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Aug 19, 2019

Hong Kong companies feel heat of trade war

More than 150 Hong Kong-listed firms issue profit warnings

The ongoing trade war between the US and China is having a negative impact on listed companies in Hong Kong.

An increasing number of Hong Kong-listed firms have cited the negative effects of tariffs on their business when issuing profit warnings in the last month, according to regulatory filings.

The ongoing and escalating nature of trade tensions between the two major economies has evidently hurt sentiment and appears to have caused companies to restrain future investment. In total, more than 150 Hong Kong-listed firms issued profits warnings in July, with many mentioning the macroeconomic environment as a reason for the decline in their results.

That compares with 105 profit warnings issued in January following the end of the fourth quarter and 59 profit warnings in April following the end of the first quarter, according to regulatory filings with Hong Kong Exchanges and Clearing, operator of the Stock Exchange of Hong Kong.

In the past 12 months, US President Donald Trump has placed 25 percent tariffs on nearly half of all goods imported from China, and Beijing has responded with its own retaliatory tariffs. The two countries have resumed trade talks after discussions collapsed in May, but it is an up-and-down affair.

The situation is having a big impact on smaller-segment companies, with confidence among small and medium-sized business owners in Hong Kong falling to its lowest level on record for the third quarter, according to the latest Standard Chartered Hong Kong SME Leading Business Index, which began in 2015.

‘We think the trade war has exerted pain on the Chinese economy,’ says Aidan Yao, senior emerging Asia economist at AXA Investment Managers, in a statement. ‘There are also visible spillover effects on domestic manufacturing activity, hurting business sentiment and holding back capital expenditure and hiring decisions.’

Texhong Textile Group, one of China’s largest textile manufacturers, says it expects its profits to drop by 20 percent to 25 percent in the first half of the year because of ‘macroeconomic uncertainties’ caused by the trade war.

Precision Tsugami Corporation, a foreign-owned maker of high-precision machine tools based in China, says its profit in its fiscal first quarter could fall by 40 percent to 50 percent because of ‘various macroeconomic uncertainties, including those caused by the escalating trade disputes between China and the [US].’

And Shanghai Realway Capital Assets Management, a Shanghai real estate fund and asset manager, says its profit in the first half of the year is likely to decline by at least 30.7 percent.

Bank of America Merrill Lynch economists Ethan Harris and Aditya Bhave say the probability of a deal between the US and China ‘in the next few months is dropping’.

‘While we would not rule out some kind of small de-escalation, the lack of incentives to get a deal done suggests more ups and downs but no actual deal. Moreover, whether or not there is a deal with China, we expect new fronts to open in the trade war in the coming months,’ the economists write in a research note.

‘The good news is that policymakers seem ready to offset at least some of the trade war shock. The bad news is that this will require expending already low policy ammunition.’