Who will get affected?
Although, it is not a surprise to many of us, it is indeed scary for the global investors. Currently traders are fleeing Chinese equities and the board shows red on the Shanghai stock market.
Besides China, who else will get effected and why?
Since the rise of the Chinese economic power 30 years ago the world shifted gears from the Western industrial production to Chinese goods. Most developing nations like South Africa, Australia, New Zealand and many other sold more raw materials to China and no longer to the Western nations.
Today developing nations biggest trading partner is China and are highly dependent on Chinese economic prosperity.
China-USA trade deal
As a result of cheap labour cost and productivity for final goods, the world and USA became accustomed of importing high quantities of goods. The “ made in China” stamp took the world by storm and swelled Chinese imports to the USA and other parts of the world. Most American companies established businesses in China to take advantage of the cheap and high productivity to expand profit margins.
Against this back drop thousand and thousand of Americans lost jobs as companies moved to China.
However for decades China’s goods moved swiftly to the USA and amount to $600 billion recorded 2017 and created a surplus of 0ver $400 billion. Which means USA are not exporting much goods and service to China and a result of this trade tension started under the Trump administration.
According to Trump the deal is hopelessly unfair and therefore need some sort of better trade deal between China and the USA. For now, trade deals between China and the USA are on the edge and Trump administration threatened with 25% tariffs.
The high USA tariffs created uncertainty around developing nations as it means that China will export less goods to the USA and China will import less raw material from developing nations. Developing nations like South Africa, Australia and others will loose billions on exports to China and China will loose billion exporting goods to the USA.
On the Forex side??
As above mentioned, Developing countries like South Africa, Australia and New Zealand will be hit the hardest. Since the global recession of 2008, emerging markets piled up debt to recover GDP in respective economies, but nothing materialized. In addition a trade war, which lowered the prospects of growth can make it even harder to repay government debt ,which can lead to a recession for emerging markets.
It is not possible for these currencies to go up against the Dollar (safe haven currencies) and the world will move to safer assets like the US bond market.
We already experience a very strong Dollar as a result of the slow down in global growth and the trade war will just escalate the demand for the Greenback.
For me personally the Dollar is still fairly under value and has still the potential to a reach record level of over 100 DYI. The Yen will also increase drastically against other currencies as it also operate as safe haven.
Be aware of massive sell off in EM currencies and equities!
All the best with trading.