Trump's latest tariff threats - investors need to pay attention to 10 key points.

After taking office, President Trump announced immediate new tariffs on China, Canada, and Mexico. Deutsche Bank stated that Trump's justifications of immigration and drug trafficking may be mere excuses, with the aim of using executive orders to wield broader authority.

Apart from the foreign exchange market, the financial markets have remained relatively calm about this, as investors may still be pondering the impact of Trump's words on the future. Deutsche Bank strategist George Saravelos listed the following 10 key observations in one breath:

Canada and Mexico are members of the USMCA agreement, which was negotiated during Trump's first term in office.

Trump's social media posts about tariffs, closely following the official nomination of Benson as Secretary of the Treasury, are not coincidental. He wants to convey that tariff policies still hold a significant place in his agenda.

Although targeting only three countries, the tariff impact covers 40% of the total US trade volume, with a significant economic impact.

Trump seems to intend to implement these tariffs through executive orders. Salavolos speculates that the most likely approach is to invoke the International Emergency Economic Powers Act (IEEPA).

Currently not mentioning tariffs as a strategic tool to address trade imbalances or increase revenue. Deutsche Bank's pessimistic interpretation is that Trump may use immigration and drug trafficking issues as a pretext, possibly just to activate IEEPA's broad powers. Salavolos believes this is just the first wave of attacks.

Last week, the US Senate introduced a new bill attempting to revoke China's permanent normal trade relations status and set tariffs of 50% to 100% on Chinese goods. Similar bills have also been introduced in the House. If Congress is involved, it may further advance Trump's tariff plans.

While the eurozone was not explicitly mentioned in Trump's tariff statement, this does not mean that European businesses are unaffected. Salavolos pointed out that German auto manufacturers have a wide presence in Mexico. The complex connections between China and Mexican suppliers could amplify the impact of Mexican tariffs.

Since Trump's announcement on Monday night, the Canadian dollar has experienced the largest depreciation on a risk-adjusted basis. Canada remains the most vulnerable among developed markets to Trump's tariff threats.

Salavolos stated that, as demonstrated by Trump in his first term, the more moderate the market response, the more confident he may become in implementing further tariffs.

Another reasonable explanation for the subdued stock market reaction to Trump's tariff statement is that many investors view these threats as a show of negotiation tactics.

During Trump's previous term, investors had to closely monitor Trump's X (then known as Twitter) account. This time, they would need to pay similar attention to Truth Social.

The newly elected US President, Trump, vowed to increase tariffs on China, his tough stance has reignited expectations for the depreciation of the RMB. However, compared to the pressure endured during the last trade war, Chinese enterprises may now face the financial pressure brought by exchange rate adjustments more calmly.

Impacted by factors such as the deep inversion of the Sino-US interest rate differential over the past two years, real estate industry bubbles, among others, the scale of external debt of Chinese enterprises, including foreign currency bonds and loans, has significantly decreased. Bloomberg's aggregated data shows that as of last Friday, the scale of outstanding foreign currency bonds of Chinese enterprises has dropped to around $654 billion (approximately 0.291 billion Malaysian Ringgit), the lowest since 2017; as for foreign currency loans, Bloomberg summarized central bank data shows that by the end of October, excluding domestic household loans, the balance of foreign currency loans of financial institutions has decreased to $570.12 billion (approximately 2.54 trillion Malaysian Ringgit), reaching a 12-year low.

The reduction in the scale of corporate foreign currency debt will directly alleviate the debt repayment pressure caused by exchange rate depreciation in the future. In addition, years of market education on exchange rate fluctuations have led companies in recent years to pay more attention to hedging exchange rate risks, which means that if the exchange rate depreciates in the future, companies may not necessarily repay foreign debts on a large scale to save costs, which could also help ease the pressure on the RMB exchange rate.

"From the current situation of this round, Chinese companies can better cope with the repayment of foreign currency debts and exchange rate fluctuations since Trump took office," said Xia Le, chief economist for Asia at a Spanish external bank, indicating that companies over the past few years have become more cautious when issuing foreign debts, fully considering the matching of their balance sheets, and have been more active in hedging exchange rate risks compared to previous years.

The People's Bank of China's foreign currency loan data includes foreign currency loans granted by domestic and foreign financial institutions as well as overseas Chinese financial institutions. Similar trends are shown in China's comprehensive external debt data released by the State Administration of Foreign Exchange. As of the end of June, China's foreign currency external debt amounted to $1.3 trillion (approximately 5.79 trillion Malaysian Ringgit), down 14% from its peak in 2021; and the proportion of foreign currency external debt to total external debt has dropped significantly from around 68% in 2017 to approximately 51%, the lowest since 2015.

According to Xing Zhaopeng, a senior China strategist at ANZ Bank, the high US dollar interest rates and the reduction in foreign currency financing for real estate enterprises are the main reasons for the recent decrease in the scale of Chinese corporate foreign debt; S&P Global ratings analyst Zhang Jihao also mentioned that overseas acquisitions by Chinese enterprises have become more challenging, which is another significant reason for the reduction in foreign currency debt financing by companies.

The scale of Chinese US dollar bond market has significantly shrunk in recent years, mainly because the previous main force in financing, real estate enterprises, defaulted frequently, leading to a sharp reduction in US dollar bond issuance. In addition, the China-US interest rate spread exceeding 200 basis points has also reduced the motivation for most companies to finance overseas.

In addition to the reduction in debt, since the Fed's rate hikes in 2022, the foreign currency deposits in China have been steadily increasing, providing a "cushion" against potential depreciation risks. Foreign currency deposit balances have exceeded the size of foreign currency loans since early 2021, overall reducing the repayment risks of foreign currency loans.

Xia Le also mentioned that after Trump was elected, some companies that had planned to renew their external debt temporarily shelved their plans. Instead, they are observing the Fed's interest rate cut process and exchange rate depreciation, which will further reduce overall foreign currency liabilities.

Trump announced this week that the United States will impose a 10% tariff on Chinese goods. The offshore renminbi briefly touched a near four-month low on Tuesday, with a year-to-date drop of about 2%.

Another way for Chinese companies to catch their breath in future exchange rate fluctuations is the increased risk hedging for foreign exchange exposures in recent years, especially in terms of forwards operation are significantly active. Data from the State Administration of Foreign Exchange show that this year, the majority of the monthly hedging ratio for enterprises has stayed at a high level of over 25%, implying that enterprises will have more resilience in the face of substantial exchange rate fluctuations.

The reduction of corporate foreign debt and advance hedging will also have a partially positive impact on the exchange rate of the renminbi. Looking back at the China-US trade war in 2018-2019, the RMB to USD exchange rate depreciated sharply. According to Xia Le, judging by the extent of the decrease in China's foreign borrowing scale as recorded by the Bank for International Settlements (BIS), at that time China had probably repaid around $100 billion of external debt in advance. It is expected that the scale and speed of this round of advance repayments will be somewhat lighter.

Xing Zhaopeng also mentioned that the scale of advance repayment of foreign currency debt triggered by subsequent exchange rate fluctuations may be much smaller, thereby having a smaller impact on the exchange rate compared to previous rounds.

Despite this, Wall Street investors shrugged off the haze of US President Trump's threat to impose tariffs on several major trading partners of the United States, leading the overnight US stock market to close higher in the four major indices, with the Dow Jones Industrial Average and the S&P 500 Index setting new records.