SINGAPORE (May 13): Will trade negotiators from Washington and Beijing manage to bring down spiking temperatures this week in an attempt to hash out a trade deal? Or will trade tensions between the two superpowers boil over — and scald the rest of the global economy?
The short answer is: Nobody really knows. Yet, it is clear that much of how markets around the world will move hinges on the outcome of these trade talks.
US President Donald Trump on May 5 surprised markets by threatening — in a long Twitter rant — that he would raise US levies significantly on Chinese goods.
Despite repeated claims by the Trump administration in recent weeks that trade talks with Beijing were going well, the president said tariffs on US$200 billion ($272 billion) worth of Chinese goods will increase to 25% on May 10.
In addition, Trump threatened to impose 25% tariffs on an additional US$325 billion worth of Chinese goods “shortly”.
“The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!” Trump tweeted.
The tariff rate on the first US$200 billion of Chinese goods was originally set at 10%, to be increased at the start of the year. But the tariff hike was postponed after China and the US agreed to sit down for trade talks.
The Twitter tirade came as a shock to many market observers, especially since recent reports had indicated the world’s two largest economies could be set to sign an agreement as early as last week.
Policy analysts were divided in their interpretations of Trump’s latest tariff threat. Some saw it as a negotiating tactic.
Citigroup Global Markets economist Cesar Rojas, for example, wrote in a note early last week that tariff threats would likely “remain as a way to get concessions from China and to enforce the agreement”.
Meanwhile, Morgan Stanley’s head of US Public Policy Michael Zezas wrote in a note that the threats might be “a pressure tactic to speed an agreement on pending issues such as existing tariff removal timing, details related to the enforcement mechanism and industrial subsidies”.
Fresh reports have surfaced since then, however, to suggest that the tariff threats have emerged because the trade deal, which was seen as close to completion, has been derailed in recent days.
Citing US government sources and private sector sources briefed on the talks, Reuters on May 8 reported that a diplomatic cable from Beijing had arrived in Washington, DC late on May 3 — just days before Trump’s Twitter post — with systematic edits to the nearly 150-page draft trade agreement.
In each of the seven chapters of the draft trade deal, China had deleted its commitments to change laws to resolve core US complaints, including in alleged theft of US intellectual property and trade secrets as well as currency manipulation.
Speaking at a campaign rally on May 8, Trump accused China of “[breaking] the deal” in the ongoing US-China trade talks. “By the way, you see the tariffs we’re doing? Because they broke the deal. They broke the deal,” Trump said. “So they’re flying in, the vice-premier tomorrow is flying in — good man — but they broke the deal. They can’t do that, so they’ll be paying.”
Chinese Vice-Premier Liu He will lead the country’s delegation, which is scheduled to arrive May 9 in Washington for two days of talks with US officials.
Meanwhile, China’s Ministry of Commerce has announced that it would soon publish details of planned retaliatory tariffs, while urging cooperation between the two sides to resolve the dispute.
The renminbi dropped to its weakest since January, while global stocks slumped on news of the tariff threats last week. Since May 3, the Dow Jones Industrial Average has slipped 2.0% to 25,967.33. In Singapore, the benchmark Straits Times Index fell 3.7% through the week to close at 3,269.70 on May 9.
And some analysts believe a collapse in talks could trigger a major selloff in risk assets.
“It’s difficult to make a high-confidence call. We think it’s likely the latest developments reflect an unusually messy and public final stage to negotiations. We can’t rule out the possibility of something more serious going awry,” says Tom Orlik, chief economist for Bloomberg Economics.
Mark Haefele, chief investment officer for UBS Global Wealth Management, believes the US and China “will ultimately reach a deal, but with the deadline for the imposition of new tariffs now very short, the path to that deal could well be bumpier than it once looked”.
As he sees it, the imposition of new tariffs and a “complete breakdown” in negotiations would probably cause a drop of 10% to 15% in US stocks from their highs, and a 15% to 20% plunge in Chinese equities.
To be sure, DBS Group Research’s forex strategist Philip Wee believes market volatility has been relatively muted so far — considering the stakes involved.
“If talks break down… risks of a financial market collapse, extreme risk aversion, and sharp slowdown in global growth will spike,” says Wee. “Even if last-moment developments lead to a postponement of escalation, the ill will generated by this week’s developments will not go away, in our view.”
Best World suspended
Meanwhile, in Singapore, direct selling firm Best World International has won the dubious honour of becoming the first stock to be suspended by the Singapore Exchange Regulation (SGX RegCo) in close to 30 months.
SGX RegCo suspended trading in the shares of Best World with effect from 3.14pm on May 9, pending its investigations into the accuracy of the company’s announcement on the same day.
Before market open on May 9, Best World had issued a statement to “strongly” refute an April 24 report by short seller Bonitas Research that had alleged, among other things, that the group’s sales in China are a fraction of what was reported to its shareholders.
SGX RegCo says the trading suspension will continue until it has completed its investigations into “the veracity of the company’s China sales”.
Shares in Best World were down 16% to $1.36 on May 9, before the suspension. The counter has tumbled 59.2% from its peak of $3.33 in February.
The last SGX-listed stock to have been suspended by the bourse was ISR Capital, in November 2016.
ISR, which has been linked to alleged 2013 penny stock crash masterminds John Soh Chee Wen and Quah Su-Ling, was said to have been suspended to “safeguard the interest of the market”.
The week ahead
Meanwhile, Netlink NBN Trust and Singapore Telecommunications are expected to announce their FY2019 results this week, on May 13 and May 15 respectively. Singapore Technologies Engineering will announce its 1QFY2019 results on May 15, while Singapore Airlines and SATS will announce their FY2019 results on May 16 and May 17 respectively.
