Last week’s announcement by Trump of more tariffs coming for everything shipped to the U.S. from China and Monday’s move by Beijing to allow for a weaker yuan begins Act III in the trade war.
Here’s the plot twist:
Treasury just hit China with currency manipulator status after market hours on Monday. It came at a time when nothing was trading. Investors were stuck in the Twilight Zone. Tuesday morning is going to be a madhouse rush for “sell China” orders by the algos. Wait for it.
As one hedge fund manager told me, “we’ve just thrown gasoline on the fire.”
Currency manipulator status gives Beijing less wiggle room because if they weaken the yuan to make up for tariffs, tariffs will likely go up to compensate.
We are in unchartered waters. At risk is what amounts to sanctions on key U.S. commodities like soybeans and pork by the Chinese government, and political risk involving Hong Kong as civil unrest continues there, putting its special trade status in the crosshairs of a China-bashing American Congress.
In isolation, a 10% tariff on $300 billion in combination with a 10% yuan depreciation would be functionally equivalent to Chinese households writing a check for $30 billion to the U.S. Treasury. “Trump may not have gotten Mexico to pay for its border wall, but he is getting China to pay (the government) for its tariff wall,” says China bear Brian McCarthy, chief strategist for Macrolens, a big picture investment research firm.
Currency manipulator status makes the trade war worse for China.
Meaningful and enduring negative feedback about China will lead to extreme financial market volatility in Asia, especially in China’s mainland equity market where a gambler’s approach to trading by the dominant retailer investor class there might cash out. And why not? China’s mainland stock indexes are up over 20% this year and this may be seen as the time to take money off the table.
Short sellers shouldn’t discount the possibility of the People’s Bank of China pumping money into the A-shares this week.
It’s too early to start expecting widespread defaults on China’s corporate dollar-denominated debt (which some firms estimate to be around $800 billion). A default would deal a harsh blow to foreign investors who have been big buyers of Chinese bonds as that market opens up and joins the major indexes.
The transmission mechanism from yuan devaluation to global securities is expressed more obviously through Europe and other emerging markets, especially those heavily linked to China — such as South Korea and Brazil. Both currencies had an ugly looking chart on Monday.
Meanwhile, the Fed can potentially isolate the U.S. economy from any economic fallout by cutting rates. Though this opens up a whole other can of worms, namely rates sinking to zero in the event of a recession.
The yuan settled at 7.05 to the dollar today after the central bank set the daily rate at just over 6.9 to the dollar. The currency is allowed to trade within 4% of that daily fixed rate. The yuan is now at its weakest level in over 10 years.
“These moves represent a significant escalation in the trade war,” says Joseph Brusuelas, chief economist for RSM, a global financial advisory firm.
“There is a specific logic and order of operations with respect to the tit-for tat retaliation likely to play out that will not result in longer-term inflation, but will instead create conditions for deflation and negative nominal interest rates along the U.S. maturity spectrum if a longer-term trade compromise cannot be reached,” he says.
I’ve spent 20 years as a reporter for the best in the business, including as a Brazil-based staffer for WSJ. Since 2011, I focus on business and investing in the big emerging markets exclusively for Forbes. My work has appeared in The Boston Globe, The Nation, Salon and USA Today. Occasional BBC guest. Former holder of the FINRA Series 7 and 66. Doesn’t follow the herd.
The ongoing US-China trade war is a distraction from China’s big problems: the blowing of multiple bubbles and the country’s soaring debt, which will eventually kill economic growth.
It happened in Japan in the 1980s. And it’s happening in China nowadays.
The trade war is one of China’s problem that dominates social media these days. It’s blamed for the slow-down in the country’s economic growth, since its economy continues to rely on exports. And it has crippled the ability of its technology companies to compete in global markets.
But it isn’t China’s only problem. The country’s manufacturers have come up with ways to minimize its impact, as evidenced by recent export data. And it will be solved once the US and China find a formula to save face and appease nationalist sentiment on both ends.
One of China’s other big problems , however, is the multiple bubbles that are still blowing in all directions. Like the property bubble—the soaring home prices that makes landlords rich, while it shatters young people’s dreams of starting a family, as discussed in a previous piece here.
New Home Prices 2015-19
Unlike the trade war, that’s a long-term problem. Low marriage rates are followed by low birth rates and a shrinking labor force, as the country strives to compete with labor-rich countries like Vietnam, Sri Lanka, the Philippines and Bangladesh—to mention but a few.
Then there’s the unfavorable “dependency rates” — too few workers, who will have to support too many retirees.
And there’s the impact on consumer spending, which could hurt the country’s bet to shift from an investment driven to a consumption driven economy.
Japan encountered these problems over three lost decades, even after it settled its trade disputes with the US back in the 1980s. China experience many more.
Meanwhile, there’s the infrastructure investment bubble at home and abroad, as discussed in a previous piece here. At home infrastructure investments have provided fuel for China’s robust growth. Abroad infrastructure investments have served its ambition to control the South China Sea and secure a waterway all the way to the Middle East oil and Africa’s riches.
City overpass in the morning
While some of these projects are well designed to serve the needs of the local community, others serve no need other than the ambitions of local bureaucrats to foster economic growth.
The trouble is that these projects aren’t economically viable. They generate incomes and jobs while they last (multiplier effect), but nothing beyond that—no accelerator effect, as economists would say.
That’s why this sort of growth isn’t sustainable. The former Soviet Union tried that in the 1950s, and it didn’t work. Nigeria tried that in the 1960s ;Japan tried that in the 1990s, and it didn’t work in either of those cases.
That’s why bubbles burst – and leave behind tons of debt.
Which is another of China’s other big problem s.
How much is China’s debt? Officially, it is a small number: 47.60%. Unofficially, it’s hard to figure it out. Because banks are owned by the government, and give loans to government-owned contractors, and the government owned mining operations and steel manufacturers. The government is both the lender and the borrower – one branch of the government lends money to another branch of government, as described in a previous piece here.
But there are some unofficial estimates. Like one from the Institute of International Finance (IIF) last year, which placed China’s debt to GDP at 300%!
Worse, the government’s role as both lender and borrower concentrates rather than disperses credit risks. And that creates the potential of a systemic collapse.
Like the Greek crisis so explicitly demonstrated.
Meanwhile, the dual role of government conflicts and contradicts with a third role — that of a regulator, setting rules for lenders and borrowers. And it complicates creditor bailouts in the case of financial crisis, as the Greek crisis has demonstrated in the current decade.
I’m Professor and Chair of the Department of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance. I’ve have also published several books, including Collective Entrepreneurship, The Ten Golden Rules, WOM and Buzz Marketing, Business Strategy in a Semiglobal Economy, China’s Challenge: Imitation or Innovation in International Business, and New Emerging Japanese Economy: Opportunity and Strategy for World Business. I’ve traveled extensively throughout the world giving lectures and seminars for private and government organizations, including Beijing Academy of Social Science, Nagoya University, Tokyo Science University, Keimung University, University of Adelaide, Saint Gallen University, Duisburg University, University of Edinburgh, and Athens University of Economics and Business. Interests: Global markets, business, investment strategy, personal success.
Capital Today founding partner Kathy Xu laughs when she talks about her career-making early investment in Chinese e-commerce company JD.com, which began with a late-night meeting with founder Richard Qiangdong in 2006:
“We met at 10 p.m. and we talked until 2 a.m.!” she tells Forbes. “I gave him five times the amount of money that he asked for — I was so worried that otherwise he’d meet with other investors.”
Capital Today managed to become the startup’s sole Series A investor and Xu’s check — $18 million USD — paid off royally as JD swelled into an ecommerce giant, with Xu working closely with Qiangdong along the way, advising him on key hires and company branding. Two years after JD went public in 2015, her firm cashed out returns of $2.9 billion.
A couple years and a handful of new deals later, Xu is making her bold debut on the Forbes 2019 Midas List, ranking in the top 10 venture capitalists in the world in her first year of inclusion (her work has previously been highlighted on Forbes China’s list of top 25 women venture capitalists in China).
This year’s list features 21 investors who are either of Chinese nationality or work for a firm based in China, the largest number ever on the list and a tribute to the growing power of China’s startup and venture capital ecosystems.
Xu says that Capital Today, which manages approximately $2.5 billion, focuses all its energy on companies based in and serving China and has zero interest in looking outside the country.
“It’s a big enough market, the economy is doing well, the entrepreneurship is great, and we’re starting to see real innovation booming for the first time,” she says. “It’s a lucrative market to focus on.”
Xu says that her team disciplines itself to only five or six deals a year in business-to-consumer companies and spends a lot of time with founders that it invests in.
“There’s more and more money here now, so building a connection with the entrepreneur and spending a lot of time with them is more important than ever,” she says, citing proximity as an advantage over out-of-country investors who only make occasional business trips.
Beyond JD.com, other Capital Today portfolio highlights include Chinese gaming company NetEase, discount e-commerce site Meituan-Dianping, classified listings site Ganji.com (which merged with 58.com in 2015), Yifeng Pharmacy, which went public in 2015, and hot snack company Three Squirrels Snack Food.
Other Chinese investors who made this year’s Midas list are Sequoia China partner Neil Shen, who topped the rankings for the second year running, Qiming Venture Partners’ managing partner J.P. Gan, No. 5, and Hans Tung from GGV Capital, No. 7.
China’s services sector growth rose for the second month in a row and hit its highest level since June 2018 , according to the Caixin China General Services Business Activity Index, released on Friday. Caixin said that increased foreign demand for Made in China goods and improving business confidence helped. The Index hit 53.9 in December from 53.8 in November and 50.8 in October. While the number is generally flat from November, it is much higher than the third-quarter average and comes at a time when trade tensions remain high.
Liu Qiangdong, better known as Richard Liu here, is already a billionaire. At the 7-Fresh grocery store in Beijing, not far from Liu’s JD.com, there’s this fruit stand that looks awfully similar to anything an American would find at a Trader Joe’s or Wholefoods. It’s organic. It’s small farm friendly. But here at 7-Fresh you can scan a barcode and find out where the apples came from, thanks to a blockchain system they’re running. Meanwhile, over my head is a small assembly line of green shopping bags filled with online food orders. It’s the Jetsons. I don’t think they have this at Wholefoods………….
Move over, U.S. economy: The real action in global forecasting these days lies in figuring out what is happening in the world’s second largest economic powerhouse, China.Wall Street is increasingly worried about slowing growth in foreign economies despite strong economic numbers at home. Federal Reserve Chairman Jerome Powell, too, recently identified weakening overseas economies as a major risk to the U.S. outlook. And these days, when investors say overseas, they really just mean China. After all, other emerging economies are viewed as too small individually for potential domestic crises to have large international spillovers…………….
Chinese President Xi Jinping’s mantra that homes should be for living in is falling on deaf ears, with tens of millions of apartments and houses standing empty across the country. Soon-to-be-published research will show roughly 22 percent of China’s urban housing stock is unoccupied, according to Professor Gan Li, who runs the main nationwide study. That adds up to more than 50 million empty homes, he said. The nightmare scenario for policy makers is that owners of unoccupied dwellings rush to sell if cracks start appearing in the property market, causing prices to spiral……….
The rich grow old like everybody else. China’s wealthiest are, on average, 55.7 years old, up from 54.7 a year ago. Still, newcomers made sure the club of China’s wealthiest has more young blood than it did in 2017. This year, 15 of China’s 400 Richest are under 40, compared to 13 last year. Among them, two inherited their fortunes; the rest are self-made — incidentally, all in tech. Together the 15 are worth close to $63 billion……..
The Chinese internet has grown at a staggering pace — it now has more users than the combined populations of the US, UK, Russia, Germany, France and Canada. Even with its imperfections, the lives of once-forgotten populations have been irrevocably elevated because of it, says South China Morning Post CEO Gary Liu. In a fascinating talk, Liu details how the tech industry in China has developed — from the innovative, like AI-optimized train travel, to the dystopian, like a social credit rating that both rewards and restricts citizens…..