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    • OPINION
    • Jun 19 2018 at 6:41 PM
    • Updated Jun 19 2018 at 6:51 PM
    Australian interest rates on hold amid growing fears of a global trade war
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    President Donald Trump is bellicose about trade with China. Andrew Harnik
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    by Karen Maley
    For the past year, investors have been on tenterhooks as the relationship between the world's two largest economic powers, the United States and China, has continued to crumble.
    The latest escalation – which saw US President Donald Trump order his administration to draw up plans for tariffs on a further $US200 billion ($270 billion) in Chinese imports if Beijing does not back down from its threats of retaliation against previously announced US import duties – sent Asian markets reeling in trading on Tuesday.
    The local sharemarket also gave up its early gains, as investors worried that Australian economic activity will likely soften if activity in China, and the broader Asian region, is hit by mounting trade tensions.
    Many analysts see the growing risk of a trade war, coming at a time when Chinese economic activity is already showing signs of faltering, will force the Reserve Bank of Australia to shelve any plans for an interest rate hike.
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    The Chinese central bank, the People's Bank of China, has cut the amount of cash lenders are required to hold in reserve, in an attempt to make funding more available for businesses. Giulia Marchi
    The minutes of the RBA's June board meeting, released yesterday, warned that "the prospect of additional tariff measures being introduced, either by the US administration or in response to its actions, continued to present a downside risk to the global economic outlook".
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    Stocks listed in mainland China suffered the heaviest losses, with the benchmark index of Chinese stocks, the Shanghai Composite Index, falling 3.8 per cent to hit its lowest level in nearly two years, while Japan's Nikkei 225 finished 1.8 per cent lower.
    Other Asian sharemarkets declined, as investors worried about collateral damage in countries such as South Korea, Japan and Taiwan.
    Investors fear that the growing trade conflict will disrupt intricate global supply chains. US and other multinational companies assemble products in China, often using parts purchased elsewhere, before exporting the goods to the US.
    For instance, although the iPhone is officially made in China, it uses components sourced from other countries, including South Korea, Taiwan and Japan.
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    David Rowe
    As the US rhetoric on tariffs has hardened, investors have been caught between conflicting emotions. Some have argued that Trump's threat to escalate the trade conflict with China is merely part of his negotiating tactics, designed to force concessions from Beijing.
    But others fear that Trump genuinely believes that tariffs will address two key problems: alleged intellectual property theft by Beijing, and the yawning trade deficit that the US runs with China, which came to more than $US375 billion in 2017.
    Some investors are even resigned to the inevitability of a major confrontation between Washington and Beijing, particularly given that China has failed to respond to gentler pressure to stop forcing US companies to share technology with their Chinese partners in order to gain access to China's vast market.
    Investors are also fearful about the potential spillover to the US bond market, given that the US is the world's largest debtor, while China is its largest creditor.

    The latest bout of market nervousness mirrors the turmoil three months ago, when the US sharemarket shed more than 7 per cent after Trump first signalled his determination to rewrite the rules on global trade by slapping tariffs on up to $US60 billion in Chinese imports.
    The biggest worry for financial markets this time is that neither Washington nor Beijing has showing any signs of backing down, which could lead both into an all-out trade war.
    The outbreak of trade hostilities comes at a bad time for Beijing, whose efforts to wean the Chinese economy off its addiction to ever-increasing credit have already caused activity to falter in the world's second-largest economy.
    Figures released in Beijing last week showed investment, retail sales, industrial production and credit growth all slowed in May. Slowdowns in investment and retail sales were particularly savage and unexpected.

    Interestingly, the Chinese central bank, the People's Bank of China (PBOC), chose not to follow the US central bank when it lifted interest rates last week.
    Instead, the PBOC has cut the amount of cash lenders are required to hold in reserve, in an attempt to make funding more available for businesses. And the Chinese central bank was active on Tuesday, injecting liquidity into markets in an attempt to ease concerns about growing trade tensions and the weakening economy.
 
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