16 June 2019
Wall Street rose amid a bright outlook for the US economy despite the trade war with China. Photo: Reuters
Wall Street rose amid a bright outlook for the US economy despite the trade war with China. Photo: Reuters

Dow Jones surpasses Hang Seng as trade war rages on

So far no one knows when, and how, the escalating trade war between the United States and China will end. But everyone knows – except US President Donald Trump and his cohorts perhaps – that the entire global economy will end up the loser in this conflict.

In the early rounds of this tit-for-tat confrontation, one way to gauge who’s winning is to look at the stock market performances.

Right now, the Dow Jones Industrial Average is searching for new highs, while the Hang Seng Index is at a two-week low with very low turnover, thanks to the Golden Week holiday in mainland China, where stock markets are taking an autumn breather.

The Dow Jones, in fact, has overtaken Hang Seng as the Sino-US trade war shows no signs of abating.

The Dow closed at 26,830 points on Wednesday. The Hang Seng, on the other hand, was down 400 points at 26,600 by midday on Thursday.

And could there be a worse sign of things to come than Donald Trump admitting that Chinese President Xi Jinping may no longer be his friend, and announcing later that he fell in love with North Korean leader Kim Jong-un?

This is the worst combination of bromance and lovers’ quarrel – if ever there was one – between these people who rule the world.

It’s not just equities that are affected: also the currencies. The US dollar has gone from strength to strength while the Chinese yuan continued to weaken as the trade war worsened over the past few months.

Things are not looking good in Hong Kong or China as far as the economy is concerned. Both HSBC and Standard Chartered lowered their GDP growth forecast for Hong Kong for next year to 3.6 percent from 3.8 percent, while JP Morgan slightly cut its prognosis for China’s economy to a 6.1 percent growth from 6.2 percent previously.

The US bank also downgraded China equities in anticipation of a full-blown trade war between the world’s two largest economies next year.

Last week, Washington imposed a 10 percent tariff on US$200 billion of Chinese goods while Beijing hit back with duties on US$60 billion of American products. Earlier, the two giants exchanged tariffs on US$50 billion worth of each other’s goods.

President Trump, in fact, has threatened to impose duties on almost all of the more than US$500 billion of goods that the US imports from China each year unless Beijing yields to his demands.

“A full-blown trade war becomes our new base case scenario for 2019,” JP Morgan strategists wrote. “There is no clear sign of mitigating confrontation between China and the US in the near term.”

On the other hand, the US economy is as robust as it can be, with Fed chair Jerome Powell gloating over ultra-low unemployment and tame inflation, which he said will continue in the foreseeable future.

But this early, American businesses are already feeling the impact of the trade war, including higher import prices and disruptions in their supply chains.

Not all brokerages are negative on China. Deutsche Bank, for example, estimated only US$1 billion of the US$50 billion worth of Chinese goods covered by the tariffs in the first round were irreplaceable.

But the stakes are getting much higher, and the German bank believes that the US will probably suffer much more as the trade war rages on.

One good thing is that both sides have not closed all channels of communication; a breakthrough that will lead to a resolution of this conflict may still occur.

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EJ Insight writer

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