I have written several articles over the past year and a half about the trade war. First, the trade war between the U.S. and its North American trade partners—Canada and Mexico. I have also written about the trade war between the U.S. and China. But all of my articles have been from the perspective of how the trade dispute is impacting the U.S. economy and U.S. companies. What about the other side?
Yes, in some instances I have expressed thoughts about the overall Chinese economy and how it has been slowing. The trade war seems to have intensified the slowdown, but what about the individual companies?
Bloomberg published a couple of stories in the last few days that looked at the corporate environment in China and they had me thinking about the perspective from the other side of the trade dispute.
One of the articles looked at the falling interest rate environment and how it could help reduce the number of debt defaults at the corporate level. The article pointed out that defaults have surged this year as the economy has slowed and the trade war wages on, but the number of first-time defaulters seems to be falling. There have been three so far in the second quarter. There were 12 in the first quarter and 16 in the fourth quarter, so the trend seems to be improving.
The monetary and fiscal actions in China have been aggressive and it has brought interest rates down considerably. With the trade war seeming to take a turn for the worse in recent weeks, it looks as though the government and the central bank will be forced to keep rates low and they are considering additional policy changes to ease the damages.
The spread between higher grade bonds and lower grade bonds has come down considerably with the actions taken and that is making it easier for corporations to meet their debt obligations. The article pointed out that with fewer new defaulting companies, it appears to be helping the overall health of the debt market.
Another interesting aspect of the trade war has been the M&A market. Chinese companies had been making deals in the U.S. in recent years, but that activity has dried up. The second article from Bloomberg talked about the impact that is having on the private equity market and their interest in tech companies.
The highlight of the article for me was a quote. “If you’re a Chinese company, there’s no way in hell you’re buying anything in the U.S., not even the trash can, for the foreseeable future,” Madhu Namburi, head of technology investment banking, JPMorgan Chase & Co.
One of the biggest sticking points in the trade dispute has been China’s policy of protecting intellectual property rights. Huawei, the smartphone manufacturer, has been in the spotlight of the trade negotiations and the U.S. has proposed a ban that would prohibit U.S. companies from doing business with the company.
Obviously if the total ban is implemented, the ramifications will be extremely detrimental to Huawei, but it will also impact U.S. companies that rely heavily on Huawei as buyer of components. Companies like Lumentum, Micron Technology, and Broadcom have partnered with Huawei in the past and a significant percentage of the revenues of these companies comes from the Chinese manufacturer.
If the trade war continues on for a number of years, it could cause some smaller companies in the U.S. to shut down. It could also permanently destroy the current partnerships between U.S. and Chinese companies. At present, Huawei gets approximately half of the chips used in their phones from U.S. companies. If the trade war continues, the company will build new relationships with companies outside the U.S. Huawei is big enough and on good enough financial footing to survive and rebuild with new partners. Can a company like Lumentum survive if it loses the source of almost 20% of its total revenue?
Obviously there will be beneficiaries in other countries. Huawei could choose to use chips built domestically in China or it could expand its partnership with a company like Taiwan Semiconductor.
Regardless of the outcome of the trade war, the landscape for trade between China and the U.S. has been permanently changed. Even if an agreement is reached in the next few months, some of the partnerships will never be the same. If the trade war continues on for years—there will be companies on both sides of the Pacific that go out of business and there will also be some that benefit.