A white paper published by China last month revealed that the country can economically withstand the effects of a long, drawn-out trade war with the United States, but it took extra measures for preparation when the Chinese central bank cut the amount of reserves held by banks.
The move was announced on Sunday when the People’s Bank of China instituted a 100 basis points cut to the reserve requirement ratio for a majority of banks, resulting in a capital injection of 750 billion yuan or $109.2 billion to help shore up the banking system. The central bank confirmed that this latest policy move was done in accordance with the pace of the economy as opposed to an accommodative move.
Nonetheless, the words alluding to resiliency may be just that, according to some experts and that the situation is more dire than China is leading the markets to believe.
“China is probably facing its worst period since the global financial crisis. All news is against it,” said Fraser Howie, an independent analyst who has covered China and its financial system.
“They certainly want to play down any talks of panic or near panic … but they’re clear it’s not business as usual in China,” Howie added.
Related: Japan ETFs Brush Off Escalating Trade War Fears
JP Morgan Predicts Trade War Goes ‘Full-Blown’
If the current tariff-for-tariff tradeoff between the United States and China resembles a mere scuffle, multinational investment bank J.P. Morgan expects it to escalate into a full-blown trade war. Just recently, the firm lowered its ratings for Chinese stocks from neutral to overweight, citing that the trade wars will heighten to a point where its economy is substantially impacted.
“A full-blown trade war becomes our new base case scenario for 2019,” emerging market strategist Pedro Martins Junior said in a note. “There is no clear sign of mitigating confrontation between China and the US in the near term.”
Last month, U.S. President Donald Trump announced his administration was moving forward with imposing a 10% tariff on $200 billion worth of Chinese goods that includes a step-up increase to 25% by the end of the year. The administration moved forward with the tariffs despite both economic superpowers in the midst of scheduled trade talks to ease tariff tensions.
In less than 24 hours, China responded with $60 billion worth of tariffs on U.S. goods beginning on Sept. 24. The new round of tariffs from China are said to affect a list of 5,207 products within a range of 5 to 10% as both the U.S. and China have already slapped each other with tariffs worth $50 billion total.
Trade Wars Not Affecting U.S. Yet
Just recently, the Federal Reserve hiked the federal funds rate by 25 basis points as a result of a strong U.S. economy, but market analysts are prognosticating that an escalation in the trade wars could give pause to the Fed’s current rate-hiking policies moving forward as they could potentially stymie economic growth. However, despite the growing concerns of trade wars, Fed Chairman Jerome Powell said its wide-ranging effects have yet to penetrate the economy and cause any disruptions.
“I think if you look at the aggregate performance of the U.S. economy, it’s hard to see much happening at this point,” said Powell. “You can look at it the other way and ask ‘If all the tariffs that have been announced are applied, what would be the affect at the aggregate level?’ They’re still relatively small.”
Powell did mention that loss of business confidence that could reduce investor capital and also the long-term effect on the financial markets are reasons that could bring trade wars under heavier scrutiny by the Federal Reserve. While Powell was quick to dismiss any short-term effects the tariffs have had thus far, he did mention that its long-term effects are cause for concern.
“More than anything, I would worry in the longer run where this is going,” said Powell. “If the end place we get to is lower tariffs, then that would be good–trade generally supports productivity and higher incomes.”
“If this inadvertently goes to a place where we have widespread tariffs for a long time in a more protectionist world, that’s going to be bad for the United States economy.”
Compounding the U.S. China trade wars is that no resolution appears to be in sight as a Bloomberg report revealed that talks were less than cordial between Secretary of State Michael Pompeo and Chinese officials during a meeting in Beijing.
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