Today, we will review the shifts in Sino-U.S. relations from the perspective of bilateral financial activities and then delve into the essence of the Sino-U.S. trade war and “decoupling” from China.
“What decoupling? China and U.S. trade in 2022 was record-breaking.” This was Fortune magazine’s headline claiming that the record-breaking trade is a signal of resilient links between the world’s top two economies despite geopolitical tensions. So, is the U.S. really decoupling from China, or is it just rhetoric?
Let’s look at the money and goods that crossed the Pacific between China and the United States in 2022, in trade, stocks and bonds, debt, and Chinese IPOs in the United States, and find out the answer.
China’s Stock Market
In 2021, a record number of foreign investments poured into China’s stock market through the Hong Kong-mainland Stock Connect, which is the required channel for cross-border trading. It hit an all-time high of 432 billion Chinese Yuan (CNY) RMB with 12 consecutive months of net inflows. The situation changed dramatically in 2022. The annual net inflow of foreign investments hit a 5-year low at 90 billion CNY, a 79% drop from 2021.
Foreign investments in the mainland’s stock market accounted for one-tenth of the trading activities and had an impact on China’s A-shares market. A 2019 study shows the direct link between foreign capital inflows and the Chinese stock market performance.
By the way, the three main stock indexes—Shanghai Stock Exchange Index, the Shenzhen Stock Exchange Index, and the Growth Enterprise Market Index—fell 15%, 26% and 29% respectively for 2022.
China’s Bond Market
According to the Chinese central bank, at the beginning of 2022, foreign institutions held 4 trillion CNY worth of bonds in China’s interbank market, accounting for about 3.5% of the total volume in that market. At the end of the year, the amount held by foreign institutions in interbank bonds was 3.4 trillion CNY, accounting for 2.7% of the total volume. That’s a decrease of 0.8% from 3.5% at the beginning of the year.
Since China’s central bank started publishing relevant data 10 years ago, 2022 was the first year that foreign investors in the Chinese bond market sold more than they bought. The Wall Street Journal reported that the total value amount of Chinese bonds held by foreign investors went down by 15% from the RMB equivalent of $591 billion at the end of 2021 to $500 billion at the end of 2022.
China-Issued U.S. Dollar Bonds
When news about Chinese real estate developer Evergrande’s debt problem surfaced in the second half of 2021, the Chinese dollar-bond market lost its appeal. In fact, 2022 was the darkest moment for Chinese-issued U.S. dollar bonds. Chinese real estate companies have completely lost their financing function in the overseas market due to default on debt.
Last year saw a record number of 94 defaults in Chinese-issued dollar debts, of which 63 were in real estate. The real estate default amount increased 5 times from $4.2 billion in 2021 to 22.6 billion dollars in 2022.
2022 was the darkest moment for Chinese-issued U.S. dollar bonds.
Chinese IPOs in the U.S.
According to China’s Wind Data Services, as of Dec. 28, 2022, Chinese companies raised $582 million in IPOs in the U.S. for the year, down about 96% from the amount raised in 2021. And the number of IPOs by Chinese companies was 17, a record low in six years.
According to Wind Data, 80% of the Chinese companies that went for U.S. IPOs in 2022 are small companies that raised less than $50 million in capital. In comparison, in 2021, about 40 companies went for IPOs in the U.S., of which 16 raised more than $100 million each.
Sino-U.S. Trade War
Beijing just published its trade numbers for 2022 and announced to the world record high Sino-U.S. trade of around $760 billion. This prompted U.S. media such as Fortune magazine and Bloomberg to follow up on Beijing’s announcement and say that “de-coupling from China” is only rhetoric and not reality.
However, if we analyze the data, we see that trade volume in the record-breaking year was not evenly distributed and is trending downward. Sino-U.S. imports and exports fell significantly in the fourth quarter of last year, and the impact is huge.
According to China’s Customs data, the country’s exports to the U.S. in 2022 totaled $47 billion, $41 billion, and $45 billion in October, November, and December—down 13%, 25%, and 20%, respectively, compared to the same period in 2021. China’s imports from the U.S. totaled $13 billion, $17 billion, and $16 billion during the same period—down 12%, 7%, and 8%, respectively, year-over-year.
Notably, China’s trade surplus with the U.S. for the last three months of 2022 went down 16%, 34%, and 25%, compared to the surplus for the same period in 2021. This decline in trade surplus with the U.S. has had a significant impact not only on the Chinese economy but also on Sino-U.S. relations and geopolitics.
Similar to any business, the country that spends more money and imports more goods from another country in bilateral trade has the upper hand in negotiation. In the Sino-U.S. trade, the United States has the upper hand because it buys more from China than it sells. The U.S. has a $400 billion to $500 billion annual trade deficit with China. This is China’s main source of trade surplus denominated in U.S. dollars.
China then allocates the $400–$500 billion trade surplus to other countries and buys goods from them, such as Japan, Germany, and South Korea. Using the imports as bargaining chips, the CCP makes these countries believe that they depend on China in bilateral trade. And that’s why Germany and South Korea, for example, are not the strongest countries in confronting Beijing’s egregious behavior.
If the United States chooses to diversify its imports and buy less from China, China will lose a significant part of its trade surplus to buy goods from other countries. It will lose its bargaining chip with them. This is the essence of the Sino-U.S. trade war and “decoupling.” And if the United States plays this well, it can significantly restrain the CCP economically and change the world peacefully without resorting to a physical war.
As the United States reduced imports from China during the last quarter of 2022, we’ve seen China’s imports from Europe and Asian neighbours begin to decline. China’s imports from the EU were down 15% last December, compared to December 2021.
For example, China’s total imports from the Netherlands fell sharply by 32% year-over-year; imports from Italy fell by 19%; and imports from Germany fell by 11%. In Asia, China imported $15 billion worth of goods from Japan in December, down 17% from a year earlier, and $14 billion of goods from South Korea, down 27% from 2021.
A similar downward trend was seen in November 2022, with China’s total merchandise imports from Germany, the Netherlands, France, and Italy, as well as Japan and South Korea falling 18%, 16%, 19%, 13%, 25%, and 26% year-over-year, respectively.China has been audacious in flaunting its power to its trade partners because it has a trade deficit with many countries.
Once China loses its trade surplus with the United States, its economy and the stability of its currency will be hit, and its trade relations with other countries will transform. Compared with other forms of economic sanctions, reducing its trade deficit may be the most accessible way for the United States to contain China geopolitically.
Without a lot of U.S. dollars made from international trade in its hands, the CCP will be effectively “decoupled” from the international community. All we have to do is to stop buying things “made in China.” Interestingly, the Chinese living in the United States don’t like things “made in China”. They don’t trust the quality of products made in China. It’s ironic, isn’t it?
If the United States chooses to diversify its imports and buy less from China, China will lose a significant part of its trade surplus to buy goods from other countries. It will lose its bargaining chip with them. This is the essence of the Sino-U.S. trade war and “decoupling.”
