China braces for trade war 2.0, with some MENA markets poised to gain

China is bracing for a renewed trade war with the US — but the fallout could offer a silver lining for our corner of the world: As China faces another round of tariffs from US president-elect Donald Trump’s incoming administration, some expect the world’s second largest economy to double down on its export industries. While economists believe such a move would allow China absorb a significant portion of the tariffs’ hit to its GDP, the combined effect could have an added upside for some of us here in the MENA region — cheaper imported Chinese goods coupled with stronger regional currencies to buy them with.

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Beijing’s most likely response to US tariffs? Opening the fiscal taps. An overwhelming majority of economists surveyed this week by Bloomberg expect the Chinese government to widen its budget deficit next year, with an emphasis on shoring up key sectors like housing and advanced manufacturing. China could also seek to develop their trade ties with other trade partners — though they may risk backlash as cheaper Chinese exports undercut domestic manufacturing.

Analysts also widely expect China to allow its currency to devalue: China’s CNY is already feeling the heat of incoming tariffs, with the CNY falling to 7.25 against the USD on Tuesday — the weakest it’s been since August. The economists surveyed by Bloomberg penciled in a fall of anywhere between 7.3-8 to the greenback next year, with analysts split over whether China will attempt to prop up the currency in a bid to discourage capital outflows.

China’s counterpunch: US agricultural exports, including soybeans, beef, and corn, are likely to be the first targets of Chinese counter-tariffs, reprising tactics from China’s last trade war with Trump. These moves are also likely to hit the hardest in farms and factories in the US’ Midwest and south, which are key constituencies of support for the incoming president.

While they’re duking it out, MENA could benefit: JP Morgan analysts speaking to Reuters expect a stronger USD, higher US bond yields, and shifting trade policies to set the stage for a rally in MENA markets. The bank highlighted that USD-pegged economies in the MENA region — including Saudi Arabia, Qatar, the UAE, Oman, and Bahrain — stand to benefit more than other emerging markets, as they will have stronger currencies with which to buy relatively cheaper Chinese goods. Egypt and other non-USD-pegged economies in the region could also see the benefits of lower import prices, which given the relatively low development of manufacturing in the region are less likely to hurt overall growth.

MARKETS THIS MORNING-

Asian markets are starting the day in the red in early trading this morning, broadly tracking losses in US markets as the post-election Trump trade euphoria fizzled out yesterday. Korea’s Kospi is down -1.5%, while Japan’s Nikkei is at -1.4% and Hong Kong’s Hang Seng is -1.0%.

THE CLOSING BELL: TADAWUL-

The TASI fell 0.5% yesterday on turnover of SAR 5.8 bn. The index is up 0.7% YTD.

In the green: Jouf Cement (+4.8%), Malath Ins. (+4.4%) and Elm (+3.9%).

In the red: Cenomi Retail (-4.4%), Rasan (-4.2%) and Red Sea (-4.1%).

THE CLOSING BELL: NOMU-

The NomuC fell 0.2% yesterday on turnover of SAR 90.9 mn. The index is up 18.7% YTD.

In the green: Al Qemam (+7.8%), First Avenue (+7.2%) and Waja (+7.0%).

In the red: Paper Home (-5.4%), Mulkia (-5.3%) and Enma Al Rawabi (-4.9%)