Trade war likely to be ‘prolonged’, denting confidence, credit rating agencies say
The escalating trade tensions between the US and China will have ‘unintended consequences’ for American businesses, according to Moody’s Investors Service
Credit rating agencies are becoming increasingly concerned about the potential impact of the escalating trade war between the United States and China as it looks to be more protracted and deeper than some had hoped.
In a new report on Friday, Moody’s Investors Service said that it now believes the economic tensions between the world’s two largest economies is likely be prolonged and will have “unintended consequences” for a number of American companies, including sellers of furniture, home goods and electronics.
“Industries that use more expensive imported or domestically produced inputs will be hurt,” Elena Duggar, the chairwoman of Moody's macroeconomic board, said. “Moving production chains will be costly and rising uncertainty will affect investment. The disruption will be higher in Asia than elsewhere given the region's integration in global supply chains.”
The US government has placed tariffs of up to 25 per cent on about US$250 billion of Chinese-made goods in the past few months and US President Donald Trump has threatened to add new levies on nearly all products made in China, or more than US$500 billion. China has introduced its own retaliatory tariffs on US goods in a tit-for-tat move.
The Trump administration is trying to overcome a US$376 billion trade deficit with China and combat what it claims are unfair trade practices by Beijing.
S&P Global Ratings said in a report this month that the ongoing trade tension had “dented confidence, evident in declining equity prices and a depreciating renminbi”. However, its forecast remains broadly unchanged, in part because of fiscal support by the Chinese government.
The rating agency noted that measures taken by the Chinese government to ease financial conditions should help limit the impact, as the government has slowed its push to reduce debt in the country and the People’s Bank of China has diverged from the US and not raised interest rates.
This week, China’s central bank reduced the cash reserves that banks must hold to boost lending.
“What’s become clear over the last three or four months is that the US focus is much less on the trade imbalances, on the trade deficit,” Shaun Roache, S&P’s chief economist for Asia-Pacific, said on Friday. “It’s on structural issues in the China economy.”
If China is unwilling to move forward with making those structural changes, there could be a longer impasse, Roache said.
“We expect China wants to move forward,” he said. “Some of the sign posts to look for will be the important political meetings in the first quarter of next year”, such as the National People’s Congress.
S&P expects China’s gross domestic product to grow at a 6.5 per cent rate this year, 6.3 per cent next year and 6.1 per cent in 2020. Moody’s expects the Chinese economy to grow by a 6 to 6.5 per cent rate over the next few years.
Last month, Fitch Ratings cut its GDP growth forecast for China by 0.2 percentage point to 6.1 per cent next year and cut its global forecast by 0.1 percentage point in 2019, saying that the ratings agency does not “expect further policy easing to fully offset the drag from new US tariffs” on the Chinese economy.
In a separate report released on Friday, the International Monetary Fund (IMF) cut its expectations for China’s GDP growth by 0.2 per cent for 2019, citing the ongoing trade tensions.
The IMF said that GDP could decline as much as peak 1.6 per cent in China and close to 1 per cent in the US if the two countries further escalate the trade war and put all proposed and retaliatory tariffs in place.
Watch: Chinese hope for swift end to trade war
“Other economies in Asia, many of which supply to China through global value chains and/or are heavily involved in the automotive trade, would also see their economies slowing substantially, and the peak GDP loss for Asia as a whole would be 0.9 per cent,” according to the IMF.
Future trade flows also appear to be weakening, but it is uncertain “whether softening export orders are the first tangible evidence of US-China trade friction at the macro level that could amplify an ongoing slowdown”, S&P said.
New export orders in September declined at their fastest pace since February 2016, according to the Caixin China General Manufacturing Purchasing Managers Index.
“Although Chinese manufacturing output continued to rise in September, the latest expansion was only marginal and the weakest recorded for nearly a year”, the survey said.
“The slowdown in growth of production coincided with a broad stagnation in total new work received by goods producers. According to panellists, subdued market demand and reduced export sales had weighed on overall new business.”
However, the trade surplus between China and the US widened to US$34.1 billion in September, according to official data released by Beijing on Friday.
HSBC said that China’s export growth surprised to the upside in September, as exports to the European Union accelerated and growth of exports to the US remained stable. Exports increased 14.5 per cent overall in September based on US dollar values, according to HSBC.
“The trade-oriented industries are still vulnerable to further escalation of the tariff war,” HSBC analysts Julia Wang and Aakanksha Bhat said in a research report on Friday. “That said, China’s exporters have some room to manoeuvre given China’s diversified trade relationship, and the policymakers’ active effort to further reduce reliance on the US market.
“Over time, the manufacturing sector is likely to become even more domestically focused, helping to reduce its vulnerability to external headwinds.”
Roache said that trade data could be “quite noisy” in the next few months, particularly as some have tried to time shipments around the implementation of US and Chinese tariffs.
More forward-looking trade indicators have certainly deteriorated, but it may be a few months before more reliable data on the impact of the trade war is available, Roache said.
In its report on Friday, Moody’s said that the latest tranche of US tariffs implemented last month on some US$200 billion of goods will be “credit negative” for Chinese sectors related to commodities and component manufacturing.
It also will have consequences for a variety of US sectors, with the largest exposure through intermediate product channels for construction, transportation, telecommunications, machinery manufacturing and computers and electronics, according to Moody’s.
It will be credit negative for retail and wholesale distributors of furniture, home goods, electronics, hardware and appliances, according to the rating agency.
Export restrictions on technologically advanced products also could lead to disruptions for some US tech companies with extensive involvement in China.
“Curtailing Chinese direct investment in the US technology sector and potential retaliatory response might dampen investment, financing conditions and growth potential of affected sectors and companies,” Moody’s said.
(Corrects “per cent” to percentage point in 10th paragraph.)