Donald Trump, in his previous stint as US president, practically reintroduced “trade war” back into the global lexicon.
Even months before he officially assumes his new term, Mexico, Canada and, of course, China are already subject to his rhetorical lashings on tariffs, as they are the three countries with the largest trade deficit with the US.
If Chinese manufacturers are mulling over whether they should relocate or diversify to markets such as Vietnam to escape Trump’s tariffs, they shouldn’t bother, says Kelvin Tay of UBS.
“You are not going to be able to get away with it because the tariffs will come to some of these other countries,” says Tay, referring to how Trump will be within his rights as the president to slap tariffs on whomever he fancies.
However, Trump, being a “transaction-oriented” president, will not impose tariffs right away. “He will use the threat of tariffs to extract anything he can get from you. There will be a process of bargains and negotiations before they finally kick in,” says Tay.
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In any case, the trade tensions hogging the headlines are taking place amid the trend of “deglobalisation” that began in 2008, with Western economies seeing a relative decline in world trade value.
“The US is no longer as important as a trading partner to most parts of the world. The Chinese have actually taken that mantle,” says Tay, referring to how China has become a trading partner with just about every major market from Asean to Latin America.
China, amid the trade wars, is inclined to keep its currency down as it faces a pressing domestic issue: its over-leveraged and over-capacity property sector.
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Prices have come off since the Chinese government imposed tight controls to prevent borrowings from getting out of hand.
However, it now finds itself struggling to help this sector regain its momentum.
With 70% of household assets tied up in properties, if housing prices continue to slump, the knock-on effects on consumption and overall confidence will be dire.
Tay points out that inventory levels in tier-1 and tier-2 cities will take at least 28 months to clear. What some statistics did not capture is that the oversupply is worse in tier-3 and tier-4 cities, which, after arriving late for the property party, had been ramping up more aggressively.
“This problem will take quite some time to resolve,” says Tay. There are some recent signs of improvement, as the most recent October statistics indicate.
However, it is too early to say that China’s property market has turned the corner, and it could take another two or even three months’ worth of data for hints of a market recovery to appear.
Tay likens China’s markets to the performance of English club Manchester United in the Premier League rankings. “You always think they are about to turn the corner, but then again, it goes back down.”
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Thus, despite recent news that China is introducing new policies of various kinds to support its massive economy, Tay believes that investors ought not to be too optimistic yet. “Be careful. Have China. Have exposure to China. I think that’s needed, but don’t have too much exposure to China right now.”
Photo: Samuel Isaac Chua/The Edge Singapore
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