Latest tariff threat could derail a U.S.-China trade deal

In early May 2019, U.S. President Donald Trump signaled his intention to increase tariffs on US$200 billion of Chinese imports from 10% to 25% later that month, while warning that another US$325 billion of untaxed goods could face 25% duties “shortly”.¹

Market reaction

The equity market’s initial response was significant, as Hong Kong’s Hang Seng Index and China’s CSI 300 Index were down by 3.7% and 6.3%, respectively, at one point in afternoon trading on May 6, local times.¹ In currency markets, China’s offshore renminbi (CNH) tumbled by as much as 1.3% against the U.S. dollar (USD), its most significant drop since January 2016, while the onshore renminbi (CNY) dropped 0.9% to 6.7976.¹

Chinese Vice-Premier Liu He was scheduled to arrive in Washington to meet with U.S. Trade Representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin. Observers originally believed that the goal of this session was to finalize an agreement. A Chinese Ministry of Foreign Affairs spokesman said on May 6 that a Chinese delegation was still preparing to travel to the United States for trade talks, but the spokesman didn’t confirm the arrival date or whether the group would be led by Vice Premier Liu.²

Our views: Hong Kong/China equities

Kai Kong Chay, senior portfolio manager for Hong Kong/China equities, reiterated that a global trade war is not in the firm’s base-case scenario, but recognized that any type of trade negotiation is a drawn-out process, and heightened market volatility may persist.

If trade tensions do worsen, Chay believes that the Chinese government could soften the economic impact of any increase in tariffs by introducing further supportive policies targeted at domestic consumption. Some key measures that have already been implemented include a cut in value-added tax and a reduction in the social security contribution rate.³

Our views: China fixed income

Paula Chan, senior portfolio manager for Asian fixed income, believes that the investment market is undoubtedly in a risk-off mode and could well fall further if China confirms that it will cancel its May 9 trip to Washington—a potential development that would add to the overall uncertainty. That said, given that the U.S. Federal Reserve (Fed) has turned more dovish this year, Chan believes the Fed’s current stance will be more supportive for risk markets compared with late 2018, when the Fed was still increasing rates.

Chan also thinks that the U.S. dollar will remain strong and expects the USD/CNY position could retest the previous high of 6.89 if trade tensions continue to worsen, although she expects the 7.00 level to hold even in this scenario.



1 “China considers delaying next trade talks after Trump’s tariff threat,” Bloomberg, May 6, 2019. 2 “Trump threatens to raise tariffs on China to 25%,” Financial Times, 5/6/19; “China says officials still planning US trip after Trump threat,” Bloomberg, May 6, 2019. 3 “China to cut value-added tax rate for manufacturing, construction sectors,” Reuters, May 3, 2019; “Local Governments Cut Pension Contribution Rate to Lower Corporate Burden,” Caixin Global, May 4, 2019.

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Kai-Kong Chay, CFA

Kai-Kong Chay, CFA, 

Senior Portfolio Manager, Asia ex-Japan Equity

Manulife Investment Management

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Paula Chan, CMT

Paula Chan, CMT, 

Senior Portfolio Manager, Asia ex-Japan Fixed Income

Manulife Investment Management

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