China Throwing More Lifelines, Apple In Trouble



Chinese President Xi Jinping has embraced the trade war. Not only is his Communist Party firing up the anti-American rhetoric to combat similar rhetoric from the Trump administration, but Xi plans to support companies stuck in the war zone. (AP Photo/Ng Han Guan)


China will lend more support to strategic sectors of the economy caught in the trade war fire fight, and one big American company, namely Apple, could be the biggest visible loser as Washington targets China tech firms like telecom giant Huawei.

Computer hardware producers are expected to be the latest on the receiving end of Beijing lifelines.

China’s stock market saw lackluster volumes on Wednesday as President Xi Jinping speaks of a “long march” in the trade war. On Wall Street today, the X-Trackers China CSI-300 A-Shares (ASHR) ETF was down 0.44% in early trading, nearly twice that of the benchmark MSCI Emerging Markets Index.

The trade war puts China’s bull market at risk. Government funds are expected to throw money at Shanghai- and Shenzhen-listed shares. (AP Photo)


But in China, publicly traded software and semiconductor companies had a strong day as investors there think two things: They can supply the hardware the U.S. is basically banning them to buy here, and Beijing now has a reason to subsidize them.

There is talk in Shanghai that computer hardware companies will receive an income tax break over the next two years. Also, China’s Social Security Fund stated that the scope of its investments will be expanded.

“I would assume this means (buying) more (China) equities,” says Brendan Ahern, CIO of KraneShares, a China-focused ETF company.

See: How China Is Really Paying For Tariffs — Forbes

This Might Be Huawei’s Secret Weapon In Trade War — Forbes

A woman using a smartphone outside a Huawei store in Beijing.  U.S. companies supplying microprocessors for Huawei telecommunications equipment, including its smartphones, are required to get permission from Washington before doing so.  (AP Photo/Ng Han Guan) photo credit: ASSOCIATED PRESS

It’s Not A Trade War With China. It’s A Tech War — The Washington Post

Besides recent announcements to curtail purchases of U.S. semiconductor and microprocessors for use in Chinese telecommunications and surveillance equipment, more tariffs are in the works. The latest tariff policy, subject to public review, will be better understood next month.

But should the Trump Administration slap 25% tariffs on the final $300 billion worth of China imports, the direct tariff effects on this list alone could reduce nominal GDP growth by another 0.5 percentage points over the following year, Nomura Securities analysts wrote in a note to clients on Monday. All told, roughly one percentage point is seen being stripped off China’s GDP numbers, currently estimated to be between 6% and 6.5% this year.

China’s economy can easily produce sub-6% GDP growth this year or next because of the trade war.

“In the medium to long term,  a rapid escalation of trade tensions in recent weeks will add more downward pressure on China’s exports, production and investment in coming quarters, especially China’s tech sector,” says Nomura’s China economist Ting Lu in Hong Kong.

Trade Impacts. Commodities Crushed

A ferry boat passes container ships waiting to be unloaded at the Port of Oakland. (AP Photo/Ben Margot)


The share of trade with the U.S. among China’s total international trade has dropped to a historical low of 11.5% over the January-April period from a recent high of 14.3% in 2017. As one China investor said recently, “This is what decoupling looks like.”

China’s export growth to the U.S. is down 10.1% annualized over the same period. China’s imports from the U.S. dropped at a much faster pace to -30.2% annualized in the January-April 2019 period compared to a 13.6% growth rate in the second quarter of 2018.

According to China Customs, volume growth in soybeans imported from the U.S. fell 98.9% in the fourth quarter of 2018 and another 79.2% drop in the first quarter of 2019. China has been buying more beans from Brazil and growing its own soy at home.

Growth in China’s crude oil imports from the U.S. slumped 95.2% annualized in the fourth-quarter 2018, mostly due to front-loading shipments in the previous quarter, based on Nomura’s findings.

Apple As Huawei Casualty

Apple CEO Tim Cook.  His company might be the most visible casualty in the trade war.  (AP Photo/Cliff Owen)


The Department of Commerce (DOC) put Chinese tech companies that make surveillance and telecom equipment on notice.

Those companies are largely reliant on U.S. hardware. Their growth has worried the U.S. because Washington believes China plays a rigged game: reliant on subsidies, a locked audience often closed to U.S. competitors and, in some cases, outright theft of U.S. intellectual property that has helped some tech companies move up the food chain. Washington is now punishing those companies based on those assessments.

The mobile phone industry is the most visible one in the crosshairs, led by Huawei. Apple, too, is seen taking a hit.

According to China’s National Bureau of Statistics, China produced 1.8 billion mobile phones last year, down from 2.3 billion in 2016. Around 76% of those were smartphones.

Nomura estimates that gross industrial output of mobile phones was RMB2.9 trillion in 2018 ($420 billion), down from RMB3.2 trillion in 2016. Excluding the costs of imported processors, memory cards and other semiconductors, Nomura estimates the share of domestic manufacturing in the gross output of mobile phones was around 25% or the equivalent of roughly 0.8% of China’s nominal GDP in 2018. So that’s the baseline value of the bottom line being targeted in one part of the new tech restrictions imposed by the DOC.

Based on China’s Customs data, China’s mobile phone exports to the U.S. were valued at $35 billion in 2018, four times higher than 2008. China wants more of that market for its own brands, including Huawei phones.

But for now, most of those shipments are of Apple iPhones. China’s exports of iPhones to the U.S. were $31 billion in 2018, accounting for 6.5% of China’s total exports to the U.S. last year, which came in at $478.4 billion, according to the U.S. Census Bureau. It was another record-breaking year for China exports and trade gaps between the two countries.

Apple is highly dependent on China. Perhaps more than it lets on. It may yet prove to be the biggest American brand impacted by the trade war.

The U.S. Trade Representative has included iPhones on its list of new tariffs under review. Look for Apple’s CEO Tim Cook to be making trips to Washington lobbying for exemptions in the weeks ahead.

Downside pressure on China’s mobile phone industry will “rise significantly,” says Ting Lu of Nomura, if the U.S. raises tariffs on around $35 billion worth of China’s U.S.-bound mobile phone exports.

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