The new customs tariffs for China’s exports to the USA will inevitably also have repercussions on other Asian countries as most of them are closely integrated in the production chains with China. So as “co-producers” of Chinese exports they will be indirectly affected by the lost demand caused by the tariffs depending on the contributions they make to the value added chain.
It is, therefore, no surprise that share prices in Asia’s markets have been under pressure since the end of January. Not only in China have equity prices fallen. There has also been a steep decline in other Asian countries such as Taiwan, South Korea, Malaysia or Thailand.
The dependency of the big Asian companies on direct business with the USA is very limited, but they will suffer from negative second-round effects. There are also direct dependencies in sectors such as electronics, manufacturing industry, automotive components and textiles – companies in these sectors are far more affected than the broad market. It is highly likely that many US companies will in the future circumvent China’s tariffs and purchase directly in the smaller Asian countries. This could also contribute to a share price recovery. But it will probably take several months before delivery and production chains have been converted.
The Asian equity markets’ valuation ratios have improved as a result of the correction, but corporate profits are likely to show signs of weakness for a short time. However, the ongoing uncertainty is likely to stand in the way of a sustainable recovery in the Asian financial markets.
On the exchange rate side we assume that the yuan will continue to lean towards weakness, but that China will intervene decisively to counter any excessive depreciation and in extremis could even decide to introduce capital movement controls.