The BlackRock Investment Institute, the think tank of one of the largest asset managers in the world, says China can weather the storm in case of more tariffs.
President Trump has threatened tariffs on $300 billion more worth of Chinese imports in the eventuality of future breakdowns in trade talks.
“We see limited direct economic impact of a ‘no deal’ scenario in the ongoing trade negotiations in which U.S. tariffs would be fully applied to all Chinese exports,” say BlackRock Investment Institute strategists led by Elga Bartsch, the Institute’s head of macro research. Bartsch and two other strategists said China “has the tools to cushion the impact.”
Their weekly commentary was published on June 10.
On the same day, Nomura Securities strategists in Hong Kong forecast tariffs on all of China’s exports to the U.S. at some point in the third quarter.
The more pressing concern for China is what happens to global supply chains and how both Chinese and global companies might shift supply elsewhere.
In one example, the Board of Investment for Thailand said in a phone interview last week that they have seen a 40% increase in the number of Chinese businesses in mainland China inquiring about setting up shop in Thailand.
“Applications for business investments in Thailand from Chinese companies is up three times from last year,” says Khun Chokedee, the deputy secretary general of the Thailand Board of Investment. Chokedee said the increase in actual, physical applications for a new business occurred over the first four months of the year versus the same period in 2018. “Part of those investment projects are the result of trade disputes,” he says.
Some companies with large supply chains in China are not going to wait for the next turn in U.S.-China trade negotiations. On Tuesday, Apple actually said that it could manufacture its iPhones outside of China if push comes to shove.
Another sign that the trade war is chipping away at China’s position as the world’s manufacturing and exporting hub, Vietnam is starting to soak up Chinese manufacturing jobs. Some of this movement was already in the works as China goes up the value chain, and improves labor and environmental laws.
Companies still like China, even with the tariffs. While U.S. companies may have to cut costs elsewhere or raise prices for consumers, China is dominant for a number of factors beyond simple economies of scale. China also has better logistics than most lower-cost producers in the neighborhood, and reliable, low-cost energy.
BlackRock Institute thinks China’s move toward greater reliance on the domestic economy is likely to accelerate. For instance, China is becoming a bigger producer of soybeans. Even if they were to produce just 5 million tons, that would be a sizable chunk taken out of current demand for U.S. and Brazilian soy.
China’s government is also subsidizing its tech sector, especially now that Washington has banned some of its major companies like Intel from supplying microchips to Huwaei, the world’s No. 1 telecommunications systems manufacturer.
Huawei became No. 1 in less than ten years. Its new smartphone business is less than five years old and has replaced Apple in mainland China.
China has evolved from the world’s factory of cheap consumer goods to an integral part of global supply chains for a wide range of products, including tech components. The deeply intertwined nature of global supply chains and other mutual interests have contained a full-blown escalation of tariffs so far, BlackRock Institute’s strategists wrote in their weekly commentary.
Recent earnings downgrades across the entire tech supply chain in Asia, particularly in South Korea, Taiwan and Japan, underline investor worries about the long-term disruption brought by the inclusion of American computer hardware bans in the trade dispute.
Chinese policymakers are likely to continue to provide economic support across the board, particularly towards favored industries like tech. That gives BlackRock a reason to believe China can handle more tariffs.
It warned that China’s policy tools come with side effects on the economy and markets.
“Our research on the ground still pointed to confidence in the resilience of the Chinese economy, despite trade talks grinding to a halt,” writes Bartsch.
One reason for the persistence of China bulls: Credit has turned positive. Banks are lending, even if the market is turning a blind eye to “bridge to nowhere” loans going to unproductive sectors of the economy, sectors that end up being overloaded with supply, depressing global prices.
Nevertheless, even if China comes out of the war bruised but not totally battered, the potential overhang of tariffs is a concern for foreign investment.
Worse yet, it is unclear if Washington will eventually use non-tariff measures to get China to bend—including what may amount to sanctions for human rights violations of Western China’s Muslim minority population and perhaps some stirring of the pot should Hong Kong pass a Beijing-favored law allowing the mainland to extradite those charged with criminal activity to stand trial in mainland courts.
Political risk isn’t going away. And that’s turning fund managers away from China.
Selling of Chinese equities by foreign investors hit record highs in April and May, with the greatest outflow of foreign capital since the launch five years ago of the “stock connect” program that gave global investors access to Chinese shares through Hong Kong brokerages.