Tensions are escalating between China and the US on trade war. We feel both countries could use different weapons in the trade spat. The US is expected to continue applying direct tariffs on goods imported from China. However, this may not be the case for China.

China may introduce other import restrictions on US goods or services, attuned to be in line with the US action. Beijing could go hard on US companies operating in China such as boycotting, and there is the fear of China devaluing the yuan and sell US assets, especially its holdings of US Treasuries.

With such scenarios on the table, we expect financial markets in the emerging region will continue to experience volatility. In particular, we believe countries like Taiwan, Malaysia, Singapore and Korea are more vulnerable due to strong trade links with China.

• Tensions are escalating between China and the US on trade war. It is reflected by the US President Trump’s plan to impose further tariffs on US$200bil of Chinese imports following a reciprocal Chinese response though the US imposed a smaller tariff of 10% as opposed to 25% on the original US$50bil.

• We feel both the countries could possibly use different weapons in the trade spat. The US is expected to continue applying direct tariffs on goods imported from China. However, this may not be the case for China. Beijing’s import from the US stood at US$$130bil against exports to the US worth US$506bil in 2017. Hence, China has limited direct ammunition.

• The possibilities for China to apply other measures is on the table. Amongst them is to introduce other import restrictions on US goods or services, attuned to be in line with the US action. Also, the Chinese may go hard on the US companies operating in China such as boycotting. The US has huge business operations in China with FDIs totalling US$257bil since 1990, and over 70% going into greenfield sites. US companies are directly exposed to the China market.

• The fear of China devaluing the yuan is also on the cards. While it may help offset the costs of US tariffs, we believe the period of weaker yuan will be associated with market volatility and heightens capital flight from China. Currently, the People's Bank of China (PBoC) has set aside such ruling and is focusing on building a stable currency. Such unfair practice will also risk competitive depreciation or devaluation in the region.

• The Chinese could also sell US assets, especially its holdings of US Treasuries. Though Beijing’s holdings has eased to 10.2% from its peak in late 2013, the Chinese is still the global leader with US$1.18tril. If China reduces its purchases of government debt, it could add some pressure on the USD to slide. The impact can be stronger should other countries also pare down their purchases of US debt. But the impact can be limited if pension funds, insurance companies and private investors come to the rescue.

• With such scenarios on the table, we expect financial markets in the emerging region will continue to experience volatility. In particular, we believe countries like Taiwan, Malaysia, Singapore and Korea are more vulnerable due to strong trade links with China.

Source: AmInvest Research - 20 Jun 2018