Crypto assets have been discussed in the mainstream media for almost two years now and in that short period of time, we have seen rapid change in the sub-culture spawned out of them, adoption by some commercial entities and adaptation of laws across the globe.
In this article, Thomas Anthony Hulme explores the existing laws that affect the crypto asset markets in both China and South Korea, compares each of them and then applies the law to the current crypto asset market, whilst also briefly discussing Facebook’s recently announced crypto asset, Libra.
The law in China
The primary regulator to monitor crypto asset regulation in China is the People’s Bank of China (the “PBOC”). Since the rise in interest and respective price of crypto assets towards the end of 2017, different concepts and activities have been created by the crypto asset market participants. Some of these activities include the creation and issue of different types of crypto asset such as Security Tokens, Stable Coins and Exchange Coins.
The concept of crypto asset mining is a regular and profitable (for some) activity, which involves owners of powerful computers connected to particular blockchains and mining particular crypto assets.
The increase in popularity has led to the creation of a large number of crypto assets with speculative prices, which were then traded on crypto asset exchanges in exchange for FIAT currency or another crypto asset.
These activities encouraged the PBOC to regulate the market. It is important to distinguish what exactly is prohibited in China and what is not.
Initial Coin Offerings (ICO) or activities undertaken for fundraising purposes with a crypto asset element are prohibited. This is due to widespread criminal activity and fraud, which accompanied the ICO trend in early 2018. Issuing new crypto assets is not prohibited, however, issuing them in exchange for mass funding is.
Financing activities and trading relating to crypto assets are also prohibited. This includes crypto asset exchanges, which allows for the public purchase and sale of crypto assets for FIAT currency; this is due to the similarities between conducting activities in this way and typical financial trading activities.
The PBOC has provided guidance on crypto assets generally but greatly in respect to Bitcoin alone. Crypto assets are not banned and the government appears to be encouraging the development of blockchain technology associated with crypto assets but putting much emphasis on the application of the technology as a centralised piece of technology.
The government has made a certain distinction between “sovereign” crypto assets, which the PBOC would wish to issue, and “non-sovereign” crypto assets.
The law in South Korea
South Korea’s approach is not as stringent as China’s; however, they still have a couple of important laws to note.
Firstly, much like China, ICOs of any type are prohibited for similar reasons as China. Crypto asset trading is not banned, however, there are laws that state that crypto asset purchasing and trading must not be leveraged and therefore the crypto asset exchanges cannot offer derivative crypto asset products with built-in leverage or margined accounts.
The concept of crypto asset mining is a regular and profitable (for some) activity, which involves owners of powerful computers connected to particular blockchains and mining particular crypto assets.
South Korea’s securities laws are much like the ones adopted by the majority of countries in the world who have a form of crypto asset regulation; if the crypto asset acts as a security, it will be treated as one.
How does each jurisdiction compare?
The laws in each country are not too dissimilar. The most important difference is the trading activity, which is lightly regulated in South Korea, in comparison to China where it’s totally banned.
In my view, this is linked to China’s approach to ICOs and the string of illegal and anti-consumer friendly activities that happened as a result of the fallout of the ICOs.
However, as crypto assets are growing in popularity generally around the globe, it appears that the masses are beginning to adopt the idea of crypto assets.
China will need to monitor this progression as if they continue to ban crypto asset exchanges and trading, it may stun growth in China’s crypto asset market.
The future of crypto assets
The crypto asset market has developed and grown since the hype, which ensued in late 2017. There is now a better understanding and a clear distinction between private blockchain, public blockchain and crypto assets with particular characteristics.
It is a growing trend that crypto assets are used for their fundamental value - the blockchain technology as a piece of financial technology to allow access to digital payments to a larger portion of the world that currently has access to it and the transfer of wealth with minimal delay and cost.
The first major example of this was JP Morgan announcing that they intend to produce an internal, private blockchain crypto asset, which will be available for clients to transfer wealth internally more efficiently whilst reducing general overheads.
More recently it was announced that Facebook is to release their own crypto asset named Libra; Libra will be a crypto asset used to send wealth in a much more accessible way.
Libra will allow users of certain messaging apps, such as Facebook and WhatsApp, to send Libra over messages as if it were a picture.
It is probable that with the announcement of Libra and the interest the Chinese people appear to have in the announcement, this concept of Libra could be replicated in China and a similar crypto asset could be sent across their messaging app WeChat.
It will be priced in US Dollars however its price will be derived from a basket of investments and securities. Libra will essentially be an Exchange Traded Fund, which can be held as a digital asset and transferred with greater accessibility and liquidity.
The intention is that Libra will be able to be used in exchange for real products from the business that wish to prescribe to its infrastructure, therefore it will need to be bought and sold by providers but also exchanged on an exchange.
If this is an example of the direction crypto assets are heading, China may need to re-evaluate their approach to exchanges and trading crypto assets in order to facilitate this movement and growth.
It is probable that with the announcement of Libra and the interest the Chinese people appear to have in the announcement, this concept of Libra could be replicated in China and a similar crypto asset could be sent across their messaging app WeChat.
Like South Korea, allowing exchanges to operate, but under greater scrutiny and rules, is likely to be the best approach moving forward, contemplating the changes in the crypto asset industry to allow its progression to the point where crypto assets are just another asset in everyone’s day-to-day life.
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Trump’s escalation of the trade war is going to trigger a “chain reaction of negative events around the world,” says Nigel Green, the founder and CEO of deVere Group.
This warning comes as global markets are in turmoil as Donald Trump’s administration announced a long list of new products that tariffs on $200 billion worth of goods from China will be levied against.
Mr Green comments: “Trump’s escalation of the trade war between the world’s two largest economies is going to trigger a chain reaction of negative events around the world.
“It is going to lead to higher inflation in the U.S, as import tariffs raise the cost of imported goods while domestic producers find that they can increase their prices as foreign competition weakens. This means interest rates will be hiked and the dollar will go up.”
He explains: “China’s cheap goods have helped keep prices, and therefore US and global inflation, low.
“To counteract increasing inflation, the US Federal Reserve is even more likely to raise interest rates. A jump in rates will, of course, strengthen the dollar.
“A stronger dollar also increases stress in emerging markets, many of which have borrowed heavily in recent years in dollars and who now find interest and capital repayments on these loans have shot up in local currency terms. In addition, emerging markets are particularly vulnerable to a downturn in exports resulting from a rise in quotas and import by the US, given that exports are a key driver of growth for many under-developed countries with China the most obvious example’.
Mr Green goes on to say: “Trump’s trade war is a masterclass in self harm for the US and global economy.”
The deVere CEO stated last week that investors must now avoid complacency and ensure their portfolios are properly diversified to mitigate risks and take advantage of potential opportunities that all bouts of market volatility bring.
He said: “Investors need to brace themselves for months of heightened posturing from the different parties, which is likely to increase market turbulence.
“And as Trump potentially marches off to a trade war, a good fund manager will help investors sidestep the risks and embrace potential opportunities.”
(Source: deVere group)
Whether you’re looking for a (last-minute) summer holiday destination, a cultural city break or a foodie weekend getaway - Malta has it all! With history that spans 7,000 years, unique prehistoric temples, medieval towns and some of the oldest architectural designs in the world, on top of its breath-taking landscapes and clear blue waters, the small Mediterranean island is richly packed with things to do, see and discover.
The capital Valletta is brimming with grand architecture, hidden restaurants and picturesque back streets, but drive 8 kilometres inland and you’ll find yourself in the chic residential area where Corinthia Palace Hotel is located. Peppered between traditional Maltese houses, the hotel is far removed from the island’s touristy areas, whilst remaining perfectly connected.
The General Vibe
Opened in 1968, the 147-room hotel is the original flagship of Corinthia Hotels – a collection of five-star hotels worldwide. Stepping into the spacious marble foyer, you’re greeted with a glass of fresh orange juice and the instant feel that the staff will do their best to help you with any request. The rooms are traditional, elegant and they all come along with a balcony overlooking the hotel's extensive gardens.
The Restaurants
With three restaurants to choose from – Asian, fine dining or a relaxed al fresco restaurant serving summer favourites, Corinthia Palace Hotel caters to most tastes.
With a menu that is a colourful mix of dishes from Thailand, Japan, Singapore and China, the award-winning Rickshaw restaurant takes you on a gastronomic journey to the Far East. From pork, cabbage and water chestnut gyozas, through to Singaporean frog porridge – the food is exotic, innovative and absolutely mouth-watering.
For an authentic Mediterranean meal cooked with sustainably sourced, local produce, or a quintessentially British afternoon tea, cosy up in the elegant Villa Corinthia restaurant, housed in a stunningly restored century-old villa.
If you’re spending the day lazing around the pool, have lunch in Corinthia Palace’s al fresco venue - the Summer Kitchen. Set within the hotel’s lush gardens and overlooking the pool, the restaurant serves anything from fresh salads, grilled fish and meat, through to scrumptious pasta dishes and pizza cooked in their brand new wood-burning oven.
The Athenaeum Spa
With its stunning outdoor pool that calls for a relaxed afternoon of soaking up the sun with a good book and a cocktail in your hand and a spa that offers everything from a Jacuzzi and a sauna through to a steam garden, Corinthia Palace is the kind of hotel that you’ll probably struggle to leave after breakfast. The extensive list of treatments and procedures at the Athenaeum Spa includes manicure, pedicure, bridal and evening make-up, tanning and ‘healthy glow’ treatments, as well as rejuvenating massages, anti-ageing, body exfoliation and detoxifying body wrap therapies.
And if you get a sudden burst of energy after a day of relaxation or like to start your day with a workout, the gym at Corinthia Palace boasts state-of-the-art cardio equipment, a resistance area and a studio with morning and afternoon classes, including pilates, yoga, and more. Private training sessions and tennis lessons with a qualified coach are available too in the hotel's own tennis court.
Rates at Corinthia Palace Hotel start from €180/night withbreakfast for a double room and from €330/night with breakfast for a suite. For more information, please go to: www.corinthia.com/palace
In January this year, Trump slapped tariffs of up to 30% on imports. In March, he added tariffs of 25% and 10% on imported steel and aluminium respectively. China and the EU retaliated with actual or threatened tariffs on hundreds of imported US products, but Trump hit back with a threat of further taxes.
Companies and investors caught in the cross-fire between tit-for-tat trade wars are concerned because:
- The US and China appear to be taking a hard-line approach to recent trade hostilities and so, escalation is possible and the economic consequences could be worse.
- The warring parties (EU, US, and China especially) are dominant economic powerhouses and their actions affect global and domestic GDPs, as well as the fortunes of millions of companies and people around the world.
- History tells us that trade wars have few, if any, winners.
The Financial Times suggests that a global trade war could knock 1-3% off GDP over a few years. They also reported that whereas capital expenditure (capex) by some US companies had risen, a Credit Suisse survey suggested that many businesses remained more hesitant about investing. Some have opted to hold onto their mountains of cash because of the uncertain outlook caused by trade war and geo-political tensions.
Capex
With reduced capex comes reduced employment and reduced productivity gains. Inefficiency eats into profit margins and competitiveness, lowering company values and economic growth, which leads to less capex, and so the vicious downward spiral continues.
Some companies might manage the situation by shifting production overseas, but in the process losing exported jobs. Relocation would also consume investment and time to raise production and adjust to the new dynamic, and in the meantime, the profit margin would diminish.
Uncertainty
A great drag on companies’ profits and a disruptive influence on supply chains, is the uncertainty that trade wars create. When will they end? Will they escalate? Which sectors will be affected and to what extent?
Chinese parts, for example, relied upon by US manufacturers, could become unavailable, or they might not. Just a month later, the US is backpedalling on its April 2018 ban on selling US company parts to Chinese company ZTE, a reversal that will cause turmoil among exporters and importers that must now reverse their plans to circumvent the ban.
Governments might retaliate to their counterparts in other ways. In 2016, China shut down Korean companies operating in China in retaliation to South Korea's actions. Hyundai and Lotte (both Korean) were denied car parts from local suppliers and 100 Lotte shops were closed. Countries have been known to expropriate foreign companies’ assets.
In the aftermath of the 2007 global financial crisis, investors stood on the sidelines for years with their pockets full of cash until asset prices and markets stabilised from the shock. The same hesitation could occur during trade wars and other geopolitical crises.
Higher funding costs
We have already seen some shareholders switching out of volatile equity investments into safer havens such as government bonds. That is likely to raise yields for borrowers, especially for high-yield borrowers, increasing interest payments and lowering corporate profits.
Currency risk
Investors’ flight to safety could significantly impact exchange rates as they dump risky currencies (such as those of some emerging market countries) and buy safer ones (such as USD), causing currency losses for companies that have not hedged their currency risks. Conversely, companies with a depreciating currency could benefit – for example, from the increase in value of overseas earnings that are reported in the depreciating currency. Those gains could be offset more or less, by higher import costs.
The IMF reckons that (without trade retaliation) the USD could appreciate by 5%. Appreciation of the USD could accelerate, causing further rises in costs of USD-denominated commodities, such as oil.
Commodity prices
Higher oil prices would adversely affect heavy users of energy, such as aviation, motoring, and manufacturing sectors. For example, American Airlines’ share price went down 6% after it expected $2.3 billion in additional fuel costs.
Winners and losers are expected from conflicts, such as trade wars, but sometimes the outcome can be unexpected.
Unintended consequences
American company Metal Box International was going to shut down after its sales had been decimated by cheap imports, but Trump’s protectionist trade policies changed its mind.
Metal Box, and other US manufacturers of products slapped with US import duties, should have seen its market sales rise as it filled the market gap created by reduced imports.
Anti-subsidy and anti-dumping duties imposed by the US on Chinese imports did result in a pick-up in Metal Box’s sales, but it was short-lived, because, according to the company, consumers and retailers feared trade war disruption so they stocked up pre-emptively. The company increased its capex in anticipation of higher sales volumes, but the machinery now sits idle.
The company’s hopes for business success were set back further by tariffs imposed by Trump on imported steel, because the company will now probably have higher costs of steel raw material.
Stagflation and GDP
Moody’s notes that workers employed by US business sectors that use steel far outnumber those employed in its manufacture, by around 5:1. That is also the ratio of job losses: gains predicted by Trade Partnership as a consequence of US tariffs.
“Protectionist trade policies, including tariffs on raw-material imports, could exacerbate these inflationary pressures [caused by global economic growth], running the risk of tighter margins and possible supply-chain disruptions in the manufacturing sector,” said Moody’s. Inflation could necessitate faster monetary policy tightening, i.e., more interest rate hikes. That would raise companies’ costs, denting their profits.
Sustained high interest rates and inflation could stymie global economic growth and create stagflation. A March survey by BoAML found that 90% of investment managers thought protectionism would cause either inflation or stagflation, and protectionism was investors’ primary fear.
Whereas some steel users will have the ability to pass on rising metal costs (either contractually, or through their brute forces of negotiating or price-setting), smaller companies will have to absorb higher input costs to maintain market share. For the former, profit margins will be protected, for the latter, they will contract.
Where investors are concerned, borrowers also need to be concerned, because the fortunes of both are intertwined. When investors become risk-averse and hoard cash, borrowers lose access to capital or pay a higher cost. Reduced profits ultimately hurt workers’ incomes, the economy’s GDP, and investors’ return on investment.
Unchecked, stagflation could deteriorate into recession, leading to job losses, reduced investment and further corporate financial distress. With many companies and individuals already highly geared with debt, a recession or stagflation that reduces income and the ability to service debt interest obligations, could trigger a wave of personal bankruptcies or corporate insolvencies, reducing GDP further and leading potentially to recession.
Companies might have to lay off employees to remain profitable or in business. Where last-in-first-out stock valuation accounting policies are used, profits will be quickly dented, reflecting higher stock costs. Cashflow will fall because of more expensive stock, or else companies will try to stretch their trade creditors’ goodwill even farther. Companies that can control their working capital interactions are more likely to survive than those with poor credit, stock, and trade creditor management practices.
Credit insurance
Companies’ trade credit insurance premia might increase, or be stopped of their financial position deteriorates. Credit insurance providers stopped providing credit protection to Woolworths’ suppliers, meaning it had to pay in cash, exacerbating the strain of its debt pile and leading to its administration. Without credit insurance, factoring of invoices, and conventional credit from suppliers, Toys R Us had to buy its games and toys as they were delivered. Without cash, a company’s shelves soon begin to empty, payments become overdue, staff are not paid, and operations grind to a halt, i.e., bankruptcy or insolvency ensues.
Gearing
Companies that have low gearing or operate in strong cashflow sectors such as fast-moving consumer groups, might withstand a cash crisis by raising additional debt, but companies already creaking under a mountain of debt and/or debtors, are more likely to break under the strain, and relatively sooner.
Almost 2/3 of aluminium and 1/3 of steel are imported by the US. Caterpillar and Boeing were caught in the firing line between the US and its trading partners because of their heavy and critical reliance on metals, and their international operations. Investors realised the negative implications so both companies’ shares dumped, sending their prices down more than 5%.
Winners and losers
Shareholders in US steel makers made a mint from US tariffs, US Steel and AK Steel, for example, rose 6% and 10% respectively. In the longer-term, US steelmakers could lose out from trade wars, however, for example, if manufacturers relocate, cut back on domestic production volumes, or use alternatives materials.
Other winners in the latest trade spat are companies that are more inward-looking or resilient to tit-for-tat retaliation, such as healthcare and BioTech. For example, shareholders in Johnson & Johnson, Merck, and Pfizer were some of the biggest winners in March. Other defensive regions and sectors include: Australia, Brazil, parts of Europe and Japan, and sectors such as telecoms, utilities, insurance, and retail. Countries whose GDP depends heavily on exports to the US, such as Mexico and Canada, are likely to suffer most from US protectionism.
Conclusion
Companies are in the cross-fire between trading countries, so they need to, above all, pay close attention to their cash flow and their survival over the longer term, even at the expense of near-term profit and revenues. They also need to monitor a changing geopolitical landscape and adapt accordingly. At such times, a company is likely to soon find out how committed banks and other investors really are to the company’s survival.
Website: www.permjitsingh.com
Investors need to avoid complacency as Trump potentially marches off to a multiple front trade war, warns deVere Group’s boss.
The warning from Nigel Green, founder and CEO of deVere Group come as worries of a trade war between the US and China have further increased, causing markets to slide around the world. The fears intensified after it emerged that President Trump is preparing a new crackdown on Chinese investments in America.
Mr Green comments: “Up until now the markets have been remarkably nonchalant regarding the escalating tensions between the world’s two biggest economies over the last couple of months.
“However, as the Trump administration sets out increasingly aggressive restrictions on what they see as China’s unfair trade practices, and because Trump is on the trade offensive on many fronts, including against traditional U.S. allies, the worries are now becoming much more focused.”
He continues: “There really hasn’t been any major asset class or any part of the world Trump hasn’t spoken out against in recent weeks. As such, if investors are serious about growing and safeguarding their wealth, complacency should no longer be an option. Vigilance is crucial.
“Now is the time for investors to ensure that their portfolios are properly diversified.
“As history teaches us, diversification is the best way an investor can position themselves to mitigate risks - and also, importantly, to benefit from the buying opportunities that all bouts of market volatility present.”
Mr Green goes on to add: “It is likely that Mr Trump’s bombastic tactics are just negotiating strategies and he will not totally overhaul and/or disrupt trade patterns.
“However, due to the scope and depth of the potential fall out of a U.S.-led trade war on international trade and global growth, investors should be actively looking to review and, if necessary, rebalance their portfolios.”
The deVere CEO concludes: “Investors need to brace themselves for months of heightened posturing from the different parties, which is likely to increase market turbulence.
“And as Trump potentially marches off to a trade war, a good fund manager will help investors sidestep the risks and embrace potential opportunities.”
(Source: deVere Group)
Last week, stock markets fell globally in the wake of US President Trump's latest tariffs threats to China. Donald Trump threatened to put tariffs on an extra $200bn (£141bn) of Chinese goods, further fueling the prospects and worries of a trade war.
This week Finance Monthly set out to hear Your Thoughts on the potential for an international trade war, gaging the opinions of experts and professionals around the world.
We asked them: What do you think about this? How will this change things internationally? What might be the short-term reactions and impacts? What about the long term? How will you be affected? How will small businesses be affected? Who will benefit from what's to come? Is this a good strategy? What are the political and social repercussions?
Miles Eakers, Chief Market Analyst, Centtrip:
Investors are right to be concerned as Wall Street futures dropped by almost 2% following Trump’s threats to impose more tariffs. Any retaliation by Beijing is likely to fuel the escalating trade war with Washington, which will in turn have a negative impact on equities and increase risk aversion.
Investors are not the only ones troubled by the current situation. The world’s largest superpowers’ shift towards protectionism has global ramifications. International companies may grow less competitive due to tariffs and the cost of raw materials purchased overseas could rise by 10–20%. It’s highly possible that any further action from the US or China could put an end to the current 10-year bull market run.
Kasim Zafar, Portfolio Manager, EQ Investors:
An all-out trade war is unlikely and we believe this will be avoided in favour of mutually agreeable changes on both sides.
The world last entered trade wars on this scale early during the Great Depression. The Smoot-Hawley Tariff was entered into US law in June 1930, about 8 months after the “great crash”. There are mixed opinions on whether the tariffs added to the economic depression or only slowed down the ensuing recovery. But it is generally agreed the tariffs themselves were not the main cause of the Great Depression
Today there are few, if any, of the conditions that presaged the Great Depression. But the world is a different place today compared to the 1930’s. The most significant difference is the interconnected nature of global supply chains that have been built by companies in the post-War era. Abrupt changes along the supply chain in terms of physical supply or associated cost will have immediate impacts on the total costs of production. Companies are not charities, so if the cost of production goes up, so too will product prices on the shelf.
The impacts will differ between companies and across nations dependent upon:
- the specific tariffs enforced;
- the speed with which reciprocal tariffs are imposed, if at all; versus
- the speed with which companies can redirect their supply chains and adjust their customer demand bases; and
- the proportion of tariffs absorbed by companies within their profit margins to remain competitive against local and international peers
The UK runs a goods deficit of over £130 billion per annum of which about 10% is with the US directly. So for the average UK consumer, the direct implication of US originated tariffs on items we buy is fairly limited in scope. The impact of tariffs on things we sell is limited also with only about 10% of UK exports heading for the US directly. The bigger risk we face is the secondary impacts from companies and countries that are impacted to a higher degree:
- The tariffs would see a fall in global trade and excess production capacity around the world.
- This would undoubtedly be deflationary for the rest of the world and inflationary for the US.
- So in the short term, it could actually mean lower prices for UK consumers as companies try to boost demand for the excess capacity and high inventories by lowering prices.
- However, with the US representing about 20% of developed market trade, any significant drop in sales to this region will create severe negative economic effects elsewhere.
- This means companies would likely downsize in the face of lowered current and expected future demand. The interconnected nature of global trade means the impact of downsizing will ripple across countries.
- Jobs will be at risk and the UK will not be immune.
- Specific items that are the subject of reciprocal tariffs by the UK or EU towards the US would see price increases. Currently this appears to be focused on jewellery, whiskey and rear view mirrors, although orange juice, denim and motorcycles and are also in the firing line!
Carlo Alberto De Casa, Chief Analyst, ActivTrades:
The trade war escalation is unsurprisingly scaring the markets. The main reason for this is actually the belief that this is only the beginning of the escalation, as China has already clarified that it will reply to US tariffs with its own. Of course, this could have many impacts. In the short term, US companies which are importing will have to pay more, while advantages for US producers will be positive, even if that’s a much smaller proportion overall. But what is scaring markets is definitely the long-term scenario, that the trade war will grow to affect more economical sectors.
This won’t only affect the big companies, it could also have a serious impact on smaller ones and retail consumers. A typical example to explain this is something like the beer can, the cost of which will rise due to the aluminum tariffs. The implications can be far wider than what you might originally think.
It is difficult to say whether this is a good strategy; we can surely affirm that this is a risky strategy as you can’t completely predict or control the effects it will have, especially in the long term. The ball is now firmly in the court of those who trade with America.
There’s little certainty that this will help drive the US economy. If this is the effect wanted by Donald Trump, then you have to consider that the tariffs which will be decided by other countries are what will drive the results. It could at best create jobs in one sector, but the additional jobs generated will likely result in a loss in other sectors. Overall, it’s hard to see this policy accomplishing its goals.
Bodhi Ganguli, Chief Economist, Dun & Bradstreet:
Rising protectionist measures from the US government are creating significant uncertainty for global businesses and adding to cross-border risks. After some optimism that the US hardline stance on tariffs was softening a bit, new announcements from the administration have re-ignited fears that the ongoing skirmishes could blow up into a full-fledged trade war, particularly between the US and China. The latest announcement came from President Trump on 22nd June when he threatened to impose new tariffs of 20% on auto imports from the EU unless the EU removed tariffs on US goods. It should be noted that, some of these EU tariffs on US exports went into effect earlier the same day; these were retaliatory tariffs in response to US tariffs already implemented on steel and aluminum (most trading partners were exempted, except the EU, Canada and Mexico). Equity prices of major European automakers dropped immediately following the announcement, highlighting the intricacies of global supply chains and their dependence on smooth trade flows between nations. In fact, all major global stock markets have seen episodes of selloffs in the past few weeks in reaction to worries that trade restrictions are rising.
The latest round of proposed US barriers to free trade have come with a pronounced inclination by the US to move away from traditional norms of multilateralism based on the WTO principles, including measures specifically directed at longtime allies like the EU and Canada. This has the potential to spill over into other areas of geopolitical risk, and pose added headwinds to the global economy. While the extent of the EU retaliation is modest so far, other countries are stepping up or planning ‘tit-for-tat’ tariffs against the US. India just hiked tariffs on a selection of US goods, while similar Canadian tariffs are scheduled to come into effect on 1st July. Of course, the biggest risk of disruption comes from the US-China spat; earlier the same week, China threatened to hit back with a combination of quantitative and qualitative measures after President Trump ordered his team to identify USD200b in Chinese imports for additional tariffs of 10% with provision for another USD200b after that if China retaliates. The global economy is still expanding; although divergences in policy are signaling desynchronization in the near term, it can still withstand some fluctuations in equity indexes. But the bigger underlying risk is that if the trade rhetoric does not die down, or if it becomes a significant headwind, stock markets will face sustained downward trends as investor confidence is impaired, eventually leading to a spillover into the real economy.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
With the ongoing spat between the United States and China, which seems to be only getting uglier, Katina Hristova explores the history of trade wars and the lessons that they teach us.
Trade wars date back to, well, the beginning or international trade. From British King William of Orange putting steep tariffs on French wine in 1689 to encourage the British to drink their own alcohol, through to the Boston Tea Party protest when the Sons of Liberty organisation protested the Tea Act of May 10 1773, which allowed the British East India company to sell tea from China in American colonies without paying any taxes – 17th and 18th century saw their fair share of trade related arguments on an international level.
Boston Tea Party/Credit:Wikimedia Commons
Trade wars were by no means rare in the late 19th century. One of the most infamous examples of a trade conflict that closely relates to Donald Trump’s sense of self-defeating protectionism is the Smoot-Hawley Tariff Act (formally United States Tariff Act of 1930) which raised the US already high tariffs and along with similar measures around the globe helped torpedo world trade and, as economists argue, exacerbated the Great Depression. As a response to US’ protectionism, nations across the globe began striking each other with an-eye-for-an-eye tariffs – countries in Europe put taxes on American goods, which, understandably, slowed trade between the US and Europe. As we all know, the Depression had an impact on virtually every country in the world – resulting in drastic declines in output, widespread unemployment and acute deflation. Even though most countries began to recover between 1932 and 1933, the world was hit by World War II shortly after that. In 1947, once the war was over, the World Trade Organisation (WTO) was established - in an attempt to regulate international trade, strengthen economic development and hopefully, avoid a second global trade war after the one from the 1930s.
Schoolchildren line up for free issue of soup and a slice of bread in the Depression/Credit:Flickr
Another more recent analogy from the past that could be applied to the current conflict between two of world’s leading economies, is the so-called ‘Chicken War’ of 1963. The duel between the US and the Common Market began when European countries, feeling endangered by US’ new methods of factory farming, imposed tariffs on US chicken imports. For American poultry farmers, the Common Market tariffs virtually meant that they will lose their rich export market in West Germany and other European regions. Their retaliation? Tariffs targeting European potato farmers, Volkswagen campers and French cognac. 55 years later, as the Financial Times reports, the ‘chicken tax’ on light trucks is still in place, predominantly paid by Asian manufacturers, and has resulted in enduring distortions.
President Trump may claim that ‘trade wars are good’ and that ‘winning them is easy’, but history seems to indicate otherwise. In fact, a closer look at previous examples of trade conflicts seems to suggest that there are very few winners in this kind of fight.
For now, all we can do is wait and see if Trump’s extreme protectionism and China’s responses to it will destroy the post-World War II trading system and result in a global trade war; hoping that it won’t.
China has been beating its currently forecast growth rate. According to official data, China's economy grew at an annual pace of 6.8% in the first quarter of this year compared to the same period in 2017.
Over the past year China has seen national economic growth that is unparalleled and unprecedented worldwide. This week Finance Monthly set out to hear Your Thoughts on the following: Is China's economic growth rate on the rise? How resilient can Chinese business maintain current growth? Will consumer demand continue to fuel its growth spurt?
Olivier Desbarres, Managing Director, 4xGlobal Research:
With mounting concerns about the impact of potential protectionist measures on global trade and growth there has been much focus on GDP data releases for the first quarter of the year. China accounted for nearly 30% of world growth last year so Q1 numbers had top billing even if doubts remain as to the reliability of Chinese GDP data.
Chinese GDP growth remained stable in Q1 2018 at 6.8% year-on-year, in line with growth in the previous 10-quarters but marginally higher than analysts’ consensus forecasts and quite a bit faster than the government’s 6.5% target for the full-year of 2018.
The stability of Chinese growth has done little to alleviate concerns that this pace of growth may not be sustainable, given the changes in the underlying driver of growth, or even advisable going forward.
In recent years, aggressive bank lending to households, companies and local government has funded rapid investment growth, including in large infrastructural projects and the property market, and driven overall Chinese growth. Property development investment growth continues to rise at above 10% yoy.
This has led to a sharp rise in public and private sector debt as well as environmental pollution. The government has responded with a raft of measures, including a crackdown on the shadow banking sector, a tightening of real estate companies’ access to credit, a tightening of the approval of local infrastructure projects and pollution controls. These measures may in the medium-term help reduce or at least stabilise debt levels, channel funds to a manufacturing sector which has seen a rapid growth slowdown (to around 6% yoy) and reduce environmental damage. Property sales growth, a leading indicator of property investment, has indeed slowed to around 3.5% yoy.
However, near-term there are concerns that these deleveraging and environmental measures could put pressure on Chinese growth at a time when net trade’s contribution to overall Chinese growth is potentially under threat. For starters, the structural shift in China has seen buoyant consumer demand and imports curb the trade surplus. Moreover, if the war of words between the US and China over import tariffs escalates into a full-blown war China’s trade surplus could erode further and household consumption run into headwinds.
The transition from one economic model to another is challenging for any government and China’s leadership has so far avoided a potentially destabilising rapid fall in GDP growth. The increasing focus on high valued-added exports, consumption and broader quality of life indicators is unlikely to go in reverse. However, this transition may not always been smooth as policy-makers deal with the overhang from years of excessive lending and investment. This could well result in slower yet more balanced and sustainable economic growth in coming years.
David Shepherd, Visiting professor in Global Macroeconomics, Imperial College Business School:
Recent figures for Chinese GDP growth suggest the economy is expanding roughly in line with Government targets, with growth at 6.85% compared to the stated 6.5% target. Moving forward, the question is whether this kind of rate can be sustained or whether we can expect to see lower or perhaps even higher growth over the coming months and years?
The outstanding growth performance of the Chinese economy over the last 20 years stems from a successful programme of industrialisation based on market reforms, capital investment and a drive for higher exports. But that was in the past, and it is unlikely that these factors alone can be relied upon to sustain future growth, partly because of a change in the political environment in the United States, which has become increasingly antagonistic towards the Chinese trade surplus, but mainly because of purely economic factors related to high market penetration and the rise of competing low-cost producers in Asia and elsewhere. While exports and capital investment will always be important for China, if further high growth is to be sustained it will have to come either from higher domestic consumption or increased government spending.
The share of government spending in the Chinese economy is currently only 14% of GDP and the Chinese economy would undoubtedly benefit greatly from increased expenditure on health, education and other public services. While this could in principle be a significant engine for growth, in practice there are significant constraints on the ability and willingness of the government to finance increased spending, not least because of an already high fiscal deficit. The implication is that if high growth is to be sustained in the future it will almost certainly require a move towards higher consumption.
In contrast to the United States and the United Kingdom, where consumption has increased significantly over the last 20 years and now accounts for almost 70% of GDP, in China consumption spending has if anything been falling and currently accounts for only 40% of GDP. For the US and the UK, consumption is arguably too high and both economies would benefit from lower consumption and increased capital investment and exports.
In China, the opposite re-balancing is required, and the relevant consideration is how a sustainable increase in domestic consumption can be achieved. Consumption typically rises when real wages rise and when households choose to save less, but in China, saving rates are high and the share of labour income in national income has been falling. The challenge for policy makers is to find the best way to change these conditions, to reduce saving and boost wages at the expense of profits and other business incomes, all in a context of considerable uncertainty about the economic environment. It is now almost nine years since the current economic expansion began and, if history is any guide, the next recession is not too far down the road. But how that would affect China’s growth performance is another story!
Alastair Johnson, CEO and Founder, Nuggets:
Napoleon once referred to China as the ‘sleeping giant’. It’s looking, certainly in terms of its economy, like the giant is finally rearing its head. China’s unprecedented and unparallelled growth in the e-commerce sector trumps that of other nations, boasting a 35% rise in the past year (with a market twice the size of that of the rest of the world).
There is a great deal of focus, not only in online retail commerce in and of itself, but in the bridges built to link it to peripheral services. China dominates the O2O (online-to-offline) model, strengthening the connection between strictly digital commerce and brick-and-mortar merchants. Instead of displacing traditional commerce, the nation’s retail industry is instead evolving by combining physical stores with increasingly innovative online solutions.
Development of applications such as WeChat and Alipay have lead to a seamless user experience, whereby individuals can simply access stores and make purchases from within the app. It integrates with some of the biggest players in ecommerce, including the behemoths that are Alibaba, JD.com and ULE.
Worth considering on the telecommunications front is China’s plan to bootstrap a new network for 5G (versus simply building atop existing ones). Given that 80% of online purchases are done on mobile (versus under half in the rest of the world), this development will only serve to further strengthen the connection between mobile devices and e-commerce.
It’s hard to see the trend dying down anytime soon. Businesses appear to have grasped the importance of user experience, and identified the lifeblood of the industry: consumer demand. New wealth in the nation is fuelling purchasing power. To maintain this hugely successful uptrend, companies in the sector should continue to foster an ecosystem of interconnectivity, both with retailers and tech companies. Smartphone manufacturers anticipate that their growth in 2018 will be slow in China, due to saturation and slow upgrade cycles. Brands will need to look to Western markets for continued development.
Jehan Chu, Chief Strategy Officer, Caspian:
China's rise is not only measured by its achievements, but also by its insatiable appetite to develop new industries. Despite the ban on ICO's and cryptocurrency exchange trading in China, there has been a surge in interest and development in Blockchain technology - the underlying rails of crypto.
From new startups like Nervos (blockchain protocol) and veterans like Neo (US$5bil coin market cap tech) to institutions like Tencent (Blockchain as a Service) and Ping An (internal infrastructure projects), China is leading the world in developing efficient solutions using Blockchain technology. In addition, increased restrictions inside of China have spurred ambitious Chinese developers and entrepreneurs to decamp to crypto-friendly cities like Singapore and San Francisco, creating expert and cultural diaspora networks that span the globe but lead back to China.
Looking forward, it is clear that the sheer volume of engineering talent combined with its seamless adoption and endless ambition to build the new Internet on top of blockchain will keep China at the forefront of technology for decades to come.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
