The American administration wants to achieve decoupling with China. We listen to various points of view, some seeing China as the loser, others the opposite. Chinese economist Huang Qifan gives a somewhat official point of view. He describes the current American difficulties, the ten aspects of decoupling. He says that both countries will lose out while thinking that American companies would instead continue to benefit from globalization than follow Trump. In the last part, Huang shows that China is not easy prey, that it cannot succumb to financial attacks, unlike other countries in the past.
黄奇帆, Huang Qifan :
Summary of Huang Qifan’s lecture:
The Three Main American Difficulties
The biggest event of the year is the Black Swan, the coronavirus epidemic, which is expected to affect at least 10 million people worldwide by the end of the year. The United States, the region where the virus is the most developed globally, is currently experiencing several serious problems: 1. severe economic stagnation.2. a highly populist society.3. Politicians are running away.
Inflation and economic contraction are striking. The US government has issued $3 trillion in bonds in the last three months, another $3 trillion in quantitative easing super-loans, which is in addition to $6 trillion in monetary easing, so much so that the US government’s national debt balance has reached $27 trillion.
With monetary hyperinflation of this magnitude, substantial inflation follows, and in the event of an epidemic, products, the economy, businesses will not experience inflation, but the opposite. So, where does this monetary bubble go? Three places: 1. the stock market, the Dow Jones fell to 18,000 in February to rise to 28,000 .2. Real estate. 3. Precious metals, for example, gold from the United States. Its price has increased by 80% since the beginning of the year. Another aspect is the devaluation of the dollar against the euro and the depreciation of the yuan.
The other end is economic contraction. The United States is experiencing the worst economic contraction in decades. It now has a record number of unemployed people. Inflation is a disaster, causing the devaluation of the currency.
Now that the currency is devaluing, the economy is contracting, life is hopeless, and the future is uncertain. We are rushing to extremes. The left is going further left, the right is going further right. America is torn between the Democratic and Republican parties, between blacks and whites; even the federal and state governments are clashing.
The third characteristic is, of course, the evasiveness of politicians, who do not face reality by blaming the Chinese, the cause of all evil, for the proliferation of the virus. Tens of millions of people have been laid off because of the Chinese economy, Chinese companies, and the Chinese government, which have stolen Americans’ jobs.
Ten aspects of the decoupling of the US and China
- Decoupling of exchanges, then no deals. The concept of trade decoupling is more severe than tariffs. Adding tariffs is still trade. It’s just increasing the cost of trade, but it’s not yet decoupling. But if the business is decoupled, I don’t buy your products, I don’t sell them to you, and mutual trade and economic exchange stop.
- Decoupling of capital markets
A bill is expected to be introduced that will affect more than 200 Chinese companies, and if passed by the US legislature, this law is a straitjacket for Chinese companies. The companies listed in the United States today are all listed with the help of US investment banks, US law, and accounting firms, all in full compliance with US law. But with the new straitjacket and new regulations, this is unlikely to be legal.
- Financial decoupling. US insurance banks do not make loans or insurance for Chinese companies.
- Technological decoupling. Recently, we saw with Huawei that the US is blocking chips or high-tech equipment.
- Investment decoupling. This is called a lender. American companies disinvest in China or don’t invest in China.
- Decoupling of education. All kinds of measures are taken to expel Chinese students. After graduation, students are not allowed to find jobs in the United States.
- Decoupling of the Internet. A month and a half ago, US Secretary of State Mike Pompeo proposed five aspects of Internet decoupling.
- Decoupling with the Swift network could lead to extreme inconvenience in trade between China and the world.
- The alleged decoupling of currency and exchange rate
- Long arm skill. US domestic law is used as a substitute for international law to find various Chinese companies’ faults in different countries, freeze assets, or impose hefty fines. Example: the arrest of Ren Zhengfei’s daughter from Huawei, Canada.
The American government has not yet declared war. We are on a dangerous slope at the moment: US trade decoupling, technology decoupling, and investment decoupling all lead to the problem of market loss. The United States has more than 10,000 companies in China, created in the last 20 years, with a total investment of $500 billion, which translates into $700 billion in production and $50 billion in profits. Its return on investment is therefore 10%, and its sales margin of 7%.
US$700 billion in China is equivalent to 5 trillion yuan in production value, 1,500 billion yuan in GDP. Decoupling would lead to paralysis in this area; China would lose 1.5% of GDP and 2.5 million jobs. In this sense, of course, it will affect us in some areas of China, in certain circles, but China has room for maneuver. It can fill the void; it is capable of balancing; it will only have local difficulties. But for the United States, if those 10,000 or so companies really listen to Trump and disinvest completely, the number one loses $50 billion in profits.
They can’t recapture that market anywhere else in the world.
The entrepreneur’s emperor is the market, efficiency; the board of directors wants profit, it wants a minimum ten-year base, it will not follow a politician in office for four years and eight years. General Motors founded a mixed capital company in Shanghai in 1994 and today sells three million cars a year in China. The parent company sells more than eight million vehicles a year. Once GM leaves China, three million vehicles will be gone, and only five million will be left, making it a second-rate auto plant. How can GM bosses listen to Trump?
Apple is dead if it leaves China. Trump told Apple to divest. Why can’t Apple manufacture in the United States? Cook explained that Apple had one factory in the United States and one in Brazil. The company was losing money. But in China, the company produced more than 100 million cell phones, which generated 75% of the world’s profits from the cell phone part. The boss of the company also explained something exciting. China cannot leave Apple, and Apple cannot leave China; leaving China means death. Companies are not very inclined to follow Trump, just like Wall Street. The Chinese government in June opened access to foreign financial services central government. August data already showed $30 billion in investment. Investors follow the market, not the president. Trump instead disrupts the markets.
The chip market
China will be affected, whether it’s trade decoupling, technological decoupling, or investment decoupling, or so-called education decoupling, Internet decoupling, it will have an impact on China, but the effect is tolerable, it can be adjusted, and over time it can force China to move up a level. Of course, decoupling from the United States will not destroy the United States, but specific American companies may find themselves in difficult situations.
A study by the Boston Consulting Group estimates that restrictions on chip sales to China could cost US suppliers as much as $83 billion, or 37% of their revenues. They could lose the Chinese market.
Finance: China has some defences
We can discuss decoupling capital markets, decoupling insurance and banking finance, decoupling the Swift network, decoupling currency, and decoupling long-arm jurisdiction. These decouplings are all financial instruments, and by using these instruments, the Americans sunk the former Soviet Union, causing an 80% drop in GDP in dollar terms. Today, Russia’s GDP is lower than that of one of our provinces, Guangdong, and the reason is the scourge that was sown in 1990. In 1998, these financial attacks also brought down South Korea in 1998, Thailand, and Southeast Asia, and in the early 1980s, Japan was also hit hard. The blows are significant. Would China be in an unbearable situation if financial instruments were to hit it? If we decouple from the United States in the financial sector, we would all lose, the United States more so. What is the reason for this? Why can’t they beat China when they’ve been successful against Russia, Southeast Asia, South Korea, and Japan? Whether it is the Asian financial crisis or the 2008 crisis, we have never seen American financial methods attack the Chinese financial system, and above all, we have in China three defenses that can be described as our nuclear umbrella, our shield. First, we do not have free convertibility of capital. Prudence has always accompanied the decisions of the State Council. 2. Until today, even though we are said to be open to foreign financing, at the end of last year, foreign financial institutions accounted for only 1.8% of China’s financial assets. 3. Financial operations in China must be governed by the Chinese constitution, Chinese law, and the central bank, under penalty of punishment. We are a sovereign country.
Why are the five cases we have just mentioned cited everywhere? The Russian economy had barely begun to develop when the currency was fully convertible with no defense for capital as a result of the so-called reforms. Secondly, the Russian reforms changed all their financial regulations to the liking of the American IMF. Finally, American companies entered Russia and controlled more than 30 percent of financial assets. As long as South Korea, Southeast Asia, and Japan, these three regions and countries are open and controlled by Americans. Security is not assured. China has limited openness and is much more protected. At this stage, this is the fundamental reason why Chinese finance is immune to international shocks from the financial crises of the late 1980s, late 1990s, or 2008.
End of the summary
It is essential to recognize that the Chinese government has been able to defend national interests since the opening of the late 1970s by moving forward cautiously, particularly in the opening of financial markets. There has always been an intense fear of being the plaything of the financial markets like weaker countries. The protection of its currency has allowed it to advance in its deep waters. One of the strengths of the United States is innovation, which is China’s weak point. Will China be able to move from copying and improving existing innovations to being a leader in innovation? For the moment, the answer cannot be yes. Will the future show the opposite?
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15 October 2020