Escalating trade tensions between China and the U.S. will increase downside risks for both countries and create uncertainty, said Zhu Haibin, chief China economist and head of China equity strategy at J.P. Morgan.

J.P. Morgan performed an analysis based on different trade war scenarios. 

The first scenario is based on the U.S. increasing the tariff on 200-billion-U.S.-dollars' worth of Chinese goods from 10 percent to 25 percent, Zhu said. 

"We estimated that it will probably affect China's GDP growth by roughly 0.4 percentage points in 2019 and 2020," Zhu said last Saturday at Tsinghua University during a two-day financial forum focused on supply-side reform and opening-up.

"For the U.S. side, the economic impact will probably be 0.2 percentage points, and the inflation in the U.S. is also picking up," Zhu said.

"It will indeed be a lose-lose situation," Zhu said.

According to official statistics, China's GDP grew at 6.4 percent in the first quarter of 2019, and the U.S.' GDP growth was pegged at 3.2 percent.  

In a more severe scenario, if a 25 percent tariff is implemented on all Chinese imports, then the economic hit on China will probably be much bigger, and the negative impact on the U.S. will also be much bigger.

"We hope that both sides will be taking a rational attitude to maintain the dialogue," Zhu said.

"As a market participant, we are cautious about the downside risk."

China continues its financial opening-up

J.P. Morgan believes that the trade tension won't affect China's course in financial sector opening-up.

"We need to separate the market moves away from the change in the reform agenda," Zhu said.

Despite the ups and downs in the China-U.S. bilateral trade talks in the past year, even when the talks are heading in the wrong direction, it still doesn't affect the Chinese policymakers' pace to reform financial measures, according to Zhu's observation.

"In that sense, we are confident that the financial opening-up will be a continuous trend," Zhu said.  

"It's very clear that the Chinese policymaker is determined to further push the financial reform and also the financial sector openness," Zhu concluded.

Zhu said that in the last one to two years, he has seen more significant progress in three important areas of financial opening-up.

The first one is the expanded access for foreign shareholders. "The market access to foreign rating companies, or the credit card business have been widened," Zhu said.

Second is the scope of the business operation. "For example, now the foreign banks, they have no restrictions, they can operate the same as domestic banks," Zhu said.

The third area is the relaxation of China's capital market to foreign investors.

"Particularly very significant progress has been made to encourage foreign institutional investors to invest in China's onshore bond market and equity market," Zhu said.

The MSCI included China's A-share market in its index last year, and this year they plan to expand the weight to 20 percent.

"We see that the global institution investors, their market share in China's onshore bond market and equity market, their holdings are starting to pick up, that's a very positive outcome," Zhu said.

Global investors show interest

Zhu also predicted that the global institutional investors and the global financial institutions will continue to be very interested in the Chinese financial market despite the escalation in trade tension.

"It's not surprising to see more volatility in the market. For example, for the first time this year, we see the capital outflow rather than the continuous inflow in the equity market," Zhu said.

"It's more of a rational reaction of the market, it doesn't mean that in the longer term that the global investors are losing confidence in the Chinese market," Zhu said. "Some of them are just taking the opportunity to make profits."