The US-led trade war is already three months old and Beijing is starting to feel the pain. But there’s a whole lot of pie in China and every reason why Nordic businesses can take advantage. Just do your due diligence, Amy Zhuang tells Martin O’Rourke
If anybody tries to convince you that China’s not hurting after three months of trade warfare with the US, a few minutes in Amy Zhuang’s company will soon disabuse you of that notion.
“The impact on China is already visible,” she says in interview with Nordea Markets chief editor Martin O’Rourke. “The rate of exports is decelerating and next year, they will actually contract. A lot now depends on what happens at the US mid-terms. The composition of congress after the mid-terms will be key. A split Congress could actually be quite a bad thing for China.”
That’s quite some timeline. Given the elections take place in November, such an outcome on Zhuang’s analysis would almost certainly see the battle spill over into 2019 and effectively take the war to a minimum six months. That also raises the spectre of US president Donald Trump ramping up the dispute. He has in his arsenal a further $400 billion-plus worth of trade penalties waiting in the wings, ready to be unleashed, especially if a weakened Congress has little stomach for the fight. It’s quite a prospect.
“The Shanghai Stock Exchange is down 10-15% since the trade war started and from Trump’s perspective, he’ll be viewing this as a win because the major US indices are up,” says the Nordea Markets chief analyst. “If the government has to, it will intervene through getting some of the big state-owned pension funds to long the market. But it’s not a real solution.”
A glance at the SSE does of course tell its own story. It topped out at 5,166.35 on June 12, 2015, before falling nearly 30% within three weeks. And, with the inevitable spikes here and there, it’s continued to slide shuddering to a Monday close (September 17, 2018) of 2,651.79, a near four-year low. To put that in context, that’s virtually half the value from that 2015 high spot. The last thing China evidently needs is a trade war.
Yet, Singapore-based Zhuang remains optimistic. Worst-case scenarios are one thing. How things might actually pan out in reality is another.
“I don’t see the trade war resolving in the next few months but I am confident the dust will settle in the first half of 2019,” she says, in a skype call. “In the US, they are under-estimating how the trade war will impact the US economy. Things are going to take a turn for the worse there too and that will impact the stock market performance and consumer prices.”
“Trump will believe he holds the upper hand because of the respective performances of each country’s stock markets, but when business profits start to take a hit and consumer prices increase, you’ll see a change,” she says. “Once we are well into 2019, I really don’t see the trade war generating anything like the same amount of headlines as we are seeing now.”
The Trump factor
Of course, there is an unpredictability about Trump that could skew even the most well thought-out and carefully-taken position, Zhuang concedes, but she also suspects that much of the recent agenda is good old-fashioned politicking at a time when he needs to keep his constituency on side and recharge his batteries for another presidential campaign as 2020 begins to loom into view.
“He’s an opportunist and he comes from the business world,” she says. “For him, China is an easy target and he’s pushing hard against China as he thinks this is what voters want to hear from him.”
China as the bogeyman does of course play nicely in certain parts of the US and Trump has tapped into that before with enormous success as his presidential campaign of 2016 demonstrates. And the US has been there. It was the upstart at the start of the twentieth century taking on the European powers and specifically the British Empire before it emerged top of the pile and then fought off a perceived challenge from Japan in the 1980s that was ultimately more imagined than real. It’s classic decline of empire stuff, says Zhuang.
That’s most likely to manifest itself in a battle to become the globe’s currency of choice. The US has it. China wants it. And the battle could be intense.
“A few years ago, I would have called it very likely that the yuan would win,” says Nordea’s Asia specialist. “I still see it as definitely possible but I can’t have the same certainty as a few years ago.”
The problem lies with China’s lukewarm efforts to liberalise financial markets, she says. “If the Chinese currency is to challenge the dollar, then markets need to be fully open. You can’t keep going in and out of the market with capital controls or even more opaque ways of intervening in markets and this makes the whole process of liberalising the financial system very complicated.”
Zhuang points to an over-leveraged banking sector as grounds against opening up markets, given the nature of the debt on their books, and an inability to raise the game in more competitive circumstances. “I’m not convinced China will ever open completely. If they opened up to foreign competition, they might not survive.”
Instead, says Zhuang, China has a plan. A cunning one even, as a certain Blackadder might once have said.
The much-vaunted Silk Road Plan may have garnered all the plaudits in recent years, and in many ways deservedly so, but it is likely to run into headwinds over the next decade or so.
“The Silk Road won‘t go at the same pace as it has so far. You’re starting to get some pushback against the projects with less China-friendly governments elected in the likes of Pakistan and Malaysia to name a couple,” Zhuang says. “Yes, there has been a lot of benefit from the type of infrastructure projects backed by Chinese money, but there are already protests in parts of Africa and some of the central Asian states over the impact on ecosystems and the work culture. It’s not a panacea.”
There is another project nevertheless that Nordea’s chief analyst in Singapore has her eye on that’s lesser known but potentially every bit as important as the Silk Road over the next decade.
“Beijing launched a ‘Made in China 2025’ initiative three years ago that was little heralded at the time, but is kind of like a blueprint for where it wants to be in the next decade. The plan revolves around high tech and China expects to control 80% of the domestic market in ten top industries by then.”
Industries primed for the campaign include cutting-edge IT, clouding, big data, aerospace and Robotics. It is quite a remove from the high volume manufacturing that characterised China at the turn of the century which has left the country with a stained reputation for quality that it is trying to erase.
“There’s an irony here, of course,” Zhuang says. “If China does control 80% of these markets domestically by 2025, then it will likely require intervention to limit foreign involvement and corroborate the kind of criticisms Trump has levelled at China for not being open to competition. I’m not sure that China cares all that much though. It sees itself as the tech hub of the future superseding the US, Germany and Japan.”
It is, says Zhuang, a more subtle effort to take the challenge to America. “It’s not really as simple as seeing it as an existing power against a new power. China’s ambitions are clear. It wants to be best in all markets. It has to be best in all markets. And, very specifically, it will concentrate on technology developments over the next decade.”
Not everything will run smooth towards that goal, says Zhuang. Tensions among China’s rising middle class are growing, dissatisfaction with pollution levels, congestion and food health remain a constant and these simmer beneath the surface as a wary Beijing knows only too well.
And yet, it is that middle class that should prove the ultimate allure for Nordic companies wishing to do well in China. Estimates vary but at least some 300 million Chinese now have purchasing power on a par with their western European counterparts and Zhuang suspects that figure could be seriously under-cooked.
“China’s been pushing for a shift from an investment-led economy to one that is consumption driven, but it hasn’t really gained traction yet,” she says. “What we are really seeing is domestic-investment driven rather than consumption driven.”
Nevertheless, a middle class that Zhuang estimates easily surpasses 500 million should be music to the ears of Nordic companies wishing to make the most out of China. Whatever the impact of the trade war, China’s one mighty big bowl of noodles and there is plenty of opportunity to be had. It’s not for the faint of heart though. Or for the reckless, says Zhuang.
“Definitely do your due diligence,” she says. “Look at your competition, the size of your competition and also the regulatory framework into which you’ll be entering including what might be in the pipeline ahead.”
“Don’t expect the Chinese to roll out the red carpet for you. Those days are gone. Competition is extremely fierce and it’s key to understand that they are not guaranteed survival either. Just adjust your expectations and have a plan.”
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