24 May 2019
One-third of the soybeans consumed by China is imported from the United States. Photo: Reuters
One-third of the soybeans consumed by China is imported from the United States. Photo: Reuters

Why HK property is vulnerable to China-US trade war

To many Hongkongers, the looming trade war between China and the United States does not seem a cause for concern.

But if the trade row escalates, it could lead to higher interest rates and thus have a negative impact on the city’s property market.

Strictly speaking, there is no trade war yet because goods targeted by the tariffs are not major trade items at all.

The US has targeted China’s new energy cars, medical equipment, aviation, and biopharma products. The administration of US President Donald Trump has largely ignored electronic products, low- and medium-range industrial products, garments and toys, which are key Chinese exports to the US.

China also gave a muted response by seeking to impose tariffs on American fruit, wine, steel pipes and scrap aluminum products, which are also relatively insignificant.

China’s former finance minister Lou Jiwei said Beijing’s retaliatory measures were “relatively mild” and suggested that tougher steps be taken.

“If I were in the government, I would hit soybeans first, then cars and planes,” Lou said.

Aircraft, soybeans and motor vehicles are the top three US exports to China, worth US$16.3 billion, US$12.4 billion and US$10.5 billion respectively. The three categories account for 30 percent of total US exports to China.

It should also be noted that Iowa, Michigan and Wisconsin are major soybean-growing states, and the key states that helped Trump win the 2016 election.

If China decides to target soybean imports from the US, Trump may risk losing support in these states. John Heisdorffer, president of the American Soybean Association, complained to media that someone is messing up their biggest market, as 35 percent of US soybean exports go to China.

“Rural America put Mr. Trump into office so it’ll be fun to watch in the next election what happens, whether they will continue to support him,” he said.

The underlying message from Lou is that China remains very much restrained in its response to Trump’s action.

China, in fact, wants to avoid a trade war with the US. China, the world’s largest soybean consumer, has seen its consumption of soybeans double to 100 million metric tons last year from 50 million metric tons in 2007. It has to import 85 percent of soybeans, with Brazil and the US being the two major sources.

Currently, the global soybean market is in a tight situation. If China slaps tariffs on soybean imports from the US, that will almost certainly lead to higher costs of animal feed, and consequently meat prices, which will eventually push up inflation.

Targeting US soybeans is also likely to trigger a tit-for-tat action from the Washington, which would then target Chinese exports of electronics, industrial goods, clothing and toys. That, too, pushes up US consumer prices.

By then, both countries may face mounting pressure to raise interest rates.

Hong Kong’s low interest rate environment is to a large extent a result of capital inflows. If interest rates of both the US dollar and the renminbi go up, Hong Kong dollar rates will almost for certain follow, and the local housing market would be put under pressure.

This article appeared in the Hong Kong Economic Journal on March 26

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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