KUALA LUMPUR: The escalation of the US-China trade war could add more risks to the global economy, including Malaysia, due to supply chain factor, said analysts.
Abrupt decisions by the US president Donald Trump recently include imposing a 10 per cent tariff on a further US$300 billion worth of imports from China. This means that all US$550 billion of US’ imports from China are subjected to new taxes.
MIDF Research said Malaysia’s exports performance was expected to be quite vulnerable in the current third quarter.
“Based on our regional partners’ trade performance in July 2019, Vietnam’s exports grew 9.3 per cent year-on-year while South Korea’s shrunk 11 per cent year-on-year.
“This could provide cues on what to expect from Malaysia’s exports in the upcoming month,” the firm said.
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said while trade diversion can be beneficial to Malaysia, the potential increase in trade surplus balance with the US could be a cause for concern especially when the US could harp on this issue and put Malaysia as their next target.
“On one hand, Malaysia would benefit from US import substitution in respect of semiconductors. Malaysia would also benefit from China import substitution in terms of natural gas.
“However, in May, Malaysia has been put into Monitoring List by the US Treasury Department and one of the criteria is bilateral trade surplus balance with the US of a minimum of US$20 billion,” he said.
Malaysia’s exports to the US - which accounted for 10 per cent of its total trade - expanded 8.8 per cent year-on-year (yoy) in July, moderating from 11.7 per cent yoy growth recorded in the preceding month.
Exports to China (13.2 per cent share of the total trade) continued to register negative growth at a faster rate of 12 per cent yoy, the worst since August 2016.
Putra Business School associate professor and manager of business development Dr Ahmed Razman Abdul Latiff said Malaysia will have the advantage of receiving more investment from China as the latter’s companies had started to relocate their businesses to Asean countries such as Vietnam, Thailand and Malaysia.
“Our advantage is that we are already part of One Belt One Road initiative where logistic infrastructures are already taking place such as airports, ports and rail roads. Therefore it is easier for China to relocate their businesses here and at the same time able to utilise the logistic network already being built,” he told the New Straits Times.
On yuan's devaluation, Afzanizam said this should lead to the ringgit remaining volatile in the immediate terms.
“The currency (yuan) has always been the trend setter in the foreign exchange market. We have seen such trend before in August 2015 when the currency was devalued from 6.2097 to 6.325 per US dollar on August 11, 2015 with the ringgit seeing a significant depreciation from RM3.9365 to RM3.9735 during the same period,” he said.
The local unit closed 0.3 per cent lower against the dollar yesterday at 4.1910 from 4.1775 recorded on Monday.
IHS Markit Asia Pacific chief economist Rajiv Biswas said the yuan’s slide against the dollar will reinforce negative sentiment in global financial markets towards emerging markets currencies.
“Risk aversion towards emerging markets currencies is also increasing due to the escalating US-China trade war and the recent wave of policy easing by APAC central banks, including the Bank of Korea (BOK), Reserve Bank of India (RBI), Bank Negara Malaysia, Bangko Sentral ng Pilipinas (BSP), Bank Indonesia, Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand (RBNZ).
“The Federal Open Market Committee’s rate cut on July 31 and the latest escalation in the US-China trade war has also opened the door for another round of policy rate cuts by a number of Asia Pacific central banks, with the BOK, RBI, BSP, Bank Indonesia and RBA all having an easing bias in the remainder of 2019,” he said.
Meanwhile, the trade war escalation had also affected Bursa Malaysia yesterday.
The local bourse’s key index lost about one per cent in early trade and hit a low of 1,588.98 before recovering to end 1.38 points higher to 1.611.79.
“It has caused global market sell off with our local market affected too. However, 1,600 is a crucial psychological level where it rebounded strongly from intraday 1.588.98 points to close at 1,611.79 points,” Rakuten Trade Sdn Bhd research vice president Vincent Lau said.