China bulls have been grabbing headlines this week. Top bank executives have declared their faith in the country’s longer-term economic potential, and their love of Hong Kong’s role in the rise of the Greater Bay Area. Heads of major funds have described regulatory crackdowns as “noise” and said they are buying dips. The Stock and Bond Connect taps have been gushing. Crackdowns on internet gaming, vaping, and extravagant celebrities have likely been but minor distractions for these titans of finance.
And why should they be anything but? Such men are not in the business of investing in “sin industries”. They are here to take wealth from people living in the GBA who would prefer to have it managed by experienced, worldly, friendly others, who know what to do with a hard currency. These men need not care that the US-China relationship is deteriorating by the day. It could even be said that the more the fear, the better for Hong Kong’s banks and other offshore wealth managers.
New US weapons sales to Taiwan or Chinese Foreign Minister Wang Yi’s rant at an Asean forum might not have made it into the daily news clippings of people like Bill Winters, head of Standard Chartered Bank, or Credit Suisse’s Thomas Gottstein. Ditto for Asoka Woerhmann, chief executive of the €859bn German asset manager, DWS. All believe that China’s growth story remains intact and will continue to follow the trajectory it has been on for the past 40 years, give or take a few squiggles.
They might be right. China is opening its wealth management industry, and now could be the time when centuries of historical precedent are erased as the Chinese government forgets the national security implications of allowing rivers of silver to flow into the hands of foreigners.
Then again, they might want to look into what is happening at Amazon. If they don’t, they could miss signs that the foundation on which the GBA’s prosperity is based – foreign trade – is wobbling and could soon head into structural decline.
The “world’s largest marketplace” has clearly been taking instruction in how to run a crackdown from China’s cyber police. Without notice or explanation, Amazon has recently been purging brands from its platform. The global e-commerce giant has, with a few clicks, terminated the get-rich-quick dreams of tens of thousands, possibly millions, of Chinese merchants.
Western media are still playing catch-up on this story, suggesting that about 300 brands have been expelled. Chinese media have quoted the Shenzhen Cross-Border E-Commerce Association as saying more than 50,000 Chinese sellers have been affected, causing losses of as much as 100 billion yuan. “This has been a huge shock in the industry, a once-in-hundred-years event,” one observer noted.
It should come as no surprise to learn, if Amazon were to disclose, that most of the victims of this heinous hegemonic act are from the Greater Bay Area. Guangdong has 13 cross-border e-commerce pilot zones, the most in the country, which generated 113.95 billion yuan of sales in 2019, before the pandemic broke out. That was the last time the provincial government updated its statistics publicly available to foreigners. Last year, national statistics show that China’s cross-border e-commerce grew 31% to 1.69 trillion yuan, around 9% of the country’s total foreign trade.
The city neighboring Hong Kong is probably the most exposed to the Amazon crackdown. Some analysts say companies based in Shenzhen account for 80% of Guangdong’s total in cross-border e-commerce sales. A must-read article from Pandaily quotes executives of companies based in the city, some of which had been doing tens of millions of dollars in annual sales. Chinese media describe one of the recently purged companies called Patozon, which did revenue of nearly five billion yuan in 2020, accumulating more than 800 “Amazon Bestsellers” distinctions. Its main brand, Mpow, was No. 1 on Amazon’s North American audio products.
It makes sense that the GBA has been driving this phenomenal growth. Thanks to dense river networks around the Pearl River Delta, and Cantonese culture, the region has always pioneered foreign trade trends in China. Offshore enclaves in Hong Kong and Macau have merely turbo-charged the region’s exporting and importing networks. Cross-border e-commerce was destined to be dominated by GBA companies once its time came.
Now for the hard part
For those who are new to the story, cross-border e-commerce is a sub-sector of foreign trade denoting producers who ship directly to customers overseas, rather than going through the kind of middlemen who had kept the Canton Fair going for 50 years. Internet platforms have made this possible. Some of this foreign trade has gone via Aliexpress, Netease’s Kaola (now owned by Alibaba), and JD.com Worldwide. But the biggest part of it has been via Amazon and eBay.
As the Pandaily article explains, not all Chinese sellers on Amazon should be tarred with the same brush. Good ones have built credible brands without the help of click farms and pay-per-review mercenaries. Yet it would be impossible not to conclude, from a brief review of the subject, that the vast majority of those suspected of errant behavior on Amazon are Chinese. This is for no other reason than 70% of all sellers on Amazon are based in China.
Amazon probably still has a way to go. With a database of more than 2.3 million “active sellers”, it is easy to assume that many more than those purged so far have been deploying dubious sales tactics. As the Pandaily source notes, this is how business is done in China’s domestic e-commerce market.
Could there be something else, bigger, going on? Chinese netizens quoted in the Pandaily story are convinced the crackdown has a geopolitical design. What they might not realize is that, if true, there is likely more carnage to come. It suggests someone at the White House has woken up to an aspect of the US-China trade relationship that had previously flown under the radar. If it turns out that any of these Amazon sellers from China have been using the platform to evade tariffs, and Amazon has been facilitating this ….
That is unlikely, of course. Goods from China are goods from China, whether brought in by Walmart or shipped directly to buyers via one of Amazon’s warehouses. But still, it is hard to shake the feeling that the newly reinvigorated Federal Trade Commission might be taking a harder look not only at Amazon, but the Chinese e-commerce groups as well.
Regardless of whether a new front is about to open in the US-China trade war, it is worth also keeping a closer eye on the Commerce Department. Normally a cheerleader for business and trade, it has been beefing up its Chinese expertise, and is probably looking into what is happening both on its home turf and on its adversary’s. Why else would it need Stanford’s esteemed China scholar, Elizabeth Economy?
If so, neither Commerce Secretary Gina Raimundo nor her feisty counterpart at the Trade Representative’s Office, Katherine Tai, could have been pleased by reports this week from China about trenches being dug in anticipation of the trade war escalating. This one, from Reuters, details how the central government has been issuing new procurement guidelines that require up to 100% local content on hundreds of items, including X-ray machines and magnetic resonance imaging equipment, thereby erecting fresh barriers for foreign suppliers. The report quotes a former official saying that when China joined the WTO, it agreed not to issue such internal documents. The document also violated the spirit of the January 2020 Phase One trade deal with the US, the former official said.
Another comes from SCMP, outlining a plan, orchestrated by China’s central bank, to tighten up and improve supply chains across key industries as the economy slows in the coming months. The report follows another by SCMP in late June, which said provincial and city leaders have been appointed as “supply chain chiefs”, with responsibility to “boost self-sufficiency” and ensure adequate supplies of critical goods such as computer chips and grains. It wasn’t kidding when it said these were “quasi-military commanders”, either.
Against the backdrop of this newsflow, US Vice President Kamala Harris is taking a trip to Vietnam and Singapore later this month. Ostensibly to gather facts on supply-chain issues facing American manufacturers, it seems sensible to expect that Harris will also be setting expectations for how the US-China trade war is about to move up a level or two.
Ties that no longer bind
Air Force Two could not be asking for better tailwinds. As this article from the Associated Press indicates, foreign trade is looking increasingly likely to be pushed out of China by not only tariffs, but infrastructure bottlenecks. Put simply, the pain of higher input costs can no longer be endured indefinitely by China’s exporters. Hard as it might be to do, many are reaching the point where they have no choice but to figure out how to move.
Cries of bias from the boosters can already be heard. They are likely to cite statistics showing China’s foreign trade surged in the first five months of this year and is back to pre-pandemic levels (see chart below). Yet this is not the space to get into a debate over either the reliability of Chinese official statistics or the resilience of China’s exporting machine. It is to note that China’s remarkable rise as a trading powerhouse has rested on its trading partners’ tolerance of sales tactics like those witnessed on Amazon in recent years, and their tolerance of Chinese government support for such firms, who are given export rebates and special treatment in dedicated duty-free zones.
Such tolerance is clearly running out. Officials in Brussels, Tokyo, Singapore and Seoul, among many others, might like to keep having their cake and eating it as long as possible, but at some point the US will decide it’s time for push to become shove. When that happens, the vast majority of the world’s trading system is going to systematically accelerate efforts to kick China out. Observers who say it cannot happen, the system is too dependent on China, need to read up on how the US dealt with Japan in the early decades of the 20th century.
Central government economic planners and trade strategists clearly know this. It is why they have been circulating notices like the one found by Reuters and why they have been putting “quasi-military commanders” on notice. There is no going back: the trade war is only going to intensify.
This would be obvious to any student of Sun Tzu. But it would equally be clear to followers of Clausewitz. Trade wars are best fought as total wars. That people like Joseph Nye can still be penning pleas for a strategy of “managed competition” is remarkable. It seems unlikely to be falling on receptive ears in Washington. Trade groups such as the Chamber of Commerce that have requested President Joe Biden repeal tariffs and restart talks with China obviously don’t have a finger on the pulse of American politics, either.
Winter is coming
There is no place in China more sensitive to this change than the GBA. How sensitive it is can probably be seen from this SCMP report about how the foreign trade landscape is shifting, dramatically impacting small and micro enterprises in China. To believe that the GBA’s wealth-management industry is on the cusp of a golden period of sustained, long-term growth is to ignore what is unfolding here on the ground in Guangdong. Quoting statistics about the rise of the services sector is all well and good until jobs need to be created without the export machine running at high speed.
The role that foreign trade has played, and continues to play, in China’s overall economic growth, is too detailed a subject to get into today. A book by Gavekal Research’s Arthur Kroeber, unabashedly titled, “China’s Economy: What Everyone Needs to Know”, lays it out well. Suffice to say that the defining question of the coming decade will be whether China can successfully transform itself into a domestic-oriented economy, while keeping the foreign investment flowing in, or whether the Dual Circulation Theory works only in the abstract.
What does seems eminently refutable is the notion that China will be able to internationalize its currency at the same time as it decouples from the global trading community. This is not only because of the obvious, i.e., that diminishing demand for goods from a country will diminish demand for its currency. It is also because the custodian of the global financial system will be standing against it. And if China cannot make the yuan a serious rival to the greenback and Euro, the Hong Kong dollar is only going to become more vulnerable to attack.
Moreover, the idea that the US will fight China only on the issue of tariff evasion or breaching its WTO commitments is risible. Not to sound Trumpian, but the trade war will likely soon become a total economic war. If Hong Kong’s new wave of wealth-management hires think they are about to capitalize on the opportunity of a lifetime under the Wealth Connect Plan, they had best start paying more attention to what their gear costs on Amazon. The two are inextricably linked.