Market Flash: Mounting concerns over trade

Another week of trade tensions was marked by Washington’s plan to levy 25% import duties on $34bn in Chinese consumer electronic products and to restrict Chinese investments in the US. It may be tricky to assess the exact economic impact from such measures but the knock to confidence is clear enough. The most vulnerable countries are those with the most open economies and equity markets as in Europe and Taiwan and South Korea in Asia. Japan could also be hit as its auto industry represents 8% of its GDP.

China, meanwhile, has other ways to retaliate. The renminbi has already started to fall, losing 1.5% against the US dollar in a week and 5% since mid-April. Beijing could also sell US Treasuries. China owns more than 1,100bn in US sovereign debt and is its biggest foreign creditor. Any massive selling would immediately hit the US dollar. And measures against US companies in China could be taken, stopping them imposing, or being hit by, extra duties. We do not believe, however that China is actually in a position to use these weapons. Its bond market has just been opened up to foreign investors, making it hard for them to be targeted. Beijing also has enough on its plate trying to stop capital outflows without adding to them. And a depressed dollar from sales of Treasuries would also send the renminbi higher, hardly one of China's objectives.