The US-China trade conflict, which is currently still in its initial stages, is seeing both countries imposing an additional 25% tariff on up to USD 50 billion of exported goods from the other country. However, the impact of the trade tensions between the United States and China will definitely extend beyond this "first round" of confrontation. For one, the additional list of tariffs on USD 200 billion in Chinese goods recently announced by US President Donald Trump poses a many grave potential risks to China's economy and trade. What's more worrying for the market is the fact that there is building anticipation in relation to these issues and their corresponding impact.

Here, it is worth noting that with regard to trade, Trump has long been prejudiced towards China.

In February 2017, not long after Trump took office, he pointed out that about 70,000 factories had gone bankrupt since China became part of the WTO in 2001. He even publicly asserted on various occasions that the WTO has been treating the US unfairly in relation to China; according to him, China, which is "a great economic power," has given preferential treatment by the international trade body based on its status as a developing nation within the WTO. In April, he also said that "We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!" On 14 July, in an interview with CBS, he said: "I believe that we have several enemies, and I think that the EU is our trade enemy," "Russia is an enemy in several aspects, but China is the economic enemy…this doesn't mean that they are bad guys, but rather that they are our competition."

More and more analysts have confirmed that Trump has had little to no hesitation in increasing the tensions between US and China, especially with the numerous tariff-seeking policies that have been introduced. Didier Saint-Georges, the Managing Director of Carmignac Gestion, is of the opinion that some differentiation is required when analysing the threats posed by the trade tensions created by Trump: on one hand, its short-term goal is to convey a powerful message for the mid-term elections in November; on the other hand, its long-term strategic goal is to weaken China. "The market risks caused by the former will intensify this summer, while the latter will severely threaten trade dynamics because there will be fierce retaliation from China."

If the trade tensions between US and China continue progressing down this line, the Chinese economy will inevitably be impacted. Economist Rosa Duce from the Deutsche Bank in Spain estimates that the effect of the Trump administration's policies on the Chinese economy, which is supposedly the most severely affected, is not more than 3 to 4 percent of China's GDP— estimates by Anbound's research team place loses at around 2 percent. To external parties, while the Chinese government may have sufficient tools to withstand decreasing economic growth, the additional list of tariffs on USD 200 billion in Chinese goods is nonetheless worrying as this might create even more fluctuations in the economy, fluctuations that will have a magnified impact on China.

Currently, with regard to the USD 200 billion list of tariffs announced by the Trump administration, the Chinese government has yet to take any clear equivalent measures or severe counterattacks; rather, it has maintained a cautious attitude and position. However, this by no means indicates that the Chinese government will not take any action. Once China does decide to impose a tariff "counterattack," the Trump administration will find that it has got a tiger by the tail and have no other option but to continue down the path it has mistakenly chosen. Subsequently, trade relations between the two countries will be severely threatened, and any order and balance that existed before would be thrown out the window. What's more, the repercussions of this could well extend beyond the domain of trade, which could in turn lead to an outbreak of a whole host of problems. This will be a nightmare for Chinese businesses. Therefore, now is the time for China to do some stock-taking and spring cleaning, and businesses must prepare themselves for the worst-case scenario.

Of course, it is not only the business community that must prepare for the worst; China's stock market, bond market, and foreign exchange market will also be affected by the intensifying trade conflict. In short, the financial market must prepare itself for the worst. It is worth noting that before the trade conflict began, Anbound's research team had already issued multiple warnings that a "war" was about to begin in the Chinese financial sector, and based on these gloomy prospects, the Chinese financial sector had long initiated large-scale reforms. This, however, is not the same as the counterattacks in the trade conflict. For one, the "financial war" was waged asymmetrically, in the sense that China had to bear great and almost unilateral losses that involved the stock market and foreign exchange market. Between 22 May and 4 July, the SSE Composite Index fell by 14.2%, while the SZSE Component Index fell by 16%. Likewise, the exchange rate of the RMB against the US dollar declined rapidly with the offshore renminbi exchange rate falling by as much as 3400 points, or 5.3%, in the 14 trading days between 14 June and 4 July. It is thus evident that as the financial market continues to come under pressure, the systemic financial risks that China has been most worried about are starting to unfold.

Considering the intensity of the trade tensions between China and the US, it is crucial to anticipate what move the US will make next, and likewise, how China would respond to it. Generally speaking, China is not very adept at signaling international policy for its own strategic benefit. While China has been frank and reasonable on many occasions, such communication often gets lost in the international information channels and escapes the attention of the masses. Consequently, even when China takes action after it has already made an announcement, tensions still intensify and affect the market negatively, and it is often under such conditions of mutual hostility that the trade conflict intensifies.

Final Analysis and Conclusion:

Looking at the situation as a whole, both China and the US are now at a stage where they are "preparing for battle," and so although things might seem calm on the surface, a fire is already raging beneath. Once things break loose, one can only imagine what the consequences will be. Therefore, the Chinese business community and financial sector must be prepared for the worst-case scenario, whatever that may be.