China-US trade tensions: A blessing in disguise

In terms of the percentage of GDP to the US, or the trade imbalance, China now is where Japan was in the late ‘80s. The US is again in a political and economic wrestling match with its biggest rival – this was once Japan and now it is China.

As such, there are historical precedents for the current political climate. In the 1980s the US levied high tariffs on Japanese car imports in a bid to protect its own home-grown car manufacturers. However, the impact of trade sanctions on the Japanese economy could be seen as positive in some respects. It forced companies to streamline their production efficiencies and improve product innovation in order to remain competitive.

Toyota, for example, remains the world's largest car manufacturer today. Despite the trade sanctions in the ‘80s, Toyota managed to maintain its status as an industry leader and used local resources to support its global expansion. Today, it also produces cars in the US.

Toyota’s manufacturing process has one of the highest productivity levels in the industry. It adopts a “just-in-time” concept, with manufacturing equipment that can be easily set up to make different components as needed. This allows the company to remain nimble and react quickly to customer demand. Additionally, smaller lot sizes and faster communication on the assembly line tends to mean better quality products, as production mistakes can be quickly picked up and corrected.

From a political standpoint, we believe conflicts between China and the US will continue to arise, whether on exports and trade or other geopolitical issues. That said, we believe these issues primarily affect market sentiment, rather than China’s actual economy – China’s economy is predominantly domestically driven and its exports contribute only a tiny part to GDP.

Not only that, despite various trade barriers imposed by the US, China’s export numbers continue to beat expectations. In fact, the Covid-19 pandemic has affected non-Chinese manufacturing bases more than those in China. As global demand recovers, China has become a reliable manufacturing source for most markets around the world.

Before the pandemic, there were concerns that China might lose its manufacturing edge due to labour shortages. However, that concern is slowly diminishing. Tesla for example, built its largest factory in the world in Shanghai last year and it now exports cars from China to Europe – this reflects China’s high manufacturing competitiveness.

In conclusion, we believe that the US-China trade war should not lead to long-term headwinds for Chinese companies, in fact quite the opposite. In the medium-to-long term, we believe Chinese companies will be forced to strengthen their core competencies and those that are able to adapt to the new norm should emerge stronger over time, despite trade sanctions.

‍

Note: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same.  All securities mentioned herein may or may not form part of the holdings of FSSA Investment Managers’ portfolios at a certain point in time, and the holdings may change over time.

‍

Important Information

The information contained within this document is generic in nature and does not contain or constitute investment or investment product advice. The information has been obtained from sources that First Sentier Investors (“FSI”) believes to be reliable and accurate at the time of issue but no representation or warranty, expressed or implied, is made as to the fairness, accuracy, completeness or correctness of the information. Neither FSI, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any use of this document. 

This document has been prepared for general information purpose. It does not purport to be comprehensive or to render special advice. The views expressed herein are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an investment recommendation. No person should rely on the content and/or act on the basis of any matter contained in this document without obtaining specific professional advice. The information in this document may not be reproduced in whole or in part or circulated without the prior consent of FSI. This document shall only be used and/or received in accordance with the applicable laws in the relevant jurisdiction.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.

In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

First Sentier Investors and FSSA Investment Managers are business names of First Sentier Investors (Hong Kong) Limited. First Sentier Investors (registration number 53236800B) and FSSA Investment Managers (registration number 53314080C) are business divisions of First Sentier Investors (Singapore). The FSSA Investment Managers logo is a trademark of the MUFG (as defined below) or an affiliate thereof.

First Sentier Investors (Hong Kong) Limited and First Sentier Investors (Singapore) are part of the investment management business of First Sentier Investors, which is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (“MUFG”), a global financial group. First Sentier Investors includes a number of entities in different jurisdictions.

MUFG and its subsidiaries are not responsible for any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.