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US, China locked into ‘a game of economic chicken': Moody's
Published in Ahram Online on 07 - 09 - 2019

Moody's released its Capital Markets Research which focused on a leading credit-risk indicator that signals a rising default rate and highlighted the impact of the US-China trade war.
For investment grade Moody's see year-end 2019's average investment grade bond spread marginally above its recent 127 basis points (bps), while with a recent 466 bps, the high-yield spread may approximate 475 bps by the end of 2019.
Meanwhile, Moody's Investors Service's Default Report has the US trailing 12-month high-yield default rate rising from July 2019's actual three percent to a baseline estimate of 3.2 percent for July 2020.
Issuance for 2018's dollar-denominated corporate bonds, IG bond issuance sank by 15.4 percent, recording $1.276 trillion, while high-yield bond issuance dropped by 38.8 percent to $277 billion for high yield bond issuance's worst calendar year since 2011 when it had recorded $274 billion.
According to Moody's, in 2019, dollar-denominated corporate bond issuance is expected to rise by 2.9 percent for IG to $1.313 trillion, while high yield supply grows by 29 percent to $358 billion.
“The very low base of 2018 now lends an upward bias to the yearly increases of 2019's high-yield bond offerings,” read the research.
It also shed light on the US-China trade war as the Trump administration recently imposed a 15 percent tariff on $111 billion worth of Chinese goods imports. This is the first of two fresh tariff waves in the US-China trade war, while the second wave is scheduled for 15 December on the remaining $156 billion worth of Chinese goods imports.
“China is retaliating with tariffs on a total of $75 billion worth of US goods imports, also on 1 September and 15 December. With these latest tariff volleys, the US and China are currently locked into a game of economic chicken. A game of chicken typically ends one of two ways: either one party blinks and gives way, or both parties get hurt. However, at some point it becomes too late for anyone to duck out, and both parties are doomed to mutual destruction. As the tariff volleys intensify, the odds that the US and China are pulled into an economic downturn, and take the rest of the world with them, are rising. At some point, a trade deal will not be enough to avert a global recession,” according to Moody's.
Consumer spending and sentiment will be the key crucial points for how the trade war affects the US economy, according to Moody's research that also said that the consumers are in the crossfire.
“Until now, consumers, who make up the backbone of the US economy, have been largely shielded from the effects of the trade war, as the Trump administration has targeted intermediate goods for tariffs. The 1 September list marks the first large deviation from this trend,” read the report.
Briefing the conflict escalation, the research highlighted that following the imposition of higher duties on existing waves of tariffs in June, trade talks resumed between US and Chinese officials in Shanghai at the end of July. By 1 August, Trump tweeted that all remaining Chinese goods imports would face a 10 percent tariff on 1 September, citing China's lack of agricultural purchases and continued sale of fentanyl as reasons for the tariff hike.
It added that Chinese officials did not issue their own tariff threats in response. However, over the next few days, China's currency devalued to below seven yuan per dollar, helping to keep Chinese exports competitive in the US in spite of the tariffs. Consequently, the US Treasury Department labelled China a currency manipulator, a largely symbolic move.
“However, halfway through August, a string of weak economic reports from abroad coupled with an intraday inversion of the 10-year and two-year yield curve rattled financial markets. Trump issued some trade war relief by announcing that the $300 billion tariff list would be applied in two waves to protect US consumers during the holiday shopping season. Notably, this was the first time that the president admitted that tariffs could hurt American consumers,” according to Moody's.
It added that within 10 days, China issued its tariff retaliation plan which involved that duties of five percent and 10 percent will be imposed on the same dates as the new US tariffs on about $75 billion worth of goods imports. Trump immediately lashed back, raising the threatened tariff rate to 15 percent and announcing that existing tariffs on about $250 billion worth of Chinese goods would jump from 25 percent to 30 percent on 1 October.
“Although the US and China agreed to resume trade talks at the G-7 summit a week before the scheduled tariffs, no progress was made in the interim. Thus, on 1 September, both countries followed through with their tariff threats. As of 3 September, China has filed its third suit against the US with the World Trade Organisation over this latest escalation,” read the report.


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