Can China hold the fort amid trade war risks?

WHILE the current view on China’s economic resilience is positive, trade war risks may weigh on world trade and even China can be affected.

Next year may be the year to watch as fears mount on it possibly being a ‘watershed year’ for the ongoing expansion cycle. Right now, a slew of economic data in the first two months of the year pointed to continued growth for China.

In fact, there are views that China’s economy may gain further momentum with new initiatives from the recently concluded National People’s Congress. China sustaining its economic goals is seen as a way to mitigate some of the trade war risks posed by the US on this part of the world.

Trade diversion may provide some relief although it is unsure to what extent it may work, considering the heavy weightage on trade occupied by the US and China.

“The current protectionist moves are US-centric and inward looking, so China’s economic status in the region is unlikely to be affected. In fact, it could gain further momentum as initiatives from the recently concluded National People’s Congress indicates continuity, coordination and execution of policies,” said Suhaimi Illias, the group chief economist of Maybank Investment Bank.

This includes China’s regional and global agenda amidst ambitions like the Belt and Road initiative as well as the Regional Comprehensive Economic Partnership, greater use of the yuan as currency for settlement and investment, and the opening up of domestic financial markets.

For March, China’s factory gauge posted its first gain since November, rising to 51.5 against 50.3 last month.

For the first two months, China’s retail sales firmed up, indicating healthy consumption; industrial production and manufacturing activity maintained their momentum and infrastructure spending supports investment in urban fixed assets.

“China’s restructured economy towards the services and consumptionoriented sectors should be able to absorb the impact from the slapping of trade barriers by the US.

“If both countries restrain on retaliatory measures and prevent the situation from worsening, China’s economy will be resilient enough to counteract the dampening effect from the US tariffs,” said Lee Heng Guie, the executive director of Socio Economic Research Center. Diversification of trade may help counter the current US-China trade war and over concentration on one or two export markets. “By now, emerging markets have more options to trade with other major economies, unlike 20 years ago. This is especially with the emergence of stronger economies like China and India. Compared with a decade ago, Malaysia, for instance, has diversified its trades from being reliant on just a few developed countries,” according to Danny Wong, the CEO of Areca Capital.

Trade diversion also occurs as US imports from China or China imports from the US may be diverted to other exporters including Malaysia via substitution. The worry is that a full blown trade war can spill into areas such as investments between the two largest economies of the world.

“The US and China make up 40% of world gross domestic product and nearly a quarter of world trade. The impact of a full blown trade war to world trade and growth can be significantly negative and blunt any advantage gained from having diversified markets,” said Suhaimi.

US growth in the fourth quarter slowed less than previously estimated but there are signs that activity slowed further in the first quarter. US retail sales fell in February for the third straight month, housing data had been generally weak and the trade deficit exceeded a nineyear high in January.

Aside from the seasonal quirk, would trade war risks dent this slowing growth.

A positive impact from a chill in world trade will be a reduction in the US trade deficit.

“But the cost of production will rise sharply; consumers will trim their spending and manufacturers may cut back on production.

“Against this global chill, the slowdown that is already underway in the European Union and Japan, and beginning in China, may soon spread to the US,” said Pong Teng Siew, head of research, InterPacific Securities.

Could a recession be looming?

“Several unconventional forecasting tools to estimate the next US and global recession, point to one some time next year. This is despite the continued strength of US job numbers,” said Pong.

While it may not be the end of the bulls on Wall Street, “the speed of the retracement has become a concern,” said Thomas Yong, the CEO of Fortress Capital.

Columnist Yap Leng Kuen worries about men in a hurry.