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.
(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.)