▶What Experts Say: Fear of bear

2018.07.11 14:45:09 | 2018.07.11 14:48:32

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Korea equity market touched yearly low this month by tumbling below the bottom line of 2,300p. When we forecasted our 2H18, we have mentioned summer season won’t be pretty. Instead, we weighed higher hopes for 4Q18. This summer, mainly two themes (Trump’s trade policy and Fed’s tightening policy) will continue to pressure index rally causing market to stay mundane. However, this doesn’t mean that bear has already arrived, casting gloom throughout 2H18. We recommend lowering keys for the summer and hope for the rise at the end of the year.

What triggered the bear to wake up in summer? Fed’s tightening policy is one of the reason but obviously, as we all know market is currently in turmoil by uncertainty from Trump’s trade policy. Threat of imposing $200bn worth of tariff on Chinese goods and 25% of tariff on European cars have upset governments and rattled markets. If this becomes reality, global economy will face tremendous loss by rise in price of goods and fall in global trade volume. Especially, Asian countries where most of their economies rely on trade fear of getting direct hit. This noise will continue to pressure down Kospi within the box range. However, the very worst scenario that trade war can lead to may not be the real purpose behind Trump’s trade policy. As he has mentioned numerous times, Trump is not protectionist and tariff lover, the tariff chicken game between the US and China mainly stems from the Trump administration’s desire to protect US intellectual property rights in China. According to the Trump administration, China’s theft of US intellectual property rights is estimated to inflict US$308.0bn worth of annual damage on the US. It appears that President Trump’s ulterior motive behind the unfolding trade conflicts is to induce China to fully open its market. Weighing these factors, it is unlikely that the US’s plan to slap hefty import tariffs on Chinese goods will materialize

On July 6th, the Trump administration slapped 25% tariff on US$36bn worth of imported Chinese goods. Later, the US government declared that it would impose an additional 10% tariff on US$200bn worth of imported Chinese goods, in the event of China’s retaliatory measures. Consequently, concerns over a US-China trade war have been mounting. Should the Trump administration act on its words and impose hefty tariffs on imported Chinese goods, it would reduce global trading volume and eventually slow down global recovery momentum. However, China-made nuclear reactors, boilers, and machinery are the first items to face hefty US tariffs effective from Jul 6, 2018. China represents only 30% of these imported items in the US (List 1 items). Items subject to hefty tariffs center on goods whose components can be sourced from other countries like Mexico, Japan, and Germany. So the first round doesn’t really affect the market.

In trading with China, what the Trump administration essentially wants is to protect the US’s intellectual property rights, in addition to reducing the US’s trade deficit. China proposed that it will increase imports from the US by US$70.0bn (equivalent to a 17.8% cut in the US’s trade deficit with China) in the fields of agricultural produce and energy. However, the proposal was rejected, apparently due to failed negotiations over the US’s demands over China’s full opening and protection of US intellectual property rights. In an attempt to evolve into a global IT powerhouse, the Chinese government is aggressively expanding its R&D budget, whilst the number of patents filed with China’s State Intellectual Property Office is rapidly increasing. This causes Trump to become wary of ‘China Manufacturing 2025’. When it comes to the number of intellectual property rights registered by global leading companies, China tops the list. In terms of major focus areas for intellectual property rights registered, China ranks first in the field of digital communication (newly emerging segment), whilst the US ranks first in the field of computer technology (traditional segment). Against this backdrop, Trump is attempting to raise the US’s guard against the rapidly rising China, which is evolving into a new IT powerhouse on the global stage.

How did Chinese IT companies grow so rapidly to the extent of posing a threat to the US? At present, US IT giants (eg, Facebook, Google, Amazon, Apple, and MS) are struggling in the Chinese market, due mainly to the Chinese government’s strict censorship and Internet regulations. In force since Jan 1, 2017, China’s Cybersecurity Law embodies the Chinese government’s stronger commitment to enforcing Internet regulations. Under the law, critical data must be stored in China, and network providers must disclose technological information on working mechanism to the Chinese government—clauses designed to make it easier for China to obtain global IT firms’ core technologies. Besides, due to the ambiguity of the clauses prescribed in the Cybersecurity Law, as well as randomly conducted censorship and control, US IT giants have difficulty expanding their market share in China Not only US but other countries are also having complaints mounting against China’s theft of intellectual property rights. Global institutions in the US as well as in Europe, Korea, Japan, and Mexico are now opposing China’s Cybersecurity Law. The US government estimates that the damage inflicted upon the US by China’s theft of intellectual property rights amounts to US$308.0bn pa. In a bid to forcefully induce China to open its market fully, Trump is seeking to impose an additional 10% tariff on imported Chinese goods worth US$200bn. We believe the current US-China trade war has arisen from the US’s move to induce China to fully open its market.

This negotiation will take long to reach its conclusion. The hegemonic fight between the two superpowers will likely trigger outflow of funds from smaller markets like Korea. Since the worst scenario of trade war is unlikely to fold, what we can do right now is to wait for the storm to pass.

【The contributions from outside analysts are unrelated to the views of the publisher. They have been contributed in English and the wordings have been mildly edited.】

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By NH I&S Strategy Department Analyst Julie Cho

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