Learn more about how China trade wars can significantly affect the investment market today.
In this article:
- Trump’s Accusation of China’s Currency Manipulation
- The Tariff Rollout on Chinese Goods
- The “Chilling Effect” on US-China Investments
- The US and China’s Venture Capital
- Private Equity in China and the US
- Mergers and Acquisitions in the US and China
- Tech Companies May Suffer the Most
- Individual Stocks Are Vulnerable Too
What to Know About China Trade Wars
Trump’s Accusation of China’s Currency Manipulation
In late July 2018, Trump accused China of “manipulating their currencies and interest rates lower” to achieve a competitive advantage over the United States of America. The US president even stated that the country should be permitted to compensate what was lost because of bad trade deals and illegal currency manipulation.
A few days later, Steven Mnuchin, US Treasury secretary, said that his team was closely monitoring the currency of China for any indication of manipulation. Goldman Sachs, owner of PitchBook (an investment banking services provider), also warned potential clients that China trade wars were already developing into a currency war.
The Republican-led Congress was moved to action too, passing legislation to be stricter with the review procedures of foreign investment deals, in the interest of national security.
The US president expressed that he was ready to raise tariffs on all imports from China, primarily because of the trade war with China. The Trump administration wanted to narrow down the country’s trade deficit with China, which was already more than $300 billion in 2017.
The Tariff Rollout on Chinese Goods
In Section 301 by the US Trade Representative (USTR), it was revealed that China was repeatedly involved in activities that infringed US intellectual property. This finding made Trump roll out US tariffs on China of 25% on imports worth $50 billion.
After a public comment in August, the US president asked the USTR to stretch the tariff even higher on Chinese goods worth $200 billion, which is now at 25% from 10%.
In response to this tariff change, China warned the US that they could also increase their tariff, to 25% from 5% on $60 billion worth of American goods. This means that the investment market will keep its high prices if tariffs from both parties keep increasing. Despite China trade wars, both countries have now stopped high trade talk levels, according to the latest report.
The “Chilling Effect” on US-China Investments
Rhodium Group, an independent research provider, reported that these China trade wars are causing a chilling effect on both countries’ investment activities.
In the first 6 months of 2018, a 90% decrease in foreign investment from China was recorded, which totaled $1.8 billion. This has been the lowest rate in the last 7 years. The prolonged China trade wars could significantly impact businesses’ investments negatively.
The US and China’s Venture Capital
China’s venture capital started to blossom and challenge America’s own venture capital. Analysis from the Wall Street Journal revealed that the US enjoyed a 97% share in 1992, and last year, they only had 44%, in part because China held 24%.
China’s venture capital industry has continued to grow over the years. The country had $38 billion in 2017, $30 billion of which stayed in the country while $3.1 billion went to the US. America’s venture capital had $67 billion in 2017, of which $52 billion stayed in the country and $5.5 billion went to China.
Both countries have taken off their tech investment in the current years, the US into China and China into foreign investments including the US. Since 2010, Chinese venture capitalists have already closed over a thousand deals for American companies worth $36 billion, which occurred mostly between 2014 and 2017.
Private Equity in China and the US
America’s private equity interest in Asia has been active and moving recently, with Blackstone and Carlyle “holding the final closes on Asia-focused funds around June.” Carlyle had $6.6 billion out of Hong Kong, and Blackstone had $2.3 billion out of Beijing.
China-focused capital represented a 20% total fundraising for the region around the first half of the year. This outpaced the Pan-Asia capital raised by over 70%.
However, China trade wars are starting to affect allocations with a capital raised by US-headquartered private equity and China-focused firms having only $3.6 billion in the first half of the year.
Mergers and Acquisitions in the US and China
China Mobile and ZTE are Chinese companies doing business in the US held captive under geopolitics. In July of this year, the US Commerce Department issued a recommendation over increased security risks to block China Mobile from their operations.
They also banned ZTE for breaking a 2017 agreement of paying fines for some violations against sanctions on North Korea and Iran. The US president lifted the ban in May, however.
For American companies, Apple has plans of partnering with suppliers with renewable energy sources using an investment fund to fight against climate change. They plan to invest almost $300 million in China Clean Energy Fund within the next 4 years.
Facebook also built a unit in Hangzhou that serves as an innovation hub, with a capital of $30 million. However, the Chinese withdrew from the project the day after it was announced.
Tech Companies May Suffer the Most
The China trade wars can significantly affect tech companies because of high tariffs–particularly since many tech products are manufactured in China, such as those from Apple. Some industries that are susceptible to this impact are biopharmaceuticals, robotics, artificial intelligence, cell phones, 5G communications, and semiconductors.
Margarita Cheng, Blue Ocean Global Wealth’s CEO, stated that not all tech stocks can be affected by the China trade wars. Businesses that provide technology services may not feel the impact of the trade issues because they do not have products that will be affected by the changes in manufacturing rules.
Individual Stocks Are Vulnerable Too
People with individual stocks in tech companies like Apple may want to consider scaling back on the investment if they want to mitigate any potential losses due to the trade wars. “We try to recommend that people keep taking profits and using those funds to rebalance their portfolio,” Diahann W. Lassus, president of Lassus Wherley.
Additionally, you may want to set a target for what percent of your portfolio a particular stock should comprise and rebalance it if it grows beyond that.
It is clear that China trade wars impact many businesses in the US and China, especially in the tech arena. Businesses don’t have any control over this trade war between US and China, however. It is time they start checking vulnerable areas in the industry that may be affected by the trade war, so they can make necessary adjustments.
What are your thoughts on the China trade wars? Share them in the comments section.