Markets are starting to believe that U.S. President Donald Trump may just carry out his threat to impose duties on all Chinese imports, said the CEO of a private equity firm, who added that new tariffs could prompt investors to flee to safer options.
"The market is beginning to digest that President Trump will go all the way, and I think that China has to be prepared he will go all the way," Victor Chu, the CEO of Hong Kong-based First Eastern Investment Group, told CNBC at the World Economic Forum on Tuesday.
"If China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports," Trump said in a statement on Monday when announcing the additional tariffs on Chinese goods.
"I think the market will continue to be nervous, I think the equity players will want to have flight for liquidity and safe haven, and it's very easy for them to liquidate portion of the equity position," Chu said, commenting on the latest round of tariffs being imposed.
But not all investors will react immediately and investors with a longer term view will have a wait-and-see approach, Chu noted.
"See how this will play out, particularly after the midterm elections, and see whether this is going to be really a longer drawn medium term and long drawn struggle, or whether there's going to be a political deal after mid November," he added.
He was referring to the mid-term elections due to take place in the U.S. on Nov. 6, where political watchers are widely expecting the Democrats to win back control of the House.
Meanwhile, Chu pointed out that there are longer term, "real issues" that have to be grappled with. That would include the emerging markets crisis, as well as a possible financial crisis that might happen soon.
In the past few weeks, economic troubles have hit Turkey and Argentina, leading to a selloff in emerging currencies, and with that, fears over emerging market contagion. Some Asian currencies have been affected, such as the Indonesian rupiah which slid to its weakest level in more than 20 years, and the Indian rupee which also took a hit.
— CNBC's Jacob Pramuk contributed to this report.
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