Global financial markets have been roiled, but not yet upended, by the escalating U.S.-China trade war. The next round of tariffs could be the tipping point into crisis, according to a China specialist at Europe’s biggest asset manager.

This is where the pain threshold is, Qinwei Wang, a senior economist at Amundi in London, said in reference to the Trump administrations consideration of 25 per cent duties on the remaining $300-billion or so of Chinese imports not yet affected by tariff hikes. There would be a chain reaction, and everyone will suffer. A global recession is a real risk, he said.

The yuan could tumble as much as 10 per cent, shooting through 7 per dollar if the fresh tariffs are enacted, Wang said in an interview. That would disrupt emerging markets and eventually hit the U.S. economy via corporate earnings and a broad stock sell-off, he said.

The yuan will fall, and that’s not going to be the case of China using the currency as a weapon -- it will be let go because the government doesn’t have enough policy room to handle the shock, said Wang, who worked as an economist at China’s central bank earlier in his career.

While Wang’s base case is for a U.S.-China trade deal, he warned that if talks don’t resume in the wake of the G-20 summit in late June -- where Presidents Donald Trump and Xi Jinping could meet -- some investors may start pricing in the worst-case scenario.

Recommends cautions stance

Amundi recommends maintaining a cautious stance toward risk assets. It sees South Korea, Hong Kong and Taiwan as countries likely to be most affected by heightened trade conflict while India should be among the most resilient in Asia.

There are still reasons to be optimistic about the trade outcome, Wang said. The door is still open. The two sides have done concrete work on this. We are closer to the deal than further away from it. But the risk it could get worse before it gets better is significant.

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