Chinese company profits could become collateral damage in escalating US trade war

Analysts say tit-for-tat levies could disrupt trading patterns and companies not in the affected industries could start to feel the heat

PUBLISHED : Friday, 06 July, 2018, 7:58pm
UPDATED : Friday, 06 July, 2018, 10:16pm

The US$34 billion in tariffs on Chinese goods imposed by the US on Friday could cause collateral damage to profits at Chinese companies not directly in the firing line, as the tariff war disrupts established trade flows.

The initial set of tariffs targeted industrial components, cars and various tech products, while another US$16 billion in tariffs could be enacted soon. China immediately retaliated with tariffs of its own, mainly on US food and agricultural products.

Analysts said the tit-for-tat could hit profits of publicly traded Chinese companies and could spill over to industries beyond just the goods targeted by the US. There is a potential for damage to shipping, aviation, ports and farming in China and even in emerging Asian markets.

“Intensifying trade frictions can directly dent China’s exports and [hurt a broader economy] by weakening domestic demand indirectly,” Wang Hanfeng and Zhou Changjie, analysts at investment bank China International Capital Corp (CICC), said in a research note.

In the best-case scenario, impacted Chinese companies, excluding financials, could see their profit growth slow to a range of 10 per cent to 14 per cent in the next 12 months, according to CICC. That would be down from a previously forecast rate of 16 per cent to 28 per cent.

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The initial impact of the tariffs may not significantly hurt China’s economy – the People’s Bank of China, the country’s central bank, sees it as subtracting about 0.2 per cent from gross domestic product growth.

But should US President Donald Trump go ahead with a threat to target as much as US$400 billion in goods if China retaliates, profit growth could slump to 1 per cent at some Chinese companies, according to CICC.

Anticipation of the US tariffs has weighed heavily on stock markets in Hong Kong and China for several days, with the Shanghai Composite Index – mainland China’s benchmark stock index, and the Hang Seng China Enterprises Index, which tracks Hong Kong-listed Chinese companies, both entering bear market territory last week.

On Friday, the Shanghai Composite Index hit a 28-month low in trading on Friday, before rebounding to close 0.5 per cent higher.

Investment managers meanwhile are approaching the latest escalation in trade tensions between the United States and China with caution, but are not broadly pulling back from the markets even as retail investors react to the tariffs.

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Eleanor Wan, chief executive of BEA Union Investment Management, a joint venture between Bank of East Asia and Germany’s Union Investment, said investors had been in “panic mode” recently.

“I think the market has overreacted a bit,” Wan said. “The rapid worsening of sentiment is mostly due to people’s lack of clarity about how things are going on about the trade issue between China and the US, or between the US and its trade partners. Any progress in the negotiations? Not yet known. That’s where the fear comes from. As more information comes out and people have a clearer picture about the progress, I think the market will calm down.”

The drop in Chinese stocks could present good buying opportunities for some specific sectors,” she said.

Other analysts noted that there was a difference between news headlines on the trade war and the reality of the tariffs on the ground, something for investors to bear in mind.

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“The current US tariffs affect less than 1 per cent of China’s total exports, meaning that the direct impact is probably less than this week’s market sell-off suggests,” said Jing Ning, portfolio manager at Fidelity Funds’ China Focus Fund.

That said, if the amount of goods facing tariffs increased dramatically, “all bets would be off,” said John Woods, chief investment officer for the Asia-Pacific at Credit Suisse, who noted that politics may also have a role to play in the dispute.

“I notice that Trump’s approval ratings have increased coincidentally with the trade war on China and I suspect similarly if we were to see indications of deferred capital expenditure or companies relocating away from the US, we would see a prompt reappraisal of the trade dispute,” he said.

Additional reporting Enoch Yiu