Global trade uncertainties downside risk to growth

The worsening of China

THE consequences of a brewing trade war between the United States and China are now playing out on a number of fronts. And the message it is sending to markets is a chilling one.

And for Malaysia and other countries in South-East Asia, the worsening of China’s economy and prolonged weakness in its stock market will impact on stocks in this part of the region.

“Being an open economy, we cannot run away from just how dependent we have become on China,” says an analyst on how the lingering weakness in China’s stock market would affect stocks on Bursa Malaysia.

“There will be a contagion effect.”

Malaysian Institute of Economic Research said on Thursday after releasing the sentiment indices and its revised outlook for Malaysia’s growth that the political and policy uncertainties influencing global trade and growth are the main globally driven downside risk to Malaysia’s growth prospects.

“Among others, the newly erupted US-China trade war may have repercussions on global trade and growth and this will definitely have an impact on Malaysia, one way or another,” it said.

Jitters from the brewing trade war have manifested itself in the price of a number of commodities linked to the global economy, and also specific items hurt by retaliatory tariffs by China are showing that demand for industrial metals such as copper and aluminium, and edible oils such as soy bean, is taking a beating.

The price of copper is down 17% from June 7 and aluminium is nearly 15% down from June 6. These two metals, especially copper, are leading indicators for manufacturing activity. Copper is used extensively in a wide range of manufactured products and the drop in the price of the metal is over fears that a trade war between China and the US would affect demand for the product.

The direct impact from China’s retaliation against the US’ move to impose tariffs has been on US agriculture products, particularly soy bean. The price of soy bean has fallen about 17.8% since June 6.

Fears over the economic impact from an escalating trade war have also hurt the Shanghai stock market. The index is down 14.5% year-to-date but is 9.34% lower since June 6.

With threats that tariffs by the US can envelope just about all of China’s exports to the US and China likely to reciprocate with punitive tariffs on its own, the implication is that both these moves would exact a terrible price on global growth.

The International Monetary Fund has warned that the global economy could lose US$430bil by 2020 if the trade war escalates, and that will shave 0.5% off global growth.

Implications of such losses will be damaging to the global economy, particularly China, whose economy is already showing signs of strain and has to deal with trending declines in key indicators such as investments.

As such, China’s bond yields are already rising and Bloomberg reports that the average yield on AA- rated firms, considered junk score in China, has risen 210 basis points from a six-year low in October 2016 to 7.2% currently, near the highest in more than three years.

“There has been about 33.3 billion yuan (US$4.9bil) in corporate bond defaults so far this year, data compiled by Bloomberg show. That already exceeds the full-year record of 30 billion yuan, set in 2016. These include nine private and 25 public offerings. Strains are set to worsen if the trends of credit-rating companies are anything to go by – agencies including Dagong Global Rating Co have been downgrading firms by an unprecedented margin,” the report says.