U.S.-China trade tension may hit emerging markets, says Ind-Ra

The rise in trade tensions between the U.S. and China could lead the latter to divert its exports to emerging markets (EMs), including India, according to Indian Ratings and Research (Ind-Ra).

In the past, China has shown such a tendency and dumped its products at predatory rates in many markets, including India.

This could potentially disrupt the demand-supply dynamics in the Indian domestic markets, especially for products such as electronic goods, iron and steel and organic chemicals.

A fall in Chinese exports to the U.S. could potentially put downward pressure on the Chinese yuan (RMB). A likely devaluation in the RMB could stimulate a competitive depreciation in the Indian rupee, failing which the competitiveness of Indian exports could be affected, Ind-Ra said in a statement.

Chinese exports accounted about 18% of the total U.S. imports in 2018, representing 2.34% of the U.S. GDP. Given the substantial share of Chinese imports in comparison with the size of the U.S. GDP, lower imports or a rise in the cost of imported goods could stimulate inflationary pressures in the U.S.

This could provide fillip to the U.S. credit market yields, which, in turn, could push up discount rates and reduce the arbitrage opportunity for U.S. investors, resulting in weaker foreign portfolio investment (FPI) flows to EMs, including India. A continued shrinkage in the Chinese trade surplus is likely to transform China from an exporter of capital to a net importer of foreign capital. Therefore, Ind-Ra expects the combined effect of higher capital flows into China and a rise in inflation in the U.S. to crowd out impinge upon flows into EMs.

Ind-Ra opines that India is unlikely to benefit much from the ongoing trade frictions between the U.S. and China. There is a stark difference in the nature of commodities exported by India and China to the U.S. For instance, pharmaceutical products, and gems and jewellery accounted for about 30% of the Indian exports in 2018 to the U.S., while electronic goods and capital goods accounted 47% of the Chinese exports to the U.S. in 2018.

Any slowdown in Chinese exports to the U.S. on account of the recent imposition of tariffs on Chinese goods could result in a commensurate rise in Chinese exports to other EMs. With Chinese industrial production continuing to grow at around 5% and Chinese exports to U.S. contracting persistently, over the last few years, Chinese exporters have started penetrating into alternate markets. Hence, imports by other Asian EMs from China grew 20.70% in 2018 compared to 12.75% in 2010. This has been catalysed by the Chinese manufacturers’ ability to undercut domestic manufacturers in these markets, resulting in lower market share for the domestic players in the EMs.

In particular, India’s share of imports from China in total imports of steel, polymer and capital goods could potentially increase as Chinese exports to the U.S. start losing traction. The impact could percolate through lower international prices, thereby putting pressure on domestic prices due to diversion of supply from China to other importing countries.

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Printable version | Jan 29, 2022 1:32:03 PM |

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