Jostling for the front row

Jostling for the front row

by Pininvest Analysis

Exposure to US-China Trade on

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In ‘Cooling overblown expectations’, our recent comment on US trade negotiations with China, we observed that the issues which strike at the heart of international trade relations will probably continue to fester

We argued that China’s development model of central planning fused with free market features would remain off boundaries and unchallenged

While the original intention of the 'Chinese economic reform' policy, dictated by Deng Xiaoping in 1978, opened the era of 'socialist market economy' and has been broadly pursued by his successors, the massive economic expansion, the profound transformation of Chinese society and the major impact on industries around the world were probably not fully anticipated

The shock waves have not subsided and while trade wars make the front covers in the West, the distorsions of China's social fabric, and growing inequalities, may be flashing the gravest warning  to China's authorities

To expose the tensions building in Chinese society, an understanding of China's staged economic conquest of global industries may provide some insights 




Pressing ahead, China will pursue its long term strategy of securing bridgeheads on Western markets, expanding into new industry segments of more and more sophisticated product ranges and securing domestic sourcing for the supply chains

None of these goals lend themselves to criticism as Western economies have relied – and often continue to rely – on very similar growth strategies

To the extent that China’s industrial policy favors domestic consumption, its success should be strongly supported in the global economy


But, as we discussed in 'Trade is War...', China’s march forward presents singular features, besides the obvious ‘size’ effect on the Chinese market

  • By holding on to market segments, however low-tech they may be, China's manufacturers end up dominating entire swathes of Western competing economies
  • Building on recognized technologies by marshalling vast R&D resources, Chinese firms demonstrate undeniable skilll in innovative high-tech applications, expanding their reach

In context of globalized economies, business competitors should not expect anything else…

In the Chinese model however, fusing national priorities, a resurgent State-owned sector and free enterprise with top quality mechanical and electrical engineering talent, these business strategies take on a different dimension


Never let loose

A singular aspect of China’s growth path : low tech manufacturing has not shrunk over time with industry’s technical progress

Instead of

  • moving from low-tech products (apparel, commodities) with low-wage workers
  • to mid-end products (such as household goods) as the work force gained expertise and more investments were directed both domestically and internationally
  • and entering ultimately high-tech manufacturing

China remains a major player at every level of manufacturing, covering the full range of workers qualification and advancing with speed


From low tech...

Christmas decorations - one example, from many, of complete domination achieved by Chinese exporters in 2017...

Source WSJ Dec.17, 2018 China Trade Leviathan (graphics) - paywall

A shift to countries less advanced in the production cycle would have been the norm

But, while the sheer size of the Chinese workforce may be a major factor, the supply chains linking segments industry in tight networks from raw materials to wholesale organizations should concentrate the minds

Even at the low end, efficient supply chains create a barrier to competition  – as less developing countries hoping to mimic the Chinese growth pattern come to recognize

Utterly compelling, absurdly symbolic of Western consumerism, Yiwu (Zhejiang province) brought a ‘Christmas market to the world

and much other general merchandise as well… from socks and shoes, belts, hats, scarves and gloves to jewelry and artificial flowers, suitcases and bags...

On its website, Yiwu Market brands itself as “The World’s Largest Wholesale Market of Small Commodities”, with 75 000 booths and 100 000 suppliers presenting 400 000 consumer products

Yiwu, Jinhua, Zhejiang, China

and if the sheer scale were not enough, the logistics of shipment by containers of mixed lots is mentioned as a matter of course... high tech

Equally efficient at the high end of manufacturing expertise, the Pearl River Delta (PRD) dominates the production of electronics hardware worldwide

The PRD, on the way to become the mega-city of the Greater Bay Area envisioned by the Chinese planners, links 9 cities around the Yangtze River, foremost Guangzhou (15 million inhabitants, larger than London) and Shenzhen (13 million, on par with Los Angeles), extending its infrastructure to Hong Kong (8 million) and Macao

Pearl River Delta map - credit

With a total population of 70 million (5% of total population in China), the PRD generates $1.41 trillion in manufacturing, close to the GDP of South Korea and more than 10% of total Chinese GDP ($13.6 trillion)

View a high resolution graphic, credit TimeOut Hong Kong (May 17, 2016)

The dense network of factories of the PRD has given a new dimension to the concept of supply chain, with an unassailable position in the production of mother boards and computer gear, smartphones (900 million produced in China in 2017 according to Statista out of a total of 1.5 billion phones - Gartner), video surveillance cameras, drones or air conditioners - all the later in ranges of 80% (or more)


The PRD today embodies China's contradictions

Initiated to make full use of the vast Chinese labor force, the Special Economic Zones, experimented with Shenzhen and Zhuhai, both on the Delta, in 1979, were designed to attract foreign capital, very much in line with the export-oriented strategies of neighboring Asian countries (notably Japan and South Korea)

But, by unleashing economic development in less than 40 years on a scale unheard of – and transforming the Delta in a manufacturing hub of industries taking on the world – the huge strides of the SEZs confront China’s planners with major uncertainties

  • Spectacular growth has come at the cost of grave economic unbalance between the China’s continental regions and the coastal areas – and especially the Deltas: Pearl River, Yangtze River and the Xiamen-Zhangzhou-Quanzhou Triangle (Min River delta). The resulting – and growing sense of – inequality is probably one of the central concerns of Chinese government, if not the single most important
  • China's regional economies of world scale are entirely geared towards exports at times of growing discomfort on targeted Western markets – blocking any further build-up of Chinese imports and aiming at actual decreases of trade flows by domestic alternatives

Across industries and contending for the number one position time and again, China’s manufacturing capacity casts a long shadow on every national economy, in the developed Western world as well as in emerging markets,

The stakes keep rising as much for China's authorities, pressed to share the benefits of jobs and living standards more fairly across the country,  as for the other parties to global trade, stressed and overwhelmed


Hostage to export-driven growth rooted in the rise of the SEZs, of which the Pearl River Delta is exemplary,  China's indutrial policies imperil entire Western industries and inflame the political spectrum, not only in the US

If global trade is in crisis, the moment may come to decide that ‘What goes around, comes around' ... as our forthcoming presentation will suggest