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Credit Conditions: Asia-Pacific March 2018--Risk of China-U.S. Trade War Escalates

An escalating U.S.-China trade dispute could upset otherwise stable credit conditions in the Asia-Pacific. The region's vulnerability to asset-price volatility and capital outflows remains high, but is unlikely to worsen in the second quarter of 2018. Similarly, S&P Global Ratings considers China's debt overhang is elevated but manageable in the short term. In our view, the top macro-risk is trade-related.

Last week, U.S. President Trump unveiled a package of China-specific trade penalties, including up to US$60 billion in annual tariffs on Chinese imports. Beijing's initial response was relatively measured, indicating potential tariffs on about US$3 billion of U.S. imports. The question now is whether Washington will aggressively follow up on the latest threats; and if so, whether Beijing will take additional retaliatory action. A trade war involving China could affect Asia-Pacific business activity and growth, given regional supply chains and China's economic size. Consequently, fears are high despite slight improvements in the macroeconomic outlook, financing conditions, and rating trends over the past quarter.

Key Takeways

  • Overall. Fears of a China-U.S. trade war cloud otherwise positive momentum in the Asia-Pacific's macroeconomic outlook, financial conditions, and sector trends.
  • Risks and imbalances. We have raised the risk level of trade interruption and geopolitical tensions to 'high' from 'elevated'. Other top risks remain asset price volatility; a liquidity pullback; and the China debt overhang.
  • Macroeconomics conditions. External demand should be reasonably solid as the global synchronized upturn continues. The key risk here is also U.S. trade policy, and the reaction of major trading economies.
  • Financing conditions. Despite marginally tighter credit standards in emerging Asia, financing conditions facing borrowers remain favorable going into second quarter 2018.
  • Industry sector trends. The ratings outlook for Asia-Pacific's issuer pool is improving. The net ratings outlook bias shifted to -5% in February 2018, from -7% in October 2017.

(Editor's note: S&P Global Credit Conditions Committees meet quarterly to review macroeconomic conditions in each of four regions (Asia-Pacific, Latin America, North America, and Europe, the Middle East, and Africa). Discussions center on identifying credit risks and their potential ratings impact in various sectors, as well as borrowing and lending trends for businesses and consumers. This article reflects the view developed during the Asia-Pacific Credit Conditions Committee discussion on March 26, 2018.)