US-China Trade War Threatening to Become Major Risk to Emerging Market
Last updated on December 3rd, 2018
The robust global growth of 4 percent is expected this year; however, many risk factors could undermine this optimism. One of such risk is the ongoing US-China trade war. This has cause funds investors to go in search of a safe haven thereby causing harm to emerging market currencies. The economic and political relationship between the US and China is one of the most important there is today.
According to Jameel Ahmad who is the global head of currency strategy and market research with FXTM – a foreign exchange broker, the US-China trade war could be the most significant risk the global financial market will experience since the economic crisis hat affected the world. The trade war has caused a lot of tension resulting in the lack of confidence in the currencies. As this lack of confidence is pushing investors to abandon “risky assets” for a more guaranteed asset such as gold. However, this move doesn’t spell well for emerging currencies like the Rand.
The FXTM operates in various countries like China, Indonesia, Nigeria, India, Thailand among others with a headquarters in Cyprus provides brokerage services internationally. According to him, the reason why the US-China trade war or any other trade wars affects emerging markets is that the emerging market are very much dependent on trade. As such, the foreseen weakening of the global market trade is the biggest threat that is currently facing emerging markets. He also said for countries whose economy is presently under recession like South Africa, it is terrible news.
According to him, the tense trade relations between the Chinese and the US has triggered currency volatility with currencies that are emerging. Going further to explain that except for Mexico whose currency the Peso weakened against the dollar this year. He said it is not a coincidence at all; “it is because investors are trying to avoid taking on risk”. Saying that “there has been a lot of risk aversion by investors in the market and the Rand has been affected as well”.
The tension between the US and China has also led to the IMF cutting its forecast for global growth citing the trade war between the US and its allies in trade which will hurt the economic activity of the world. The forecast was cut by 0.2 percent reducing it to 3.7% according to the IMF Economic Outlook report.
Ahmad said that the IMF “made a more concerning comment that the global economic growth could be at its peak saying the global growth could be flattening. They also said that the trade war is a major risk and according to recent statements from Beijing and US which suggest that the tension is expected to get even worse before it becomes better”.
Heinrich Krogman, a senior economist at Tutwa Consulting, said the trade war could lead to Chinese goods being diverted to other markets instead of the US. And this other markets or new markets are the emerging markets. He also said on the other hand, “the trade tension could also lead to trade creation as manufacturers from other countries will get to penetrate the US market”.
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