What Every Banker Needs to Know About China
By Stephen Kuhl, CFA
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 we want to make sure you’re in the know.
For decades, the U.S. has 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.
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 NAFTA. 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.
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.
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.
Then there’s the problem of lifestyle. Americans have become accustomed to buying so much so cheaply – some might say to the point of excess.
Are we 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.
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.
We’re here to help you and your clients navigate these shifts, and all the significant changes underway globally.