China trade war could spark a Lehman Brothers-style ‘earthquake’ that triggered the 2008 credit crunch after Dow Jones bloodbath, experts warn
THE bitter trade war between the US and China could spark a Lehman Brothers-style “earthquake” that triggered the 2008 credit crunch as stock markets continued to tumble, a financial analyst has warned.
Macro and quantitative strategist Masanari Takada at investment bank Nomura issued the warning about a financial collapse after the Dow Jones plummeted 767 points by the end of trading on Monday.
Takada said in a note yesterday: “At this point, we think it would be a mistake to dismiss the possibility of a Lehman-like shock as a mere tail risk.
“The pattern in US stock market sentiment has come to even more closely resemble the picture of sentiment on the eve of the 2008 Lehman Brothers collapse that marked the onset of the global financial crisis.”
The market plunge could arrive as early as late August.
Takada added: We would expect any near-term rally to be no more than a head fake, and think that any such rally would be best treated as an opportunity to sell in preparation for the second wave of volatility that we expect will arrive in late August or early September.
“We would add here that the second wave may well hit harder than the first, like an aftershock that eclipses the initial earthquake.”
‘EARTHQUAKE’
US stocks tumbled in early trading today as central banks around the world cut interest rates and increased fears that global growth is being crimped by the US-China trade war.
Every major US index fell in the early going, putting stocks back on a course for losses after briefly breaking a six-day losing streak on Tuesday.
Banks sustained some of the worst losses as bond yields fell sharply. Lower bond yields mean lower interest rates on mortgages and other kinds of loans, which mean lower profits for banks.
JPMorgan Chase fell 3.2% and Bank of America fell 3.6%.
The falls on Monday were triggered by China allowing its currency, the yuan, to weaken against the dollar in response to US threats to add yet more tariffs to Chinese goods in the ongoing trade war.
Washington dubbed Beijing a “currency manipulator”, marking a sharp escalation in the year-long trade dispute between the two economies.
A fuming Trump tweeted: “China dropped the price of their currency to an almost historic low.
“It’s called ‘currency manipulation’.
“Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time.”
TRADING BLOWS: The US-China trade war
The basis for the dispute lies with the US President Donald Trump wanting to “Make America Great Again”.
Part of that is to redress what he sees as unfair trade deals the US has agreed to in the past.
During the 2016 election campaign, Trump accused Beijing of “raping” US workers.
Chinese Premier Xi Jinping has also said he does not want to be seen backing down, with both leaders seeing the honour of their nation at stake.
Words turned to action on July 6, 2018, when both sides levied tariffs on $34bn worth of goods.
This was then increased by $16bn by both sides on August 23, 2018.
The stakes were raised yet again on September 17, 2018, when the US imposed $200bn at a rate of 10 per cent while China was more cautious imposing the same rate but on $60bn.
A ceasefire of sorts was then introduced in December 2018 with the two sides agreeing to start negotiations and tariffs were paused.
But despite numerous rounds of talks no agreement has been reached and the US then said it would raise tariffs on $200bn of China goods to 25 per cent.
On May 13, 2019, China said it would increase tariffs on £46bn ($60bn) of US exports, which caused stock markets to tumble.
The US dollar weakened on August 6 after Washington criticised Beijing as a “currency manipulator”, marking a sharp escalation in the year-long trade dispute between the two economies.
Blaming the decline on “trade protectionism“, China’s action followed Donald Trump’s threat last week to slap punitive tariffs to an additional $300billion of Chinese imports.
He added: “Based on the historic currency manipulation by China, it is now even more obvious to everyone that Americans are not paying for the tariffs – they are being paid for compliments of China and the US is taking in tens of billions of dollars!
“China has always used currency manipulation to steal our businesses and factories, hurt our jobs, depress our workers’ wages and harm our farmers’ prices. Not anymore!.
“China is intent on continuing to receive the hundreds of billions of dollars they have been taking from the US with unfair trade practices and currency manipulation.
“So one-sided, it should have been stopped many years ago!”
The yuan has lost 5 per cent against the dollar since hitting a high in February of 6.6862 to the dollar.
That helps exporters cope with tariffs of up to 25 per cent imposed by Trump on billions of dollars of Chinese goods.
The Chinese central bank governor, Yi Gang, tried to reassure investors, promising late Monday that Beijing will stick to commitments “not to use exchange rates for competitive purposes.”
Yi said that the People’s Bank of China was “committed to maintaining the basic stability” of the yuan “at a reasonable and balanced level”.
DON'T BANK ON IT: The collapse of Lehman Brothers
When bank giant Lehman Brothers collapsed in September 2008, it triggered a global financial crash that led to a devastating recession in Britain.
Lehman, which was based in New York but had a large office in London, went bankrupt after investing in dodgy financial instruments.
The bank had become heavily involved in the mortgage market and owned mortgage seller BNC Mortgage.
By 2008, the bank held 30 times more in real estate than it had capital – and had been borrowing too much money to fund its mortgage investments.
However, the market turned, and Lehman had held on to – or could not sell – so many low-rated mortgages.
Investor confidence in the firm declined, leading to its crash in September 2008.
Its collapse sparked global panic, with firms such as RBS and Lloyds having to be nationalised.
The subsequent recession was the worst since before WW2, leading to the loss of millions of British jobs and a spike in the level of government debt.
In the US, the firm’s collapse turned a US subprime mortgage crash into a global economic downturn which lasted until late 2009.
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Businesses in China though are said to be feeling the pinch as the country’s economy slows and the trade war tariffs start to bite.
According to The New York Times, cash-strapped Chinese companies are increasingly turning to “IOUs” to pay their debts instead of cash.
It is understood that the IOUs issued by Chinese firms are now worth “more than $200billion” in total, up by more than a third compared with last year.
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