Asia’s developing markets brace for prolonged US-China trade war

MANILA, Philippines — Financial markets in developing Asia are adopting a wait-and-see stance on the developments of the trade war between the US and China, but are bracing for worse global trade conditions, economists of the Asian Development Bank (ADB) said.

In a new entry on the Asian Development blog titled “How global trade tensions are affecting Asian financial markets,” economists Donghyun Park, Cynthia Castillejos Petalcorin and Shu Tian said the dimmer business and consumer confidence in both countries are already beginning to be felt in the financial markets of several countries.

“At the moment, with a great deal of uncertainty surrounding the eventual evolution of the China-US trade dispute, the financial markers seem to be rationally taking a wait-and-see stance,” they said in the blog entry.

“Nevertheless, if the dispute escalates significantly, the damage to trade and growth is likely to be tangibly larger. And the damage to financial markets will grow correspondingly,” they added.

They noted that since early 2018, the imposition of tariffs and other trade restrictions by the US against its major trade partners has been met with retaliatory tariffs and measures.

“Especially worrying is the ongoing trade dispute between the US and the People’s Republic of China, the world’s two largest economies,” they said.

China plays a central role in the tightly-integrated regional production network vital to global manufacturing supply chains.  It imports a wide range of intermediate goods from East and Southeast Asia, and assembles them into final products for export to the world, including the US.

 The ongoing US-China trade dispute would adversely affect China’s exports to the US, thus disrupting the regional production network and global manufacturing supply chain.

The economists noted that while the primary and immediate impact of the trade war would be on trade and growth, a secondary effect would be on business and consumer confidence which may, in turn, adversely affect financial markets.

They said the escalating trade dispute likely contributed to the recent weak performance of China’s equity market, as well as those of Hong Kong, China, Malaysia, Singapore, Vietnam and the Philippines.

They, noted, however, that market players still believe the trade war has limited effects on economic growth prospects in developing Asia.

“Current evidence indicates a market perception that the trade dispute may have limited impacts on developing Asia’s economic prospects. This is largely consistent with the limited – albeit expanding – scope of the tariffs and other restrictions so far,” they said.