The US-China trade war worsens

Date: May 27, 2019

  • The STI dropped 36 points or 1.1% over the week at 3,169.89;
  • Volume remained low, averaging S$1b daily;
  • Main drag came from the continuing trade war between US and China;
  • Giant China telco Huawei was main target of US action;
  • US consumers likely to be victims;
  • Money is shifted to safe havens like US Treasuries;
  • Singapore’s economic outlook at risk from trade war, MTI cut forecasts;
  • Eagle Hospitality Trust turns in disappointing debut


One of the features of trading over the past year has been the relative resilience of Wall Street to developments on the US-China trade front. This seems to be changing, with the major US indices coming under pressure for most days last week as tensions between the two countries grew. Furthermore on Friday and as the US heads into its Memorial Day weekend, US indices closed higher but still recorded their fifth consecutive week of losses.

A fortnight ago the US banned its companies from exporting to China technology firms and also placed China telecom giant Huawei on a trade blacklist. Last week, Google barred Huawei from updates to Google’s Android operating system. Several other US tech companies then followed Google in suspending business with Huawei, including Intel, Qualcomm, Broadcom and Xilinix. The motive for targeting Huawei is that the US government believes the company engages in espionage for the Chinese.

The upshot of these moves was to shroud markets in uncertainty and cut 36 points or about 1.1% off the Straits Times Index at 3,169.89. Volume remained low – on Friday, 1.3b units worth $977m was traded, below the industry’s ballpark breakeven of $1b.

Tariff war will hurt US companies and consumers

The problem is that raising tariffs on China goods will, according to experts, only hurt US companies and its consumers. The International Monetary Fund (IMF) last week published a study in which it said “tariff revenue collected has been borne almost entirely by US importers”. Extrapolating that further, the IMF found that “some of these tariffs have been passed on to US consumers”, highlighting the rising cost of goods such as washing machines.

“A further increase in tariffs is likely to be similarly passed through to consumers,” found the researchers, which analysed price data from the bureau of Labour Statistics on imports from China.

Similarly, according to a report in the South China Morning Post, a study by economists at the University of Chicago, published in April, found that a 20 per cent tariff on washing machines resulted in a 12 per cent increase in the cost for US consumers. It also drove up the price of dryers, since the products are often bought in pairs.

Tariffs are taxes, and if this latest threat takes effect, this is likely to be the largest tax increase on consumers in American history,” said the US-based Retail Industry Leaders Association when the latest round of tariffs were announced. An open letter from 173 American footwear manufacturers to the White House, meanwhile, read: “The proposed additional tariff of 25 per cent on footwear would be catastrophic for our consumers, our companies, and the American economy as a whole.”

Investors seek safety in US Treasuries

On Thursday last week, US bond yields fell to their lowest point since 2017 as money was moved into safer assets. Three-month yields were higher than 10-year yields, a pricing anomaly known as a yield-curve inversion. When the yield curve remains inverted for weeks, it is seen as an indicator of future recession.

Strategists have previously said that near-term recession is unlikely; however, trade negotiations have deteriorated to the point that they are changing their forecasts. Just this week, Bank of America Merrill Lynch cut its bond-yield forecasts and Goldman Sachs raised its U.S. inflation estimates.

Singapore’s growth also dragged lower by trade war

The ongoing trade dispute between US and China is also hurting Singapore’s economy. Last week the Ministry of Trade and Industry (MTI) announced that growth  in the first quarter of the year came in lower than officially estimated at 1.2 per cent – the slowest quarter growth in nearly a decade – as manufacturing shrank amid global trade tensions and an electronics slowdown.

This was lower than both the MTI’s flash figure of 1.3 per cent growth and the 1.4 per cent expansion tipped by analysts polled by Bloomberg. It is also the smallest annual expansion for any quarter since April-June 2009, when gross domestic product shrank 1.2 per cent from a year earlier.

In its Economic Survey of Singapore, MTI also narrowed downwards its full-year growth forecast to 1.5 per cent to 2.5 per cent, from 1.5 per cent to 3.5 per cent, after “taking into account the performance of the Singapore economy in the first quarter, as well as the weaker external demand outlook”.

“With the recent trade actions announced by the US and China, there is a risk of a further escalation of the trade conflicts between the US and its key trading partners, especially China,” said Permanent Secretary for Trade and Industry Gabriel Lim at a media briefing on Tuesday. “Should this happen and trigger a sharp fall in global business and consumer confidence, investments and consumption could decline, thereby adversely affecting global growth.”

The local market’s latest big IPO, stapled security Eagle Hospitality Trust, debuted on Friday. The counter ended its first day with a US$0.05 or 6.4% loss at US$0.73 from its US$0.78 offer price. It comprises a real estate investment trust and a business trust, with mainly upscale hotels in the US in its portfolio. Singapore-based ARA US Hospitality Trust debuted on 9 May and is also now trading below its IPO price – US$0.865 versus US$0.88.