China’s role in global trade and why it still matters
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China’s role in global trade and why it still matters

  • China continues to play a major role in the global economy, accounting for more than 18% of global GDP at the start of 2022
  • Despite the European Union’s trade deficit with China, their interdependence emphasises the impact of globalisation on global trade
  • China’s GDP growth outlook, policy goals and ensnaring geopolitical risks are potential flashpoints on your portfolio

China is a big deal: it singlehandedly accounts for more than 18%  of the world’s GDP (gross domestic product). Across the world’s 10 biggest economies it is the top trading partner for eight and a top five partner for the remaining two. It has the world’s largest trade surplus at $676 billion, which is roughly equivalent to the GDP of Poland. And it is the leading import market for six out of 10 of the world’s largest economies (Figure 1). Within the emerging Asian economies, China is the largest export market for these nations, highlighting its importance regionally as well.

In recent decades China has been a major driver of globalisation. According to traditional economics, the enhanced trade associated with globalisation should allow all participating countries to benefit from lower cost goods and services. These lower costs have been deflationary – for example cheap textiles and electronics – and have helped foster the low inflationary environment seen since the start of the century.

Figure 1: China biggest trading partner

Figure 1 - China biggest trading partners

Source: Bloomberg, ECTR Trade Flow function, data covers year-end 2021. Highlighted countries indicate the six out of 10 of the world’s largest economies for whom China is the biggest import market.

Figure 2 shows the European Union’s net import and export balance for the most traded goods between it and China in 2021. In total the EU ran a $249 billion trade deficit, with only Germany, Ireland and Finland running a surplus. Automotives, the healthcare sector and aircraft trade were substantial net exporters, with the likes of Airbus and Europe’s automotive sector the benefices. Turning to net imports, Europe is clearly reliant on China for electronics, particularly telecommunications equipment, as well as textiles, plastics and base metals

 

Gathering storm clouds

This reliance on China for basic materials and lower-end manufacturing emphasises the impact of globalisation within trade. However, US Federal Reserve Chairman Jerome Powell said recently “there is a real possibility that globalisation will go into reverse1. His comment alludes to recent events that have caused countries to question the reliability of their overseas supply chains and think about creating domestic supply chains instead. Such events include competition for Covid-19 vaccines, and the breakdown of the once heralded just-in-time supply chains and subsequent bottlenecks.

Figure 2: the EU’s net import and export balance with China, 2021 (€ billions)

Figure 2 the EU’s net import and export balance with China, 2021 (€ billions)

Source: Eurostat, 24 February 2022. Note: the data above denotes the net import and export balance for the EU with China for the top 20 most traded goods between the two (€ billions) in descending order. Underlying data from Eurostat

Furthermore, Russia’s invasion of Ukraine sparked an exodus of companies leaving Russia on principle, gas supplies became weaponised and we saw the emergence of global food security issues. In China, there were extended Covid-19 lockdowns which restricted industrial activity, as well as accusations of anti-competitive practices and human rights concerns around the treatment of the Uyghur Muslim population. Considering the magnitude of all these challenges, domestic supply is seen as increasingly attractive for countries. As an example of this phenomenon, Apple has begun shifting production to Vietnam and India from China, especially following its recent issues with Chinese supplier Foxconn2.

 

Investment considerations

Given the predominance of China, then, its future trajectory matters in three main ways:

 

GDP growth outlook

The Bloomberg consensus is for 5.1% year-on-year GDP growth in 20233. This may have an outsized short-term impact on more cyclical industries such as autos and aircraft, or a longer-term impact if China is no longer the engine of growth it once was. It is no secret that GDP growth has declined in recent years, albeit from an elevated level, but China’s demographics are concerning. The country’s population growth has been consistently slower than the US in the 21st century and even contracted by 850,000 in 2022 a feat once thought unthinkable. The population is also ageing with those 65 and over climbing to 12% of the total population, versus 6.5% for India and 16.6% for the US. China has also struggled with youth unemployment, which currently sits at 17%, another factor reducing the labour force4.

Finally, the elephant in the room: China’s soured real estate sector that has spurred rapid growth since the financial crisis and accounts for around 25% of GDP5. Government policy towards the sector has improved in 2023 with loosening of leverage and liquidity constraints alongside mortgage rate cuts. However, with a high proportion of developers having either defaulted or in distress the sector remains challenged and constrained.

 

Policy goals

This includes themes such as self-sufficiency in areas such as science, technology, food and base metals – the last of which has implications for global commodity prices in the event of stockpiling. Another consideration is China’s pivot to high value manufacturing such as advanced semiconductors as the country advances and its lower wage advantage erodes. The increased focus on technology was evident at the 20th National Congress of the Chinese Communist Party in October 2022, with “technology” and “talent” (in a technology context) getting 55 and 34 mentions relative to 25 and 5 at the 19th congress6.

 

Geopolitics 

When BP exited its Rosneft stake in Russia in February 20227 due to the invasion of Ukraine it resulted in a loss of almost $25 billion. In a worst-case scenario of China invading Taiwan you could see similar styled exits. Such scenarios aside, the ongoing US/China semiconductor dispute has seen Dutch chips firm ASML restricted from selling advanced chip-making machines to China, which saw it lose around a quarter of its Chinese revenue8. Similarly, Huawei, following spying allegations from the US, was blacklisted and blocked from acquiring US technology for its smartphones. The action resulted in a 50% drop in revenues in its consumer division, turning Huawei into a shadow of its former self9

 

Conclusion

What is clear is that exposure to China is global and widespread. While there is no one-size-fits-all solution, each country, firm, sector and investor should consider their relationship with China and their exposure to its continually evolving economy. Key factors to consider include China’s growth trajectory , the Chinese Communist Party’s policy goals and the resultant headwinds and tailwinds, and finally the geopolitical risk that investments in China carry.

23 March 2023
Jake Lunness
Jake Lunness
Client Portfolio Analyst, High Yield and Emerging Market Debt
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China’s role in global trade and why it still matters

1Wall Street Journal, Fed Chairman Jerome Powell at the WSJ Future of Everything Festival, 17 May 2022
2Wall Street Journal, Apple Makes Plans to Move Production Out of China, 3 December 2022
3Bloomberg, as at February 2023
4Bloomberg, Chinese National Bureau of Statistics, 2022
5https://www.scmp.com/economy/china-economy/article/3163411/china-gdp-economic-growth-tipped-slow-amid-coronavirus
6The Diplomat, What the 20th Party Congress Report Tells Us About China’s AI Ambitions, 5 November 2022
7https://www.bp.com/en/global/corporate/news-and-insights/press-releases/bps-position-in-russia.html
8Bloomberg, China’s $150 Billion Chip Push Has Hit a Dutch Snag, 20 January 2021
9CNBC, Huawei posts first-ever yearly revenue decline as US sanctions continue to bite, but profit surges, 28 March 2022

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For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.


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In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

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In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).  For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.


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Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.


In Australia:
Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414.  TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act.  TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).  For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.


Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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