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US-China Trade Tension: Is It A Concern For Asian Equity Markets?



By Mike Shiao, Chief Investment Officer, Asia ex Japan on Mar 29, 2018, in Capital Growth

What were the newly proposed tariffs between the US and China mean for Asian markets?



On March 22, President Donald Trump signed a memorandum that would impose 25% tariffs on up to $ 60 billion in annual imports from China, relating to Intellectual Property Practices under Section 301 of the 1974 Trade Act. The proposed tariffs target 1,300 product categories concentrated in aerospace, information and communication technology as well as machinery, and a detailed list will be unveiled within 15 days for public comments. Section 232, as well as tariffs on washing machines and solar panels.

In reaction to the newly proposed tariffs, the Ministry of Commerce in China

China's trade surplus with the US widened to $ 278 billion in 2017, based on Chinese trade data. 1 While We believe the figure is overstated China

 Chart 1: US trade deficits with China

Sources: CEIC, J.P. Morgan, February 2018. USD refers to US dollars. CNY refers to Chinese yuan.

We expect the increasing uncertainty over trade policies to lead to negative sentiment and equity market volatility in the short term. However, we anticipate limited impacts on growth, as the Asian economy is on a much sounder footing and is growing.

Limited impacts on the regional economy [19659014] Limited impacts on the regional economy [19659014] We believe the announced trade protection measures have become more dependent on domestic economy and investment since the global financial crisis. In China, we believe that exports have structurally peaked and will only impact the underlying economy on a cyclical basis. In addition, equity markets in Asia generally have low exposure to US demand. Shares of US sales by MSCI constituents in major exporting markets are at around single-digit to mid-teens. 2

Chart 2: Sectors targeted by the US have made small contributions to China's GDP

 Sectors targeted by the US has low contribution to China

Source: CEIC, US International Trade Commission, JP Morgan, February 2018 3

Established supply chain in Asia makes it costly to relocate production

China has been building up manufacturing capacity since 2001 when it joined the World Trade Organization, and it is located in the center of an established manufacturing supply chain in Asia. We believe it is very difficult and costly for multinationals to relocate production back to the US. The existing setup in the Asian supply chain is built on an abundant laboratory force and improving infrastructure. It has helped foster industrial clusters that operate efficiently at a large scale and enable multinationals to expand margins and keep low prices for US consumers. We believe US consumers would ultimately bear the brunt if there were any change in these dynamics.

So we believe the impact from heightened trade tensions are likely to be felt negatively among markets, including South Korea and Japan, that are an integral part of the supply chain.

No one wins in an integrated world

Though the spotlight has been on China, we believe the US economy and corporations will be adversely affected by tariffs as well. 2 4 with Caterpillar (NYSE: CAT) and Boeing (NYSE: BA) among the biggest losers. Agriculture and aircraft are among the US economies with the most exports to China, and they are more vulnerable to counter-measures from the country – for instance, if they were more likely to Boeing than Airbus (OTCPK: EADSY).

Conclusion

We believe the current trade issue between China and the US wants to continue to weigh on investor sentiment, keep the market nervous and raise near-term volatility. However, our base case is that of China and the United States. On one hand, China has been applying regulations in areas in which the US is critical, seeks protection of intellectual property, and is willing to go further. On the other hand, there are still different voices among top US politicians. Many US corporations have vested commercial interests in China as the country is growing into a more affluent economy. Learn more about the ways Invesco Greater China Fund seeks long-term capital growth.

[1 1 Source: Bloomberg.com, January 2018

2 Based on a summary of indices, including the MSCI China Index, MSCI Hong Kong , MSCI Taiwan and MSCI Korea.

3 Solar Panels include products classifiable under subheading 8541.40.6020 of the Harmonized Tariff System of the United States (HTSUS). 8450.90.6000, 8450.11.0040, and 8450.90.2000 of the HTSUS.

4 Source: S & P 500 Index, Dow Jones Industrial Average

Important information

Blog header image: ssguy / Shutterstock.com

The MSCI China Index is an unmanaged index considered representative of Chinese stocks.

The MSCI Hong Kong Index is an unmanaged index considered representative of Hong Kong stocks.

The MSCI Taiwan Index is an unmanaged index considered representative of Taiwanese stocks.

The MSCI Korea Index is an unmanaged index considered representative of Korean stocks.

The S & P 500 ® [

The Dow Jones Industrial Average is a price-weighted index of the 30th most widely traded stocks on the New York Stock Exchange.

Thi s does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor before making any investment decisions. Invesco does not provide tax advice. The tax information contained in is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information regarding their individual situation. The issues expressed are those of the authors, are based on current market conditions and are subject to change without notice. Invesco Investment Professionals

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Invesco, Inc.

Invesco Distributors, Inc. All rights reserved. is the US distributor of Invesco Ltd's retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers have provided investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. PowerShares® is a registered trademark of Invesco Ltd., used by the investment adviser, Invesco PowerShares Capital Management LLC (PowerShares) under license. PowerShares and Invesco Distributors, Inc., ETF distributor, are indirect, wholly owned subsidiaries of Invesco Ltd.

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US-China trade tension: Is it a concern for Asian equity markets? by Invesco US


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