drop in output, when the US tariffs on $50bn worth of Chinese goods are imposed.

By erecting and fortifying trade barriers against China, US President Donald Trump was hoping to bring down the US’ huge trade deficit of $370bn with the country.

Bringing down China’s trade deficit with the US by $100bn would cost China’s GDP 0.8 percentage points, said Ha Jiming, chief economist at investment bank China International Capital Corporation (CICC).

Although China’s overall economy will be able to sustain the fallout, switching to other export markets will take time, Ha said.

Also, the trade dispute, combined with the latest interest rate hike by the US Federal Reserve, has been hurting the yuan.

On midday, the yuan was trading at CNY6.64 to the US dollar, down by 3.4% from a month ago.

A weak yuan dampens China’s purchasing power for imported goods, as well as the government’s attempts to boost domestic consumption, said Wang Youxin, a researcher at China Bank International Financial Institution.

These attempts include the People’s Bank of China (PBoC) decision to cut the banks’ reserve requirement, or the portion of deposit that must be held as reserves, by 50 basis points effective 5 July.

Focus article by Fanny Zhang

Picture: Piles of containers are pictured on a quay at the Ningbo-Zhoushan port in Ningbo city, east China's Zhejiang province (Source: Imaginechina/REX/Shutterstock)

ICN

By Fanny Zhang