US-China Trade War affects Arab region

U.S. President Donald Trump and China's President Xi Jinping leave the bilateral meeting held during the G20 leaders’ summit in Japan on June 29. © Reuters

A war raging is never ending between Washington and Beijing. China hardly responds to Trump’s infinite tariffs until the latter responds with a surprise blow that fuels the conflict, with investors confused.

This cycle of conflict extends beyond the US and Chinese economies to the economies of the Gulf countries and the Arab region as a whole, as well as the financial markets, especially with the recent openness and the joining of several Gulf markets to the Morgan Stanley and FTSE indices, particularly Saudi Arabia, the UAE, and Kuwait.

The trade war seems to be slowly turning into a cold war that will take too long and solutions are not near as it may take years, and continuity may be the core of the crisis and its effects will be bad for the global economy, according to Abdul-Azim Al-Amawi, head of research section at AswagalMal.

Direct effect

The Chinese economy will be directly affected, and Germany is the first victim of the trade war, as its economy is export-based, and therefore the trade war consequences affect other countries. Moreover, the size of the US and Chinese economies is of $30tr, and the economies connected to them will be affected. For the first time since the start of the trade war between Washington and Beijing, President Trump imposes direct tariffs of $300bn on Chinese goods related to consumer spending to be applied in mid-December.

JP Morgan predicted that these tariffs would reduce the purchasing power of the American consumer by about $1,000 per year, which means that the US economy will be adversely affected, with 73% of which, based on consumer spending, according to Abdul-Azim Al-Amawi.

Large reserves

Gulf economies are strong due to financial surpluses and large reserves
Gulf economies are strong due to financial surpluses and large reserves

According to Al-Amawi, the economies of the region, especially the Gulf countries, will be affected to a limited degree by the trade war because of their financial surpluses and large reserves due to continued financial flows.

To illustrate, Gulf economies have not been affected by the 2008 crisis, like other economies because of the large reserves of central banks.

Now with the Gulf states are diversifying their economies away from oil revenues, they will be much less affected by the trade war.

Regarding the financial markets, Al-Amawi said that the correlation factor of the Gulf financial markets with the international markets is less, with global markets witnessing strong gains last year while the region’s markets did not witness similar gains.

How to hedge the crisis?

As for investors, Al-Amawi advises to resort to safe havens as a kind of hedge, which justifies the continued rise in gold prices above $1500 per ounce, which is the best performance of Gold in five years.

Investment in sovereign and corporate bonds is also less risky.

The trade war has prompted investors to avoid investing in short-term bonds because of the uncertainty of a possible crisis associated with the trade war, and therefore they prefer to invest their money for 10 years in bonds with negative yields.

Negative yields

The total value of bonds globally is $60tr, of which $17tr has negative returns. Investors prefer to invest in bonds with negative yields and lower risk, rather than holding them in banks that may be exposed to risk or at the very least the funds are diminished by inflation levels.

On the Forex front, Al-Amawi believes that the risk of using margin far outweighs the risk of trade war, but commodity-related currencies such as the New Zealand and Australian dollars may be adversely affected while these events are expected to strengthen the Japanese yen, the Swiss franc or even the US dollar, which may benefit from the ongoing contradictions.