US-China trade war: Escalation does not kill deal hope – Nordea Markets

Amy Yuan Zhuang, analyst at Nordea Markets, suggests that they are still expecting a cosmetic US-China trade deal even as new tariffs have taken effect.

Key Quotes

“The month-long trade war between China and the US took an unexpected turn  today at 6.01 am CET (12.01 am EDT) when  the US increased the  tariff rate on USD 200bn of Chinese imports from 10% to 25%  in response to China’s attempt to backtrack on previous commitments. Beijing has vowed to retaliated but has not yet announced any.”

“Financial market performance in the coming days and weeks will likely be dictated by signals from the trade talks.  Chinese assets face substantial near-term downside, but USD/CNY and USD/CNH will most likely stay below 7.0.  Given our views on growth and the trade talk development, we see room for upward correction of the yuan in H2 this year.”

“Despite the gloomy situation, we still think that a trade deal is the most likely outcome.  It offers hope that Chinese Vice Premier Liu He is currently in Washington to continue the talks. Trump’s firm belief in ultimatums as the art of making deals implies that his hard-line is once again a negotiation tactic.  We think that both sides are still interested in a trade deal.  Trump needs a solid economic footing and strong equity market ahead of the presidential election in 2020. China is eager to avoid pouring gasoline on the already large fire of debt to mitigate the negative growth consequences from a trade war.”

“However,  we remain sceptical that a deal would result in a long-lasting truce between the two economies.”

“Should the tariffs become a permanent installation, they will have long-lasting negative growth impacts on China.”