Amid stalled trade talks with China, JP Morgan has now lowered their guidance for Chinese equities to neutral, based on their assumption that the trade war with China will worsen over the course of the next year, negatively impacting the Chinese economy over the course of 2019 and potentially beyond.
As of last week, a 10% tariff on Chinese imports went into effect, and President Trump has indicated that they would rise to 25% next year. The US currently imports about $200 billion US in goods every year, and the tariff’s impact on that trade will produce additional impacts for the Chinese economy.
Further, the estimated impacts assume that there are no further actions taken by either side. If either the US or China become even more aggressive, there would of course be even more impacts to both economies.
The Chinese, for their part, may continue to let their currency slide in value, intentionally – by letting the Yuan weaken relative to the dollar, Beijing would be able to offset some or all of the tariff’s impact on prices. It would also likely mean that Chinese goods would probably flood a number of global markets, owing to the newly-lowered costs, potentially leading to even more destabilization.
There are dangers for China in this strategy as well – the Chinese government largely controls the value of their currency, but as with any currency, Beijing can’t control every economic factor that determines the value of their currency and the strength of the economy.
