China US trade: Possible market reactions to more aggressive US remedies - Nomura

Analysts at Nomura expect that the Trump administration may take a more aggressive stance on trade in 2018 than in 2017 and looking ahead, the trade issue likely to have the greatest macro and market impact is the US response to the large estimated economic losses resultant from China’s intellectual property policies.

Key Quotes

“We expect President Trump to announce that he takes this issue seriously in his State of the Union address (30 January). We further expect him to announce his intent to issue remedies that could range from the threat of tariffs to a set of escalating tariffs in addition to possible limits on Chinese investment in the US.”

“China macro: Mild measures by the US would likely be received calmly by China, thus having minimal near-term implications for the rest of Asia. Should there be a limited number of initial tariffs, we would expect a mixed response: on one hand, retaliation with import tariffs and non-tariff barriers on US imports, and higher hurdles to US investment in China, with continued negation on the other. If the US proves particularly aggressive, China would also become more hawkish, in our view. Curbs to US trade with China could be damaging for the region overall.”

“FX strategy: While there remains potential for a worsening of trade relations, the muted response thus far has had only a limited impact on Asia FX. An increased focus on FX policy could benefit Asia FX if it leads to more subdued central bank USD-buying FX intervention.”

“Equity strategy: Limited impact on Hong Kong/China-listed Chinese equities for now. US exports accounts for ~2% of Chinese washing machine companies’ total revenue and the tariff hike is on large (>12kg) household washing machines which Chinese makers do not sell in the US. On solar cells, National Bureau of Statistics (NBS) data show that 3-4% of Chinese solar cell producers’ revenue is exposed to the tariff change. While measures may step up in coming months, we note that: 1) c.90% of the top 25 exporters from China to the US are not local Chinese companies; and 2) the major Chinese equity indices have 8-12% overseas revenue, much lower than the 30- 50% for major equity indices in India, the US and Japan.”