Asian stocks drop as US-China trade war escalates

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A woman looks at boards showing stock prices at a securities company on the first trading day of the year in Beijing on January 2, 2018
Image copyrightGETTY IMAGES

Asian stock markets tumbled on Monday after a sharp escalation in the US-China trade war rattled investors.

On Friday, US President Donald Trump announced tariff hikes on effectively all Chinese imports to the US.

It came after Beijing said it would impose fresh duties and raise tariffs on US imports into China.

In China, Hong Kong’s Hang Seng index slid 3.2% while the Shanghai Composite gave up 1.3%.

Japan’s benchmark Nikkei 225 index dropped 2.3%. The Chinese yuan weakened to a fresh 11-year low against the US dollar. The onshore yuan was around 7.15 per dollar in morning Asian trade.

Sharp falls in the yuan earlier this month prompted the US to officially name China a “currency manipulator” , adding to tensions between the two countries.

“The trade war between the US and China has escalated dramatically,” Louis Kuijs, head of Asia Economics at Oxford Economics said.

“This tit-for-tat escalation shows how unlikely a trade deal and de-escalation have become.”

How has the trade war escalated?

On Friday, the US said it would begin the process of raising tariffs on around $250bn (£203.8bn) of Chinese imports from 25% to 30%. Those hikes will be introduced from 1 October.

The US also said fresh tariffs on an additional $300bn of Chinese goods, announced earlier this month, will now be at a rate of 15% instead of 10%. The first batch of those tariffs will be introduced in September.

In a tweet, Mr Trump said he planned to order US firms working in China to move their operations back to the US. It is unclear how he could force firms to comply.

The moves came after China delivered its latest trade war strike, announcing plans to hit $75bn worth of US goods with new tariffs and hikes to existing duties.

How did we get here?

The world’s two largest economies have been locked in a bruising trade battle for the past year that has seen tariffs imposed on billions of dollars worth of one another’s goods.

Mr Trump has long accused China of unfair trading practices and intellectual property theft. In China, there is a perception that the US is trying to curb its rise.

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Peter Fankhauser

The boss of collapsed Thomas Cook has said he is “deeply sorry” over the historic travel firm’s liquidation.

Business secretary Andrea Leadsom has asked the official receiver, which oversees liquidations, to look at whether bosses’ actions “caused detriment to creditors or to the pension schemes”.

Top directors at the holiday company have been paid a combined £20m in salaries and bonuses since 2014.

Prime Minister Boris Johnson has also questioned whether directors should pay themselves “large sums of money” as their businesses go “down the tubes”.

Accounting questions

Meanwhile, Rachel Reeves, chair of the Business, Energy and Industrial Strategy Committee, said that the public was “appalled that as Thomas Cook mounted up debt and as the company headed for trouble, company bosses were happily pocketing hefty pay-packages”.

She also said there were questions to be asked about Thomas Cook’s “accounting practices”, with suggestions that they improved the chances of executives being paid large bonuses.

pay

But Mr Fankhauser said: “That is just rubbish. I shouldn’t say that. But it is just not right.”

He defended his pay saying it was not “outrageous” compared with other bosses in the FTSE 250 index, which Thomas Cook exited last December. He also said pay-packages had been set by the firm’s remuneration committee and approved by shareholders.

‘Uncertainty grew’

Meanwhile, in a separate interview with The Sunday Times, Mr Fankhauser, a Swiss national, appeared to blame a group of banks for not supporting a bail-out plan for Thomas Cook.

He said if bondholders and a syndicate of 17 banks – including Barclays, Morgan Stanley, DNB, UniCredit, Credit Suisse, Lloyds and Royal Bank of Scotland – had acted faster, then Thomas Cook would still be trading.

Thomas Cook Airlines Scandinavia Airbus 330-300Image copyrightSOPA/GETTY

“The longer the talks dragged on, the more uncertainty grew, increasing the likelihood of a liquidity squeeze,” Mr Fankhauser told the newspaper.

“Had we been quicker, we might not be in the situation we are now.”

Thomas Cook had secured a £900m rescue deal led by its largest shareholder Chinese firm Fosun in August, but a recent demand from its banks to raise a further £200m in contingency funding put the deal in doubt.

Mr Fankhauser accused the banks and bondholders of “trading for every point” during what were to be ultimately-unsuccessful funding talks.

He also told the paper: “I think it would be very difficult for me to find another job in the UK.”

New warning on global economic slowdown

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Dessolate oil field in morning light

The Organisation for Economic Cooperation and Development – the OECD – says in a new report that prospects have steadily deteriorated.

It forecasts continued growth of around 3% but warns that the risks have increased.

The report says a lack of direction on climate policy is holding back business investment.

Although the OECD is not forecasting a recession, it is a decidedly downbeat report.

There are calls for action from governments to address challenges, some of which have both long term and more immediate consequences.

Climate change is perhaps the most striking example.

The OECD says extreme weather events could lead to disruption of economic activity and could inflict long lasting damage on capital and land. They could also lead to what the report calls disorderly migration flows.

Insufficient policy action could increase the frequency of such events.

There is clearly a long term challenge for governments in addressing these issues, but the OECD says that there is already an impact on business investment.

In many countries it is investment and trade that has been at the centre of weakening economic performance.

Power pylons shrouded in smoke with the sun behing

It says governments must act quickly.

“Without a clear sense of direction on carbon prices, standards and regulation, and without the necessary public investment, businesses will put off investment decisions, with dire consequences for growth and employment,” the OECD says.

The report argues that more clarity on climate policy – and also on digitalisation – would trigger a marked acceleration of investment by business.

It suggests the creation of national funds to make public investments in these areas.

Among the other challenges that the OECD mentions is the change in the Chinese economy, it is becoming a more services-oriented economy which means the country’s demand for imported goods for its industries to process is unlikely to grow as strongly in the future.

Along with the shift in the shape of the Chinese economy, there has also been a gradual slowdown in the rate of growth since the start of the decade. For the previous thirty years, the economy had grown at a rate that the Chinese government accepted could no longer be sustained.

China is trying to ensure it is not too abrupt a slowdown. The possibility that it might not succeed is something the OECD identifies as a risk to the global economy.

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