The world’s two largest economies are taking the ferocious mien in the brewing trade tensions that has now put several Chinese supercomputer companies under the blacklist of United States over security concerns.
How did it start?
A trade war between China and the United States started back in early 2018 when US President Donald Trump sparked the Game of Tariffs on Chinese imports. The golden hairdo man well known for his dislike to China’s trade practices shunned tariffs on Chinese products such as technology, machinery, aerospace, steel and aluminium in the initial phase of the battle with the objectives to encourage the demand for local goods and reduce trade deficits. To no surprise, China retaliated by imposing tariffs on US imports for products including wine, fruit, seamless steel pipes, pork and recycled aluminium.
Current Status of US-China Trade War
In the current scenario, technology is spotted at the epicentre of the skirmish. The United States took a dig against Chinese companies for being involved in spying on them using high-end technology equipment.
Therefore, the United States under the administration of President Donald Trump blocked the global telecom equipment giant Huawei Technologies Co. in May 2019 in an attempt of disrupting the Huawei’s supply chain which was widely dependent on US suppliers for components including wireless chips, handset operating software and antennas among others. The move placed China-based Huawei in US ‘entity list’ that means Huawei now cannot purchase from US companies without US government approval, which may lead to its struggle in manufacturing its own chips.
On Friday, the United States blacklisted 5 more Chinese supercomputer companies, citing national security and foreign policy concerns. The ban includes supercomputer maker Sugon and the affiliates of Chinese army research institute Wuxi Jiangnan, which are now barred from buying American technology and components without a waiver from the US government.
It is worth noting that this move comes just a week ahead of G20 summit where President Donald Trump and his Chinese counterpart, Xi Jinping, aim to strike a trade deal and de-escalate tensions.
Impact on the Global Economy
The full-blown trade war has the potential to cause ripples in the global marketplace, particularly impacting the companies deriving revenue from imports and exports to these two nations. To date, United States has slapped up to 25% tariff on US$250 billion worth of Chinese goods and in response, China has imposed up to 25% tariffs on US$110 billion of US goods beside establishing its own list of ‘unreliable entities.’
Recently, the United States threatened China by revealing its plan to levy tariffs on another ~$300 billion worth of Chinese Goods, effectively covering almost all Chinese exports to the United States.
With this backdrop, Australia feared a growth in the economy and therefore RBA announced an interest rate cut of 25 basis points to keep it record low at 1.25 percent, something which has not happened in the past three years. This also underscores the struggle of Australian companies and the uncertainty in their future growth due to the distressing economic environment in China, which is Australia’s largest trade partner.
Let’s have a look over major industries and Australian stocks getting affected by China trade war
The uncertainty created by the China-US trade dispute has negatively impacted revenue and earnings of ASX listed OneAll International Limited (ASX: 1AL). In the latest trading update, global premium outdoor furniture designer, manufacturer and distributor, 1AL stated that due to US-China trade disputes, the company expects its half-year revenue for six months ended 30 June 2019 to be $25.6 million, compared to $30.2 million in the previous corresponding period; gross profit margin is likely to be 2.3% lower relative to 37.2% in the prior corresponding period.
The protracted trade dispute has meant that only US$5.36 million out of US$14 million of sales orders were fulfilled in the US. Many of these sales were made at reduced margins, and in some cases, no margin, as OneAll worked collaboratively with its customers in the US.
1AL last traded at $0.850 on 24 June 2019. It has generated a negative YTD return of 6.59%.
Infant Formula Companies:
Infant formula companies seem to be the other major victims. Bellamy’s Australia Limited (ASX: BAL) derives significant revenue from the sale of its baby milk products to China. But it seems that destructive tentacles of Sino-China trade war could have adverse effects on the company’s expansion plan in China. BAL is currently trading at $7.930 on 25 June 2019 (As at 2:06 PM AEST). It has generated a meagre YTD return of 2.64%.
The a2 Milk Company Limited (ASX: A2M) is another favourite infant formula brand of Chinese. The company recently acknowledged the e-commerce legislation announcement from China’s State Administration of Market Regulation and confirmed its commitment to protecting the rights and safety of consumers and the overall integrity of e-commerce channels. While China is in the process of ruling out new policies and amendments in international business space, A2M’s revenue comes at peril.
China imports huge volume of infant milk formula from the US, Europe, Australia and New Zealand. But the recent reporting from China’s National Development and Reform Commission has drawn risk to the addressable export market in China as authorities consider increasing China’s domestic market share beyond 60%.
The rising tension between the US and China seems to test their complex relationship, especially in the technology sector where both the nations are closely interwoven through supply chains and software. The Australian stock market experienced the shock waves in its technology sector after China announced the imposition of retaliatory tariffs on US$60 billion worth of US goods, last month.
WiseTech Global Limited (ASX: WTC), Afterpay Touch Group Limited (ASX: APT), Appen Limited (ASX: APX), Xero Limited (ASX: XRO) and NetComm Wireless Ltd. (ASX: NTC) are among some of the technology industry stocks which have been facing pressures from US-China trade war.
Now, the latest blacklisting of Chinese supercomputer companies by the US could possibly add more fuel to the fire. Market participants are keenly eyeing the upcoming G20 Summit which could be an important indicator to highlight where these two economies are heading. It is scheduled to be held at the end of June 2019 in Japan.
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