Tony Nash: The 'Asian Century' Is Played out

Submitted by Taps Coogan on the 20th of May 2019 to The Sounding Line.

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Tony Nash, China expert and founder of Complete Intelligence, recently spoke with Real Vision about his concerns over the impact of Tariffs on China’s economy and its slowing growth outlook.

Some excerpts from Tony Nash:

“… The US is definitely in a stronger position on the trade war…, we’ve done a lot of analysis on the types of products that China exports to the US and whose competitive with those products. The real issue right now is five of the top ten products that China exports to the US are also produced in Mexico and they are among Mexico’s top ten exports to the US. You have other products, like mobile phones, where Mexico isn’t really strong yet but they’re building that pretty quickly. The real issue that China has is they make manufactured goods, largely. They don’t export primary goods like agriculture goods to the US. There is a lot of competition for manufactured goods. Of the rest of those goods, say three or four of their top ten exports to the US, they’re things like suitcases and chairs, very low level manufactured goods that can be made in Vietnam, or Bangladesh, or other places. There’s an assumption from developed markets and investors that China has some sort of competitive advantage with their manufacturing and the fact is they don’t. So, who pays for the tariffs? Well, if China was the only source of these goods, then the Americans would be paying for those tariffs. But the fact is, there is a lot of competition for the manufacturing of those goods, and when there is a lot of competition, the receiving end doesn’t pay for the tariffs. The manufacturer has to absorb those tariffs… When I hear people saying ‘Americans are actually paying for those tariffs,’ it’s not true. It’s something that’s absorbed by the manufacturer because those goods can be made in Mexico. Those goods can be made in Vietnam, Korea, Japan, Germany, elsewhere… In 2017, it was the first year in many years that the US imported more TVs from Mexico than from China. The global trade environment is changing and it’s a move towards regionalization…”

“Supply chains have been so centralized in China that it’s actually a risk for those… manufacturing firms… Do they want to have a diversified supply chain or do they have to have a concentrated supply chain? And the risks of having a concentrated supply chain are coming to light. So those companies that have a concentrated Chinese supply chain right now are a real risk… I would question their executive team. It’s not as if this happened overnight. Why on Earth have you not diversified your supply chain over the last two, three, five years? Why did you not see what happened to Japanese manufacturing firms in 2012? These are kind of no-brainer things that should have been happening already…”

“… Nobody wins 100% (in a trade war). There are issues in the US and of course certain goods will be more expensive, but their are two (main) losers. One is China and one is Europe… China loses because the margins for private sector companies in China are pretty thin. They are heavily loaded with debt and if they have to absorb the cost of these tariffs, you are going to have mass closures in China… You have African Swine Flu that’s hit the pigs farms in China as well. Officially, they’ve culled 20% of their herd. I think it’s probably double that. So, you have food inflation. You have a hit to CPI. You have a weakening CNY. You have manufacturing firms who have lower margins. So you have this kind of nightmare scenario for the Chinese government. At the same time you have slowing growth… You have a very very difficult environment for the Chinese government… If they make the reforms that the US government wants them to make, the central government loses control of the economy, maybe not over night but gradually, and if the central government loses control over the economy than the communist party loses control over the country. That’s a very difficult play for the CCP and that’s why we are seeing the push-back. It has nothing to do with Chinese manufacturers. It has nothing to do with fairness in global trade and all this stuff… The EU will lose because any goods that China can’t export to the US…, China can’t offload those goods to Japan, so who has the income profile that the US has? It’s Europe. China will send that deflation to Europe because they have to put those goods somewhere, and that puts the ECB is a very very difficult position…”

“For this year we think Chinese growth has a four handle on it… We do think there is growth. We do think China has matured very quickly, but we do think there is a drag based on debt… Even with all the problems that China has, I do believe the economic planners at the NDRC, the planners in the PBoC, they’re all extremely smart people… There are political forces working against those economic forces…”

“The growth in Asia is not ahead. The growth in Asia is behind us. And again, that’s not a pessimistic view. That’s a realistic view. I spent 15 years there. I saw it. I lived it. I saw the growth. It was synthetic and it was based on debt… The ‘Asian Century,’ we lived it over the past 20 years. We’re not going to live the Asian Century over the next 80 years. Companies, individuals, governments, have borrowed against the next 30 years to build the last 20… You have disorganized, opaque, and slowing markets…”

There is much more to the interview, so enjoy it above.

As the following chart shows, the vast majority of Chinese exporters’ margins are smaller than the 25% tariffs now being imposed or threatened on them.