China’s response crucial for risk appetite – Nordea Markets

Analysts at Nordea Markets suggest that China’s response against US trade restrictions will now be crucial for risk appetite in the coming weeks.  

Key Quotes

“China’s retribution patterns during the past few months have shown that it will respond to any US move with equivalent retaliation. So the immediate risk of an escalation of the trade conflict depends on how far Trump is willing to go. However, if the US ultimately decides to impose 10% tariffs on additional USD 200bn of Chinese goods, China will have to deviate from the equivalent retaliation strategy, as China imports less than USD 200bn from the US. Here, China could choose a higher tariff rate than 10% or utilise non-tariff options, such as prolonging custom processing time for US imports and sharpening regulations on US businesses in China.”

“The latter has proved to be a popular choice during previous diplomatic strains between China and a foreign country. Tougher regulations can include fire safety and product quality checks. US businesses’ outlook in China may be further darkened if the US curbs Chinese investments in the US. A proposal of such is expected to be released on 30 June.”

“We consider the above-mentioned measures much more likely than market-based retaliation measures  such as CNY devaluation or a dump of US Treasuries.”

“It is likely too early to call an end to the rising trade risks, but the risk/reward in betting on further Trump/trade-fuelled risk off is less good than a couple of weeks ago.  A new trade war ceasefire is not necessarily completely out of reach, but we likely have to wait further for that to happen.”