Crucial for successful Trump-Xi trade talks

IT is crucial that upcoming trade talks between President Donald Trump and President Xi Jinping end up with concrete results to move discussions forward.

With a large agenda covering not only tariffs, they should at least agree on some major points.

Sincerity is key and not just the suspected posturing for US midterm elections tomorrow.

Trade tensions and tariffs are hurting China, which had been the world engine of growth and lifted us out of the last financial crisis.

With China slowing down and using only fiscal measures to stimulate its economy, there are worries that in the next crisis, there will not be a similar stimulus package of US$586bil China used in the 2008 crisis.

China may not be able to take us out of the next crisis, but its stable growth is vital for the region which is also weakened by, among other things, the trade war and rising US rates.

Moving away from credit-fuelled stimulus under its debt deleveraging campaign, China is putting in measures to, among other things, boost liquidity in the financial system, increase spending on infrastructure and cut taxes.

Some slowdown from the deleveraging is already expected, but China’s economy is further spooked by the deepening trade war with the United States.

Its factory sector, a huge driver of growth domestically and globally, just crawled to 50.1 from 50.0 in September.

October manufacturing data showed a broad decline that risks affecting the global economy.

Exports shrank for the seventh consecutive month in October, the first full month following the latest US tariffs of 10% on US$200bil of Chinese goods.

Against the latest disappointing data, China has decided on more stimulus measures to stabilise its economy.

The yuan, to which many regional currencies are tied, was at a 10-year low, although offshore yuan jumped 0.5% last Friday for its biggest two-day gain since August, on news of the resumption of talks.

For the first time, China issued new bills in Hong Kong to soak up yuan liquidity and support its currency.

A survey by the American Chamber of Commerce in southern China shows that 70% of US firms operating there may delay investments or move manufacturing elsewhere.

While some may think this is a good time to buy China stocks, others believe they could get cheaper, even as stocks surged last Friday on news of a possible trade deal and more fiscal stimulus for its deteriorating economy.

Just to prop up Asian growth, it is feared that “China may not be able to help if it is hamstrung by the realisation that it cannot postpone deleveraging forever,” said Pong Teng Siew, head of research, Inter-Pacific Securities.

The trade war makes matters worse but “China should not be overzealous in propping up growth and revert to easier credit expansion,” said Lee Heng Guie, executive director, Socio Economic Research Center.

A drastic slowdown in China’s economy will impact exporters which had been dependant on its rapid growth.

With increasing risk of a synchronised global slowdown, there are worries on the next possible crisis which may last longer in the absence of a world growth engine.

 

What can spark the next crisis?

Indebtedness, compounded by higher financing costs, is a major concern as global debt stood at US$164 trillion even in 2016, which is up US$50 trillion from pre-crisis levels, and represent 225% of world wealth.

That amount is increasing as concerns mount on China’s high debt levels and whether indebted countries can clean up their debts fast enough.

Unlike China, countries like Argentina and Turkey may not be able to clear their debts that balloon with rising rates.

In emerging markets, there is US$8 trillion in US denominated debt where US$249bil must be repaid or refinanced next year.

With US regulators waving red flags over the booming leveraged loan market that cater to companies with below investment grade credit ratings, high issuance of covenant lite loans with fewer restrictions on borrowers, has come into focus.

At 80% of the outstanding US leveraged loans exceeding US$1 trillion, this category of loans may be a trouble spot in case of a sudden downturn or defaults.

Severe liquidity disruptions may arise as the US Fed reduces its balance sheet of US$4.5 trillion in 2015, against US$870bil in 2007.

Having reduced US$325bil from that balance sheet, its accelerated pace of reduction, together with rising rates, has given rise to concerns over too quick a tightening.

Italy, with an economy nearly the size of Britain, is feared to be pushing Europe into another crisis; it is saddled with high debts and troubles in its public finances and banks.

Columnist Yap Leng Kuen hopes the world is mindful of the next crisis.