Economies brace for long haul fight between two powerhouses

Pong: To hold the value of a currency comparatively low, the government of that country will sell its domestic currency.

THE latest twist in US-China trade tech relations point to potentially more acrimonious exchanges between the two powerhouses.

As economies brace for a long haul fight, they must arm themselves with measures for survival.

Monetary measures such as interest rate cuts and flooding the markets with money, can only go so far; they create bubbles that eventually burst, leaving a bigger trail of misery.

Fiscal policies that involve government spending on economic projects and other tax incentives will help to a certain extent, to generate consumption and job opportunities. Small, trade reliant economies like Malaysia, will be hit by shrinking international trade, caused by trade fights and uncertainty.

The decline in global trade volume slowed to a 0.3% drop in the three months to March compared with a drop of 1.9% in February, according to Bloomberg calculations based on the trade monitor of the Dutch Bureau for Economic Policy Analysis CPB.

A continued rebound in trade volume is in question, following heightened trade tensions. In the face of such threats, there may be few good solutions to the long term economic survival of trade dependent countries; they could allow their currencies to depreciate sharply to absorb the impact of their weakened positions.

“This appears to be happening to the ringgit which has been sliding rapidly these days,’’ said Pong Teng Siew, head of research, Inter-Pacific Securities.

The ringgit fell to 4.1870/1900 against the dollar last Friday from 4.1750/1780 the previous Friday. The local currency may face resistance at the psychological level of 4.20 to the dollar but is expected to cross that to march to 4.30 to the dollar as the trade situation deteriorates.

Malaysia is one of three countries that had cut rates recently. Currency weakening is becoming sensitive; the US, in spreading its net on tariffs, may punish countries found to have undervalued their currencies against the dollar.

To hold the value of a currency comparatively low, the government of that country will sell its domestic currency, thus increasing the supply, causing prices to drop. However, that argument (of countries undervaluing their currencies to boost exports) cannot be applied to those countries that do not intervene in currency markets, said Pong.

Pessimism over a US-China trade deal is increasing even with a potential, upcoming meeting between President Donald Trump and President Xi Jinping at the G20 summit in Japan next month.

The picture gets dimmer with each blow dealt, from higher US tariffs to the throttling of Huawei via an equipment ban; there is talk of such bans on other Chinese tech companies. China, which has been largely silent following the slew of words from US leaders, has asked Washington to fix its “wrong actions” before talks can resume; its state media has accused the US of “bandit logic” in trade negotiations.

Besides a deficit in trust, trade and security concerns are now muddled as Trump says Huawei, which was labelled a security threat, may be included in the event of any trade deal.

In a worst case scenario, this trade shock can lead to a global recession. It is a developing scenario that the world has not seen since the 1980s when the Japanese tried to resolve US-Japan trade imbalances by pushing the yen higher.

Under the Plaza Accord of 1985, the US, Japan and Germany agreed to push down the dollar whose value fell by 50% against the yen and mark before the end of 1987. While Japan caved in to US demands then, China this time is talking of preparing for the new “Long March.”

Over time, the collateral impact of this prolonged trade fight on regional economies, may lessen as supply chains get adjusted.

“To buffer any short term drop in economic activities, expansionary policies are necessary; if resources are scarce, regional economies need to reassess their composition of fiscal measures to improve efficiency,’’ said Thomas Yong, CEO, Fortress Capital.

Tax incentives to encourage investments, that may not have an immediate negative impact on fiscal balances, may be considered. Construction stimulus in Malaysia is through the revival of the East Coast Rail Link; the go-ahead for major jobs such as the Mass Rapid Transit 2, Light Rail Link 3 and Pan Borneo Highway and clearance for a previously approved RM14bil worth of projects under developmentspending.

Of the output multipliers by sectors, construction is the highest, noted Maybank Investment Bank. Companies investing and re-routing trade to Malaysia include Micron Technology (to set up a plant in Penang); Panasonic (switched to consignment production and exports from Malaysia) and Kayamatics (to set up production lines in Penang and Kuala Lumpur).

Columnist Yap Leng Kuen worries about the constant knocks on global growth.

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