Foreign Exchange | Articles
What every banker needs to know about China
Helping your clients understand another looming crisis
With so much pandemic and political news filling our national headspace, it might be easy to overlook a critical situation with China that is brewing. But since you’re a banking leader, we want to make sure you’re in the know.
For decades, we’ve had a reasonably symbiotic relationship with China. It has manufactured the goods we love at low-cost so we can consume at greater rates than any previous generation. In return, China has become the world’s manufacturing epicenter – unrivaled in its capacity and talent for producing everything from electronics to pharmaceuticals.
In order for our relationship to work, China has played outside the standard rules of currency. Rather than allowing its currency to trade on the open market, it controls the pricing, making the yuan artificially cheap compared to the U.S. dollar. This makes it compelling – and sometimes nearly essential – for companies to manufacture in China. It also helps to keep U.S. interest rates low.
The result is that China is our largest trading partner outside of the USMCA. It is also second only to Japan as our biggest creditor, owning $1.7 trillion of U.S. debt.
The importance of the relationship can’t be overstated. It greatly affects the stability of our economy and underpins our current way of life.
Now, that relationship is changing.
In recent years, U.S. sentiment toward China has changed. The U.S. government is no longer satisfied to maintain a massive trade deficit with China. Some Americans have grown uncomfortable with Chinese human right violations and the clamp down on Hong Kong. The coronavirus has intensified distrust.
At the same time, China is losing patience with the U.S. because of new tariffs imposed on Chinese imports by the U.S. administration.
Very quietly, China has shifted gears. It is reducing its holding of U.S. government debt and focusing on other trade partners.
China is also starting to open up its currency, allowing the yuan to be traded with fewer restrictions. As market forces take effect and the yuan’s value increases, American industries will no longer enjoy the benefits of cheaply priced manufacturing.
As a result, U.S. banks, companies, investors and citizens at large need to be aware that this leaves the U.S. economy – and in fact, the global economy – in a profoundly vulnerable position.
At first glance it may seem like nothing more than a huge inconvenience. Surely, we can switch to manufacturers in other countries. But it’s not that simple.
Many of the world’s most strategic supply chains – including shipping, semiconductors, lithium batteries and APIs (active pharmaceutical ingredients) – are reliant on China and no other nation is in a position to jump in as a viable alternative. It could take years, even decades for other countries to develop the infrastructure and know-how to offer similar manufacturing services. In the meantime, critical industries are faced with the choice of continuing to rely on China and absorb escalating costs, or enduring the cost and growing pains of gradually moving supply chains elsewhere.
For context, China soundly dominates the production of commercial ships. Forbes reported that of the 44,000 oceangoing vessels in the global fleet, only 200 are American. China owns 73% of the global lithium cell manufacturing capacity. China makes eighty percent of the antibiotics used in the U.S. (as reported by Forbes), along with 70% of the acetaminophen, according to the Wall Street Journal. It makes 80% of the global supply of heparin, the blood anticoagulant (also reported by Forbes).
Then there’s the problem of lifestyle. Americans have become accustomed to buying so much so cheaply. As a culture, we’ve come to expect material abundance and purchasing ease, some might say to the point of excess. While some Americans may feel determined take a stand against China, it’s easy to underestimate the lifestyle effects this would likely cause.
Are people prepared to pay significantly more for everyday goods and make do with less? Are American companies ready to build new manufacturing relationships from scratch? Are investors prepared to handle the prospective consequences to their portfolios, savings and overall net worth?
These are just some of the giant questions we face as a nation as our relationship with China continues to shift.
You may have assumed in the past that community banks don’t need to concern themselves too much with the global economic landscape or the currency markets. But given the circumstances we all find ourselves in currently, banks and credit unions of every size need to take notice. That’s why more than ever it makes sense to have a partner like Western Union Business Solutions, that brings decades of international expertise.
Your business clients may need to make some tough decisions and smart maneuvers as they re-evaluate (and possibly reinvent) their supply chains in the coming years. Their decisions will be based at least in part on where it is financially viable to manufacture based on currency rates. They’ll require expertise in managing the impacts over time in currency movements.
We’re here to help you and your clients navigate these shifts, and all the significant changes underway globally.
About Western Union Business Solutions
Western Union Business Solutions is a global leader in foreign exchange services and international payment enablement for credit unions and community banks. Our financial strength, technology and experience help facilitate new revenue opportunities for over 1,800 financial institutions globally. With hassle-free implementation, we offer a world-class, 24/7 digital platform where customers can send and receive foreign funds with only a few clicks. Each institution is offered a customized solution and dedicated support, with access to payments in over 130 currencies in more than 200 countries/territories. This simple, white-labeled addition can add not only a new revenue stream to any institution but also a way to help increase customer satisfaction and attract new business.