Time to rethink trade with China?
Thursday 15th October 2020
The Chinese economy has grown to rival that of the US. Its worldwide initiatives like the Belt and Road Initiative (BRI) and large cheap workforce have made it an attractive partner for business. Yet with straining relations between Washington and Beijing, which the Financial Times calls a “new Cold War” and a rapidly changing environment, companies may have to rethink doing business with China.
One area that illustrates the change in the business environment is with Chinese tech companies, of which Huawei is a prominent example. The Chinese telecoms company is at the forefront of this Cold War. The US ban has meant that foreign companies cannot trade with Huawei. As a result of the ban, Google, for example, is unable to trade with Huawei since last year, leaving Huawei without Google Mobile Services (GMS). The Nikkei also reports that the Huawei ban puts $26bn at risk for Japan, South Korea and Taiwan, with big firms like Sony having to seek US approval to trade with Huawei.
Though that has not stopped Huawei becoming the world’s largest smartphone maker (with a market share of 20%), much of the sales increase is in China and is expected to fall, possibly quite greatly, as sales in the West could dwindle without GMS. Huawei currently only has barely enough parts for smartphone manufacturing until early 2021 and may have to give up its smartphone branch entirely.
Huawei’s 5G services are also not faring well. Once en route to becoming a world leader in 5G equipment, it is now being banned by the US, UK, Australia, New Zealand and Japan, and faces increasing scepticism over national security in many countries. The shift in attitude is not confined to Huawei. The US has already banned ZTE and is trying to ban the popular Chinese media platforms TikTok and WeChat, over concerns of national security.
This is amid a global rise in Sino-scepticism. China has been a major trading partner for many countries. Yet its alleged responsibility for a lack of transparency over the Covid-19 pandemic has caused substantial losses for foreign companies. Starbucks has had to close 2000 stores in China, with Apple and others suffering serious disruption to supply chains.
Foreign companies and governments are, as a result, wary of relying on China. Samsung has already closed its last factory in China and Apple has shifted manufacturing of lower-end iPhones to India. The Japanese Government has subsidized 87 Japanese companies, including medical device-maker Hoya Corp, to move production to South East Asia or back to Japan. On the other hand, Germany, which has not banned Huawei, has insisted that relations with China must be equal, in that businesses must get equal treatment. Governments and businesses alike are increasingly rethinking their China strategy.
There is also a major concern for many businesses regarding trust of China, as shown in Hong Kong. The former British colony has been a popular location for companies overseas to trade with China, with its common law system and independent judiciary. Yet China’s breach of the Sino-British Joint Declaration has now resulted in it being described as ‘West Berlin’ given its spotlight in the globe, making it harder to establish business there.
According to The Chosun Ilbo, since the introduction of the extradition bill, there has been a mass loss of talents and capital from Hong Kong, with more than £3.8 billion (US$4.9 billion) withdrawn. Further, in response to the enactment of the Hong Kong Security Law, there has been almost universal backlash against China, and the US has already sanctioned 11 Hong Kong and Chinese officials, with the possibility to expand this list. This potentially even affects any institutions that do business with any of these officials, but they at the same time may breach Article 29 of the Hong Kong National Security Law by “imposing sanctions or blockade, or engaging in other hostile activities against the Hong Kong Special Administrative Region or the People’s Republic of China.” The US has also revoked Hong Kong’s special status, removing lower trade tariffs and a separate customs framework from Hong Kong.
As a result, it is perhaps no surprise that the American Chamber of Commerce in Hong Kong states that 30% of American companies are considering relocating elsewhere, and many Hongkongers are emigrating elsewhere. Companies will likely lose a gateway to China. The alternatives in mainland China, e.g. Shanghai, would mean being required by law to have a Chinese Communist Party member in the company and to hand over any information if the Chinese Government says so. Business with China will be far more difficult in this political environment. Tokyo, Taipei, and Singapore are eyeing up and prepared to divide Hong Kong’s market with their competitive offers.
At the same time, China’s dollar shortage may present a further risk for businesses attempting to trade with China. Most Chinese trade, including the BRI, is conducted using USD. Yet China is facing a dollar shortage. To get more USD, the dollar-denominated debt of Chinese banks and companies has also skyrocketed. According to the Washington Post and Bloomberg, Chinese banks have US$800 billion worth of foreign currency loans, while Chinese companies have a total of US$2 trillion in liabilities to foreign entities plus another US$650 billion under foreign subsidiaries. Yet China was forced to use $1 trillion of USD to prop up the Renminbi (RMB) in 2015 after a huge stock market crash and Chinese banks are running out of USD.
The US-China trade war has exacerbated the problem, forcing China to weaken the RMB against the USD and making it harder for Chinese companies to earn USD through exports. These firms are thus simply not repaying the loans, causing USD bond defaults by Chinese firms to have jumped threefold to US$12 billion from US$4 billion last year. Chinese banks are also increasingly worried that the aforesaid sanctions on Hong Kong might extend to them and cut them off from the US dollar payment system. In the long run, Chinese firms may lack the dollars needed to pay for raw materials and technology for their manufactured goods.
Worse still, trading with China is increasingly risky with the mountain of problems faced by the country, such as continued growth of its housing bubble and a sharp decline in internal demand spurred by, amongst other things, the recent floods.
With both US Presidential candidates focusing on China as a US adversary, and the widespread calls for decoupling or a rethink in relations, it is clear that Sino-scepticism will only grow in the foreseeable future. Given the potential issues in the Chinese economy, businesses may have to rethink their strategies — possibly to move supply chains elsewhere like the 87 Japanese companies earlier this year.
