The American Wall Street Journal reported that the impending trade war would create a lot of pressure for Asia, in addition to the expected strength of the dollar after Donald Trump wins the US presidency.
The value of the dollar has partially risen since Trump’s re-election, as proposed massive tariffs, tax cuts and a tough crackdown on immigration are expected to push inflation higher, which could force the US Federal Reserve to keep interest rates higher for longer, a bet that can be seen through the rise. in bond yields.
Higher interest rates on bonds tend to make the currency more attractive, which can give central banks in Asia difficult problems.
Valid risks
According to the newspaper, while China remains Trump’s main target – with threats to impose tariffs of more than 60% on imports from it – the collateral damage may extend across the interconnected economies of Asia.
Asia, excluding China, has become increasingly dependent on American demand, with its share of exports to the United States rising from 11.7% in October 2018 to 14.7% now, according to the US bank Morgan Stanley, and this shift partly reflects the redirection of Chinese exports through countries south of the United States. East Asia.
The newspaper pointed out that the weakness of currencies against the dollar may help soften the blow resulting from the increase in customs tariffs by making exports more competitive compared to American goods, but in return it may also risk accelerating capital flows abroad (to exploit the rises in the dollar and the increase in interest on bonds). US), which represents a special challenge for China, which is dealing with an economic slowdown due to the collapse of its housing (real estate) market.
The yuan depreciated by about 10% against the dollar during the last trade war in 2018 and 2019, but the proposed tariff this time is much higher than last time, so the yuan may need to fall further.
Beijing is likely to take a measured approach, waiting for the actual tariffs to be announced before deciding what to do. The newspaper expects that some decline in the value of the yuan will be allowed, but a sharp decline may not be allowed, given the risks of capital flight from the country.
Currency weakness
Capital outflows may not be a major concern for other Asian economies, but a weak currency would increase inflationary pressures, as it raises the costs of imported goods, especially energy and food, according to the newspaper.
According to the Wall Street Journal, this may impose some restrictions on the degree of monetary easing that can occur in the region (countries are forced to keep interest high in order not to lose investments in their bonds, especially with the rise in interest on US bonds).
With the exception of Japan, most Asian economies are expected to reduce interest rates next year, and even for Japan – which was the last country to emerge from the experience of negative (sub-zero) interest rates – the decline in the value of the yen may force its central bank to raise interest rates more quickly than it is comfortable with. .
The newspaper reported that many Asian central banks have abundant foreign currency reserves, and are likely to intervene to prevent their currencies from declining too quickly. However, capital is likely to flow out of the region if interest rates in the United States remain higher than those in Asia.
According to JP Morgan, Asian stocks excluding Japan have fallen by an average of 13% during periods of dollar strength since 2008.
