Census trade data on US-China decoupling too hot to handle, Plus new contagion fears in China's $2.9 trillion trust industry & BYD calls for Chinese EV cartel -- China Boss News 8.18.23

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What happened.

The Census Bureau last week released some remarkable US trade data revealing a new 20-year low in US imports from China, while purchases from Mexico, Canada, Europe and other parts of Asia all rose significantly.

In its aptly-titled How U.S. and China Are Breaking Up, in Charts, the Wall Street Journal made short work out of the new data, plotting declines in Chinese imports across a wide range of products - including machinery, electronics, smartphones, semiconductors, apparel and furniture.

David Lynch at the Washington Post wrote that U.S. companies are “accelerating” efforts at decoupling while “Washington and Beijing labor to put a floor under their sour relationship.” “Decisions made in countless boardrooms — not the White House — are behind the change,” he said.

The new Census data, however, didn’t seem to bother two experts Lynch interviewed who dismissed its decoupling implications.

Economist Brad Setser, a senior fellow at the Council on Foreign Relations questioned whether the Census Bureau’s data could really lead to any conclusions about decoupling: “There is no doubt about the recent weakness by the way — but some real doubt about the extent the U.S. really has decoupled with China,” he demurred.

Senior professor of international trade policy at Cornell University, Edward Prasad, gave the possibility some breathing room - but only just, when he told WaPo: "[t]he reality is that no other economy can match the scale and scope of China’s manufacturing sector, although the evolution of both domestic and external factors suggest that we have already hit or passed the peak share of China in world manufacturing.”

A Reuters analyst, more confident, said there was “no decoupling” although he entertained the notion that the West and China might “drift apart.”

Doubt as the lifeblood of science and all that, but this is getting ridiculous.

Why it matters.

The difficulty with the D-word

To be fair, there are a number of good reasons why a supply chain analyst might flunk a US-China decoupling exam.

For starters, China Boss still hasn’t seen a “decoupling” definition anywhere that everyone uses the same way and at the same time. Then Europe put up such a fight for its dry “derisking” baloney that the US finally agreed to sandwich it into official messaging. Bland.

Along with the ability to decipher official euphemisms, our wonky professional must also be able to synthesize the theories and histories of trade, geopolitics, and business management all at once - which, if you think about it - is a truly unique task.

Add to that the extraordinary pace of downward spiraling US-China relations, and the opaqueness of Beijing’s Marxist-Leninist system . . . and, well, you can see how the reports of even the greatest advisors could end up in the trash.

But if the above isn’t rigorous enough, there is also precedent to show how prominent heads of multinationals put a dizzying spin on their public relations statements as they navigate US-China tensions.

In March, Apple’s Tim Cook “stressed a symbiotic relationship with China” to officials there as his firm’s suppliers “accelerated the move” to India. Commercial “commitments” can be that unfair.

Of course, a US-China decoupling guru that can always see through such fog probably doesn’t exist. But that doesn’t excuse the failure to question outdated assumptions about China’s grip on businesses.

Take, for instance, recent surveys showing that US investor faith in China as a place to do business is plummeting and, currently, according to the US Chamber of Commerce in South China, at a “three year low.”

Earlier, optimistic projections for China’s post-Covid recovery have been upended with the latest reports on yuan depreciation, deflation, massive stock sell-offs, disappointing consumer spending and youth unemployment so high, the Party refuses to continue publishing it, now grabbing headlines.

Business confidence would also be impacted by Beijing’s disappearing of executives, continued threats against Taiwan, and its support for Russia, who after 18 months is still hitting civilian targets in Ukraine.

In other words - use graphs, surveys, confidential sources, whatever. So long as Xi Jinping steers policy-making in China, global supply chains will move, and that is going to bring with it a host of challenges - the management of which will be difficult enough without some stuck-in-the-mud old guard still hesitating over a foregone conclusion.

The believers

Last week, Bloomberg analysts called attention to what they said was one of the “the nascent signs that a ‘decoupling’ of the world’s economic superpowers . . . is starting to happen.”

Murray and Al-Rikabi, Bloomberg (WaPo reprint):

According to a March report by the New York University Stern School of Business and parcel-delivery giant DHL, the US-China trade relationship is starting to show a “general pattern” of decoupling. This research said that in 2022, the share of imported Chinese goods as a percentage of total US imports fell to 16.6%, down from 21.6% in 2017 — the last year before Trump launched the trade war. The value of US goods exported to China in 2022 as a percentage of total US exports fell to 7.3% from 8.4% in 2017.

And even the “boomy talk” finance folks have become converts.

In their Top of Mind (May 2023) report, "US-China: More Decoupling Ahead?", Goldman Sachs economist Andrew Tilton and Hui Shan applied their talents to defining the scope of decoupling, rather than pushing the theory to the fringe edge.

In doing so, they diligently described the long and windy path that delivered us cliff-side - from the failure to resolve bilateral imbalances, the Hong Kong protests, the Covid Pandemic, and Russia's invasion of Ukraine, to China’s civil-military fusion program and problems with market access.

We should all be paying that kind of attention to the restructuring of global trade to address its future impact. Beijing certainly is.

Last month, Bloomberg analysts reported how Xi is trying to reduce the impact of a break-up with the West, by redirecting streams of cash from the Gulf states in deals that move "well beyond crude purchases.”

And under Xi's leadership, the security of China's food supplies "is a constant preoccupation," Genevieve Donnellon-May at the Lowy Institute said. China wants “to reduce reliance” on US agriculture “amid worsening ties.” Hence, it is working tirelessly to “diversify its food and fertilizer import sources via a ‘Food Silk Road.’”

“Beijing is aware that safeguarding food supplies amid external geopolitical uncertainties and climate shocks is essential to maintaining the legitimacy of Chinese Communist Party rule. This global agricultural diversification strategy not only helps Beijing avoid a “Malacca Dilemma” in relation to global maritime chokepoints but also allows China to increase its control over all stages of its global food supply chains,” Donnellon-May wrote.

This Week’s China News

The Big Story in China Business

NEW SHADOW BANKING CONTAGION FEARS: "[L]oosely regulated" companies in China's $2.9 trillion trust industry are beginning to show signs of failure, The Washington Post this week reported.

Investors complain that firms "linked to financial giant Zhongzhi Enterprise Group Co.” missed payments on several high-yield investment products,” stoking new worries “at a sensitive time” in China’s economic recovery, news staff said.

$138 billion AUM: Zhongzhi is "a shadow banking giant" that currently manages “about $138 billion in assets,” WaPo noted. Worse, it holds a 33% stake in Zhongrong Trust, which has “270 products totaling 39.5 billion yuan coming due this year.”

Sum of all fears: Zhongzhi’s troubles are, particularly, worrisome since its investments span across many asset types, like real estate, stocks, bonds and commodities. Zhongzhi's missed payments also come on the heels of other bad economic indicators - like new signs of turmoil in China’s property market, hints of deflation, declining foreign investment and exports, rising unemployment and low household and business borrowing.

"The crisis at Zhongzhi feeds perceptions that poorly regulated parts of China’s banking industry may be ill-equipped to cope with those problems, increasing the risk of ‘contagion,’ where an upset in one area of the finance industry can quickly cascade and cause a broader crisis of confidence,” WaPo staff said. (Emphasis added.)

J.P. Morgan warns of “vicious cycle”: On Monday, J.P. Morgan analyst Katherine Lei warned that troubles at "China's largest private developer Country Garden could set off a 'vicious cycle' of financing stress" in China's real estate investment trusts (REITs) industry, raising more red flags for Zhongzhi.

"Unlike banks, which have holding power and are able to roll over credit to wait for an eventual resolution, alternative financing channels such as trusts may default once trust investors are unwilling to roll over the products. The default events may lead to a chain reaction on developer financing, adding stress to POE (privately owned enterprise) developers and their creditors,” she said.

In other China business news

BYD CALLS CHINA CARMAKERS TO ‘UNITE,’ ‘DEMOLISH OLD LEGENDS’: