Trade War Update: China Throwing More Lifelines, Apple In Trouble

24-May-2019 Intellasia | Forbes | 6:00 AM Print This Post

China will lend more support to strategic sectors of the economy caught in the trade war fire fight, and one big American company, namely Apple, could be the biggest visible loser as Washington targets China tech firms like telecom giant Huawei.

Computer hardware producers are expected to be the latest on the receiving end of Beijing lifelines.

China’s stock market saw lackluster volumes on Wednesday as President Xi Jinping speaks of a “long march” in the trade war. On Wall Street today, the X-Trackers China CSI-300 A-Shares (ASHR) ETF was down 0.44 percent in early trading, nearly twice that of the benchmark MSCI Emerging Markets Index.

But in China, publicly traded software and semiconductor companies had a strong day as investors there think two things: They can supply the hardware the US is basically banning them to buy here, and Beijing now has a reason to subsidise them.

There is talk in Shanghai that computer hardware companies will receive an income tax break over the next two years. Also, China’s Social Security Fund stated that the scope of its investments will be expanded.

“I would assume this means (buying) more (China) equities,” says Brendan Ahern, CIO of KraneShares, a China-focused ETF company.

Besides recent announcements to curtail purchases of US semiconductor and microprocessors for use in Chinese telecommunications and surveillance equipment, more tariffs are in the works. The latest tariff policy, subject to public review, will be better understood next month.

But should the Trump Administration slap 25 percent tariffs on the final $300 billion worth of China imports, the direct tariff effects on this list alone could reduce nominal GDP growth by another 0.5 percentage points over the following year, Nomura Securities analysts wrote in a note to clients on Monday. All told, roughly one percentage point is seen being stripped off China’s GDP numbers, currently estimated to be between 6 percent and 6.5 percent this year.

China’s economy can easily produce sub-6 percent GDP growth this year or next because of the trade war.

“In the medium to long term, a rapid escalation of trade tensions in recent weeks will add more downward pressure on China’s exports, production and investment in coming quarters, especially China’s tech sector,” says Nomura’s China economist Ting Lu in Hong Kong.

Trade Impacts. Commodities Crushed

A ferry boat passes container ships waiting to be unloaded at the Port of Oakland. (AP Photo/Ben Margot)

A ferry boat passes container ships waiting to be unloaded at the Port of Oakland. (AP Photo/Ben Margot) ASSOCIATED PRESS

The share of trade with the US among China’s total international trade has dropped to a historical low of 11.5 percent over the January-April period from a recent high of 14.3 percent in 2017. As one China investor said recently, “This is what decoupling looks like.” China’s export growth to the US is down 10.1 percent annualised over the same period. China’s imports from the US dropped at a much faster pace to -30.2 percent annualised in the January-April 2019 period compared to a 13.6 percent growth rate in the second quarter of 2018.

According to China Customs, volume growth in soybeans imported from the US fell 98.9 percent in the fourth quarter of 2018 and another 79.2 percent drop in the first quarter of 2019. China has been buying more beans from Brazil and growing its own soy at home.

Growth in China’s crude oil imports from the US slumped 95.2 percent annualised in the fourth-quarter 2018, mostly due to front-loading shipments in the previous quarter, based on Nomura’s findings.

Apple As Huawei Casualty

The Department of Commerce (DOC) put Chinese tech companies that make surveillance and telecom equipment on notice.

Those companies are largely reliant on US hardware. Their growth has worried the US because Washington believes China plays a rigged game: reliant on subsidies, a locked audience often closed to US competitors and, in some cases, outright theft of US intellectual property that has helped some tech companies move up the food chain. Washington is now punishing those companies based on those assessments.

The mobile phone industry is the most visible one in the crosshairs, led by Huawei. Apple, too, is seen taking a hit.

According to China’s National Bureau of Statistics, China produced 1.8 billion mobile phones last year, down from 2.3 billion in 2016. Around 76 percent of those were smartphones.

Nomura estimates that gross industrial output of mobile phones was RMB2.9 trillion in 2018 ($420 billion), down from RMB3.2 trillion in 2016. Excluding the costs of imported processors, memory cards and other semiconductors, Nomura estimates the share of domestic manufacturing in the gross output of mobile phones was around 25 percent or the equivalent of roughly 0.8 percent of China’s nominal GDP in 2018. So that’s the baseline value of the bottom line being targeted in one part of the new tech restrictions imposed by the DOC.

Based on China’s Customs data, China’s mobile phone exports to the US were valued at $35 billion in 2018, four times higher than 2008. China wants more of that market for its own brands, including Huawei phones.

But for now, most of those shipments are of Apple iPhones. China’s exports of iPhones to the US were $31 billion in 2018, accounting for 6.5 percent of China’s total exports to the US last year, which came in at $478.4 billion, according to the US Census Bureau. It was another record-breaking year for China exports and trade gaps between the two countries.

Apple is highly dependent on China. Perhaps more than it lets on. It may yet prove to be the biggest American brand impacted by the trade war.

The US Trade Representative has included iPhones on its list of new tariffs under review. Look for Apple’s CEO Tim Cook to be making trips to Washington lobbying for exemptions in the weeks ahead.

Downside pressure on China’s mobile phone industry will “rise significantly,” says Ting Lu of Nomura, if the US raises tariffs on around $35 billion worth of China’s US-bound mobile phone exports.


Category: China

Print This Post