Trump's Tariff Threat

      China's Response To Trump's Tariff Threat 

China’s response to Trump’s latest tariff threat could hit the US stock market even hard, especially if it targets American companies operating in China, says Oliver Jones at Capital Economics:

Chinese equities were amongst the worst performers today, with the Shanghai Composite dropping 1.8% after the US Trade Representative set out the $200bn of Chinese imports on which it intends to impose a 10% tariff. In contrast, the US S&P 500 has so far fallen by much less. But China’s reaction to the US tariffs could pose a far greater threat to the index in time.

China has yet to announce exactly how it will respond to the US announcement. It could implement further tariffs on its goods imports from the US (it matched the duties on $34bn of goods imposed by the US last week).

But it would not be able to fully match the scope of the US tariffs, since its goods imports from the US amounted to only $154bn last year. And it might be wary of imposing blanket tariffs, as some of the goods it imports from the US will be difficult to source elsewhere.

China can respond by other means, though. It has been suggested that it could deliberately weaken the renminbi – which fell by more than 0.6% against the dollar today. But while we forecast that the renminbi will fall a little further this year, we doubt that the People’s Bank will tolerate, or engineer, a steep fall in the currency. Our forecast for the end of the year is 6.80/$, compared to 6.67/$ now.

Instead, we suspect that China will target US firms operating in China directly...The operations of the majority-owned foreign affiliates (MoFAs) of US multinational enterprises (MNEs) in China dwarf those of their Chinese counterparts in the US, measuring either by sales or employment. And the sales of US MoFAs in China exceeded $350bn in the most recent year for which we have data, which is similar in scale to the US trade deficit in goods with China. So there is considerable scope for China to retaliate by penalising these firms, for example via much more stringent regulatory checks or consumer boycotts.

Despite falling today, US equities have generally proved surprisingly resilient to trade worries, while those in China have suffered considerably. But if China were to target US multinationals directly, then this might well change