Trade War

Newsletter 13 - March 3, 2020

Welcome to the 13th edition of Trade War (and apologies for its late arrival.) This week’s newsletter will be the last one before Trade War goes on a likely several week-long hiatus. I will be busy with various launch events for my new book “The Myth of Chinese Capitalism”, on sale starting March 10, and so will need to focus on that.

And hey, as long as we are on the topic, for those of you in New York City next week please consider joining me and The New Yorker’s Jiayang Fan at the Asia Society on March 12. We will be talking about my book, the coronavirus, trade and more on the U.S.-China relationship. See details below.

If you miss that, I will also be speaking at the Overseas Press Club of America on March 17 (St. Patrick’s Day, but no green beer available). Please consider attending that as well.

China’s great Return-to-Work

Even as factories begin to reopen and employees come back, it is hardly an easy process. Here is a Bloomberg News piece on the great Return-to-Work.

Providing breathing space for struggling banks

Taking a leaf from the U.S. in 2009 when mark-to-market accounting was eased to help banks get through the financial crisis, China is delaying recognition of its banks’ growing bad loans.

“This will provide breathing space,” Harry Hu, of S&P Global Ratings told Bloomberg News. “It will also likely undermine standards, making some Chinese banks less creditworthy in the long run.”

“An unexpected boon”

Not everyone is doing badly. One big winner is the online education industry. E-learning companies are doing brisk business as schools remain closed and students study from home. The big winner is TAL Education and its founder Zhang Bangxin. Here is a good piece on this trend from Yue Wang in Forbes.

Buy the dip

Stocks may be suffering but that won’t last forever. UBS is telling its clients that now is the time to buy, reports Bloomberg News.

But run far away!

At the same time, multinationals are looking far afield as they try to diversify their supply chains out of China. Both the trade war and the coronavirus are “pushing multinationals to move production to places that are as uncorrelated with China's cycle as possible,” writes economist Alicia Garcia Herrero in the Nikkei Asian Review, mentioning Mexico, Turkey and Eastern Europe as possibilities.

First negative growth since the Cultural Revolution?

Fears are growing that China will report negative growth in GDP in the first quarter; that would the first time since the Cultural Revolution, reports the South China Morning Post.


Citing China fears, Marcio Rubio is urging a CFIUS review of an AT&T media deal, reports Bethany Allen-Ebrahimian of Axios. AT&T wants to sell its stake in a European media company to a Czech private equity firm that has been implicated in a CCP influence scandal, Allen-Ebrahimian writes.

“Propaganda can’t move mountains”

Chinese officials are privately complaining that Xi Jinping is putting them in an impossible position as they try to control the virus but also boost economic growth, Lingling Wei writes in the Wall Street Journal.

Here comes spending

Beijing has announced big spending on urban projects to boost growth. “The city government said a special team would be set up to ensure the construction of the key projects and would not be affected by the ongoing coronavirus epidemic,” reports the official Xinhua News Agency.

Notable/In Depth

My latest take on the crisis as well as a nice plug for my book, here in the Missoulian newspaper.

Three articles suggest there was a coverup in China of the coronavirus, reports Jeremy Goldkorn for SupChina.

Trade War

Newsletter 12 - February 24, 2020

Welcome to the 12th edition of Trade War. The economic fallout from the coronavirus continues to widen, putting more pressure on multinationals to move at least part of their supply chains out of China. Meanwhile, at least one official in the Trump administration is using the crisis as an argument to bring manufacturing and presumably he hopes jobs, back to the U.S.

“Got to get that back on shore”

White House trade adviser Peter Navarro says the crisis shows, “not surprisingly,” that the U.S. has offshored too much of its supply chain, reports Bloomberg News. “A lot of [the U.S. supply chain] is in China, some of it is in India, some in Europe, but we’ve got to get that back on shore,” Navarro said on February 23.

AirPods, iPad, & Apple Watch Crossing the Strait?

Meanwhile big U.S. (and global) brands like Apple may be moving some of their supply chain out of China, but it isn’t coming to the U.S. Apple is “shifting manufacture of AirPods, iPad, Apple Watch from China to Taiwan due to ongoing coronavirus outbreak,” reports the Taiwan News.

Apple in China continues to take a hit as its supplier factories are running at only partial capacity, and business is lackluster as it begins to reopen its stores which earlier had been shut because of the virus, reports China’s Global Times. “Apple's iPhone sales in China may fall by at least 40 percent to 50 percent in February and March compared with the same period last year,” the state paper reports, citing industry analysts.

Worker dorm quarantines

⁦‪Even as some of China’s hundreds of millions of migrant workers start to return to their work places, many are first facing quarantines. At Apple top supplier Foxconn’s Kunshan facility, at least dozens are being held in quarantines in their dormitories, reports NPR’s Emily Feng.

And a blow to wages

All those workers who are undergoing quarantine likely at reduced pay and those who have yet to return, are taking serious salary hits. For the average migrant worker returning to work two or three weeks later than usual, that means a reduction in annual income of roughly 5-6%, 1-1.5 trillion RMB, or 1-2% of GDP, estimates Beijing-based finance professor Michael Pettis.

Surviving is the goal

At smaller firms, just surviving is the goal. According to a survey this month of small- and medium-sized Chinese companies a third “only had enough cash to cover fixed expenses for a month,” with another third only enough for two months, reports Bloomberg News.

There’s no money

“Across China, companies are telling workers that there’s no money for them -- or that they shouldn’t have to pay full salaries to quarantined employees who don’t come to work,” reports Bloomberg’s Lulu Yilun Chen 

Media and Sell Side dripping out reality on lag

Investor Dan McMurtrie of Tyro Partners predicts two quarters of “severe supply chain disruption.” That ugly fact is still being obscured however as “Media and Sell Side [are] dripping out reality on lag because they have to maintain access,” McMurtrie tweets.

Service sector, just as bad — maybe worse

“Most of the coronavirus attention has focused on manufacturing supply chains. The hits to the service sector, in my opinion, are just as bad — maybe worse — and not recoverable,” tweets Tony Fratto of Hamilton Place Strategies. “People aren’t going to make extra restaurant visits or take make up the taxi rides they missed.”

China economy running at 50% to 60% capacity

China’s economy was likely running at about 50% to 60% capacity in the week to Feb. 21, says a Bloomberg Economics report.

CFIUS Bombshell

Back in the U.S. some are predicting that security reviews of foreign investment—through CFIUS or the Committee on Foreign Investment in the United States—are set to grow dramatically. Calling it a “bombshell” Peterson Institute research fellow Martin Chorzempa predicts it will be much more “cumbersome and costly” for foreigners to invest in the U.S. going forward.

Notable/In Depth

The U.S. declared Xinhua, CGTN, People's Daily, China Radio, and China Daily as state operatives (and Beijing retaliated by expelling three Wall Street Journal reporters).

"Ears and Eyes of the Party" It’s worthwhile to recall how close the links have always been between China’s state-controlled media organs and the Chinese Communist Party. Here is Xinhua editor He Ping admiring a banner reading "Ears and Eyes of the Party."

China car sales going down…

And a personal plug as publication nears. The My new book THE MYTH OF CHINESE CAPITALISM will be released March 10. “A clearheaded and persuasive counter-narrative to the notion that the Chinese economic model is set to take over the world” says Publishers Weekly. Available for preorder:

Trade War

Newsletter 11 - February 17, 2020

Welcome to the 11th edition of Trade War. It’s one week after China officially reopened for business and while there are some signs of life, there are also numerous flashing warning lights for the Chinese economy its ability to trade as before with the world.  

“The Chinese economy is the real concern”

Hao Hong, head of research at Bank of Communications International points out that \while people may be overly worried about the coronavirus (not sure I agree), they should be very concerned about the Chinese economy (100% agree).

“People are too pessimistic about the coronavirus. But the Chinese economy is the real concern,” he writes on twitter, posting a chart showing how China’s domestic airline capacity utilization has collapsed.

I’m staying home

Meanwhile, it’s not just travel by air in China. Travel by sea, road and rail also has been devastated by the virus, as this tweet by a Peking University professor shows.

Where are the workers?

You can’t do business without workers—that in part appears to be the dilemma facing China’s companies as they struggle to resume operations. That’s particularly true of those who rely on migrants, most of which are not yet returning to the cities to work, writes Stephanie Studer in the Economist.

“On the verge of death”

Migrants may in part be staying away as they fear no jobs will be awaiting them. China’s small businesses appear to be in serious trouble, with 30 percent planning job cuts and one-tenth, “on the verge of death,” reports the South China Morning Post.

“Eviction measures includes water & power stoppage”

Making matters worse, those migrants who might consider returning, are finding they are not welcome and indeed are being forced out of neighborhoods in many cities, even when that’s where they had previously been living.

“An inherent tension”

Simon Rabinovitch who is consistently very good on calling China’s economy, makes a key point in the Economist: there is a tradeoff between continuing to aggressively curb the virus spread and getting China’s economy back on an even keel.

In short, there is no way for the economy to grow as long as cities are quarantined, roads blocked, and very importantly, people stay home, effectively withdrawing from most economic life.


Beyond Hubei's Wuhan, center of the coronavirus, other cities continue to clamp down on their populations. That’s happening in Huanggang, some 30 miles east of the provincial capital.

And quarantines

Even as the central government in Beijing pushes for companies to reopen and business to restart, the city has just announced that there will be a 14 day-quarantine for returnees to the capital—hardly a move designed to facilitate easy operation.

There go the barrels

Goldman Sachs predicts that China’s oil demand will fall by around four million barrels a day, because of the coronavirus.

Meanwhile, back in the U.S.A.

Last year was tough on state economies due to the trade war—now they have the coronavirus affecting business. “Exporters from most U.S. states experienced dismal sales to China last year as tariffs slammed products ranging from wheat and whiskey to ginseng and gas,” reports Bloomberg News. With the virus, expect the pain to continue, “phase one” deal or not.

Anybody home?

The USTR announces a hotline for resolving disputes related to the “phase one” deal—and no one answers the phone….

Tariffs? Who said tariffs?

U.S. VP Mike Pence avoids the word tariffs in a 45-minute long speech to the manufacturing association on February 14.

“Cascading protection”

Economists call a second set of tariffs on top of previous tariffs, for products earlier hurt by duties, “cascading tariffs.” That’s what steel and aluminum products are now experiencing, according to the Peterson Institute. “Trump [admitted] these new tariffs are to help an industry suffering because of his previous tariffs,” writes the Peterson Institute.

Tariffs and U.S. jobs

And perhaps not coming as a surprise: it turns out tariffs don’t always protect jobs, at least in the steel and metals industry, points out this Bloomberg Opinion piece.

Notable/In Depth

Look what happens if you say you can make masks. Your stock goes WAY up.

Good thread of video clips showing how a popular Beijing shopping mall is still deserted, even as officially China reopens for business.

China-dependent Southeast Asian economies are suffering, as Trinh Nguyen of the Carnegie Endowment explains in this piece.

Nice informative story from Bloomberg New’s Peter Martin about the former Shanghai mayor now being sent to Hubei to do crisis control. He’s a Xi guy, surprise, surprise…

Trade War

Newsletter 10 - February 10, 2020

Welcome to the 10th edition of Trade War. Monday February 10 was the day that business was supposed to resume to normal across China, with people returning to work and companies reopening, including its many export factories. That clearly did not happen.

Overzealous local officials

Even as the central government in Beijing announced the official national reopening, local governments across China ignored the order. In Guangdong province in particular, China’s biggest export manufacturing base, cities from Zhongshan to Foshan instructed factories to wait, usually until March 1 to reopen, as this tweet thread shows.

Fears that factories — and construction sites -- could become a vector for disease transmission are well-founded, given that many workers sit near each other on production lines or work in close proximity on building sites, Wang Kan, professor at the China Institute of Industrial Relations, tells Trade War in a phone interview.

“Back to work”

What would normally be packed subway stations across the country, not surprisingly, did not show a large pickup in use. While many white collar workers tried to do their jobs from home, many other people still had no work to return to. Not just factories but also company offices across the country—also often responding to orders to stay shut from the local governments where they are based—did not reopen either.

“They are afraid”

Most small shops, those that sell fruit, vegetables or daily use goods, and that traditionally have been the lifeblood of China’s cities, have not restarted business; their owners and employees, the bulk of which are migrants and had returned to their homes in the countryside for the Lunar New Year, have now delayed their return to the cities. “They have no desire to come back right now as they are afraid,” Wang Kan told Trade War.

Meanwhile, some businesses that are open are finding novel ways to deliver goods while minimizing close human contact.

Underestimating the damage

As the spread of the coronavirus continues, serious questions are starting to be asked about the longterm viability of centering so much of the world’s key supply chains in China. Already, the trade war tariffs, plus demographic changes that have raised the costs of labor, had multinationals beginning to pick up some of their operations and set up shop elsewhere, often in other parts of Asia including Vietnam, Indonesia, and India.

Author and journalist Michael Schuman warns in a tweet that U.S. investors are “underestimating the damage” the virus will cause, including by hurting corporate profits and cutting off global growth.

A broken supply chain?

China’s still widespread travel bans and transportation restrictions in particular will inflict serious damage on the overall industrial economy, and its lifeblood, China’s until now unparalleled supply chains, says this interesting tweet thread. And damage to supply chains means damage to global trade of course.

Apple as a bellwether for decoupling

And while some production looks set to restart at one key Foxconn facility producing iPhones in Zhengzhou, Apple perhaps more than any company, is being watched to see how it will respond to the virus and deal with its shuttered supplier factories. If it decides to move more rapidly to diversify production to places outside China, it would be seen as a bellwether of decoupling.

“The coronavirus outbreak has given new meaning to something Apple executives have been saying for years: Apple needs another China,” says a report by the Wall Street Journal on February 5.

Disrupts both internal and external trade

Former Pimco CEO Mohamed A. El-Erian sees the coronavirus injecting deep uncertainty into China’s overall economic outlook and for the global economy. That’s because the virus "involves critical interruptions to both demand and supply; it impacts both manufacturing and services; and it disrupts both internal and external trade," he writes in Bloomberg Opinion.

Face mask shortage

It’s also got companies distracted from their main business: As a worldwide shortage of face masks looms, firms in China including electric vehicle and battery maker BYD, SAIC-GM-Wuling, the joint venture for General Motors, and yes, Apple assembler Foxconn, have all started making their own protective gear.

“Foxconn began making masks on Feb. 5 for its 1 million employees, saying daily production is expected to reach 2 million pieces by the end of the month,” Bloomberg News reports on February 9. “While China made more than 5 billion face masks on the mainland last year -- about half the world’s output -- there’s still a shortage as the number of infections soars.”

And drug shortages?

Drug shortages in China and the U.S. are a worry too, warns Scott Gottlieb, MD, a resident fellow at AEI. The two countries dominate global production, making up 41% of drug manufacturing.

German factory orders

Factory orders are falling in Germany, a sign of the deepening global malaise. They fell 8.7% YoY, the most since the beginning of the global financial crisis in September 2009.

Phase One delight?

So what’s going on with the “phase one” trade deal, everybody celebrating that? Not so, apparently. "I'm one of those farmers who is supposed to be delighted with the US-China "Phase One" trade deal. ... Although I'm hopeful that it will give farmers a boost, I'm more than a little worried that it won't," writes Mark Wagoner, who grows alfalfa seed and wheat on his family farm in Washington, in

Meanwhile, the Trump administration is touting its trade successes, with Commerce Secretary Wilbur Ross tweeting that “trade wins for America” are “shrinking the trade deficit and leveling the playing field for U.S. exporters.”

Pain per family

Whether or not that’s true, it isn’t carrying over to the American consumer. Peterson Institute economist Gary Hufbauer predicts that the average U.S. household still will face a net loss from tariffs next year, and a report from the Congressional Budget Office puts the pain per family at $1,277.

Notable/In Depth

Lots of interesting charts on the coronavirus impact on markets and economies in this Reuters report.

A good podcast on the coronavirus, trade, and decoupling from China business maven James McGregor.

And here’s an interesting piece from the Wall Street Journal that argues that Vietnam and Mexico have been the true winners of the U.S.-China trade war.

Trade War

Newsletter 9 - February 3, 2020

Over the course of the last week it has become abundantly clear that the fast-growing coronavirus crisis has the potential to significantly slow China’s economy at least in the short term, intensify the decoupling of the long-entwined U.S. and Chinese economies, and have a large negative impact on global trade.

“It’s the punch that you don’t see coming”

Here is a chart from Bloomberg that shows dramatically how the world’s attention has shifted from the trade war to focusing instead on the coronavirus. “Biggest risk to markets? It’s the punch that you don’t see coming that knocks you out,” tweets Bloomberg TV’s David Ingles on January 30.

One reason people are so worried about the impact of the coronavirus on the global economy and expect it to be much worse than that experienced during 2002-2003 SARS outbreak: the fact that the Chinese economy is so much more important to the world then it was 17 years ago.

“In 2002 China was still in the early stages of its great economic surge; it accounted for only around 8 percent of global manufacturing value added, far less than the shares of the U.S., Japan and Europe. Today, however, China is the workshop of the world, accounting for more than a quarter of global manufacturing,” writes Paul Krugman in the New York Times on January 30.

As for overall GDP—not just manufacturing—China’s influence too has become much larger; while in 2003 China only generated 4% of the total, last year it made up 16% of global GDP.

Busily revising down their forecasts

Fear of the impact of the virus has got economists scrambling to cut their China growth forecasts, according to The Economist’s Shanghai bureau chief Simon Rabinovitch. “One analyst (Chen Long of Plenum) thinks growth in the first quarter could slow to as little as 2% y/y, which would be China's lowest recorded rate since the death of Mao,” writes Rabinovitch in a tweet.

Goodby phase-one?

The coronavirus too is likely to make it even more difficult for China to meet the already overly ambitious purchasing targets its government offered the U.S., as part of the “phase-one” deal. “With the outbreak driving down commodity prices and placing huge swathes of Chinese territory on lockdown, analysts are warning that import targets that already seemed aspirational have become even tougher to reach. The longer the crisis lasts, the worse the damage to China’s ability to meet the purchase target,” writes Finbarr Bermingham in the South China Morning Post.

Escape clause for an “unforeseeable event”?

Meanwhile the significance of a clause in the agreement that allows the two sides to engage in further consultation, if there are delays in deal implementation because of “a natural disaster or other unforeseeable event” has a sudden relevance.

“[The coronavirus] obviously is going to have some ramifications economy-wide, which we hope will not inhibit the purchase goal that we have for this year,” U.S. Agriculture Secretary Sonny Perdue said on January 29. “We’ll have to look ahead and see. But the honest answer is we just don’t know yet.”

At least one category of imported goods—products from the U.S. that are key for epidemic control—will no longer face retaliatory tariffs, China’s Custom Tariffs Commission said on February 1, notes a tweet by CNBC’s Beijing bureau chief Eunice Yoon.

“So disgraceful and cold-blooded”…

When U.S. commerce secretary Wilbur Ross commented that the corona virus “will help to accelerate the return of jobs to North America," China’s state media, perhaps not surprisingly, reacted with anger and name-calling, saying Ross is “so disgraceful and cold-blooded.”

Not to mention, a “low blow at a difficult time”…

And it wasn’t just China reacting with strong words. In an interview with the Wall Street Journal’s Bob Davis, China expert Eswar Prasad called the Commerce Secretary’s comments a "low blow at a difficult time for China."

80% of national GDP and 90% of exports

Meanwhile scores of provinces and cities have extended the date when business resumes after the Lunar New Year holiday, a move sure to have a major impact on economic growth. “The 24 provinces, municipalities and regions in China that have told businesses not to resume work before Feb. 10 at the earliest last year accounted for more than 80% of national GDP and 90% of exports,” tweets CSIS scholar Scott Kennedy citing a CNBC report.

Who’s hurting? Everybody’s hurting.

Both the Wall Street Journal (on February 3) and the New York Times (on January 29) have good, lengthy articles which lay out how the coronavirus is wreaking havoc in the operations of multinational companies and the global economy.

Apple shuts its stores in China

And Apple, which relies on China for about a fifth of total sales, is shutting down all of its more than 40 stores in China, notes the Wall Street Journal in a separate piece on February 1.

Steady supply of cellphones?

Apple’s production network in China too is heavily affected, with in particular its supplier Foxconn’s Wuhan, Hubei factory—located at the virus epicenter—shuttered. “The work of around 13,500 Foxconn workers will be affected by the virus outbreak from China, which puts to question the steady supply of cellphones, industrial robots, and precision machined products,” writes the Taiwan News.

Semiconductors too..

Virus-struck Wuhan too is an important base for semiconductors and other hardware manufacturing, notes Paul Triolo from Eurasia Group. The continued development of domestically-produced semiconductors, of course, is a crucial plank in realizing China’s high tech ambitions.

And autos

Bloomberg News warns of “a scenario in which the coronavirus spreading rapidly across the country triggers a cascade of plant closings that lasts into mid March and reduces output by more than 1.7 million cars,” a prospect that could "threaten to end the country’s run as the world’s largest auto market."

The Last Straw

So will all this doom and gloom accelerate decoupling? The answer seems pretty obvious. “The virus could be the last straw for companies doing business in China,” says Reuters.

The ‘world’s factory’ could fall off a cliff

If the virus has not abated by March, then “China’s supply chains and status as the ‘world’s factory’ could fall off a cliff” says Liu Kaiming, head of the Institute of Contemporary Observation, in an interview with the South China Morning Post.

Social instability a risk from a wave of unemployment?

One big risk is the possibility of a fast-growing problem with unemployment in China. That could be particularly severe for China’s several hundred million migrant workers who may have no jobs to come back to after the new year holiday, with factories shut and restaurants and other service businesses closed.

The chief economist of the China Evergrande Group has called for the government to provide subsidies for low-income people to “prevent social instability caused by the potential wave of unemployment,” Bloomberg News reported on February 1.

More countries halt air travel to China

Meanwhile, it seems every day or so another country announces new restrictions on flying to and from China. The list of those who have imposed blocks now include the U.S., Australia, Singapore, Israel, Russia, The Philippines, Vietnam, Italy and Qatar, reports Bloomberg News on February 2.

In Depth/Notable

A podcast on the cost to global trade from the South China Morning Post

A commentary on the fallout of Phase 1 from the former head of the World Bank in China

“WTO Must Reform or Die” is the title of a feature story worth reading from the January 27 edition of Bloomberg Markets magazine

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