China Suffers Biggest Dollar Bond Default By State-Owned Company in Two Decades December 12, 2019, 7:51 AM GMT
China Suffers Biggest Dollar Bond Default By State-Owned Company in Two Decades
(Bloomberg) -- A major Chinese commodities trader became the biggest dollar bond defaulter among the nation’s state-owned companies in two decades, in a moment of reckoning for Beijing as it struggles to contain credit risk in a weakening economy.
Tewoo Group Corp. announced results of its unprecedented debt restructuring, which saw a majority of its investors accepting heavy losses. This is expected to reshape investors’ perceptions about government-owned borrowers whose identity has for years offered a relatively strong sense of security.
It’s also seen offering a road-map for resolving similar debt crises in the future as the prospect of more failures by state-backed firms looms.
The one-time Fortune Global 500 company from the northern port city of Tianjin said dollar bond investors representing 57% of the the total $1.25 billion have agreed to be paid just 37 to 67 cents on the dollar, depending on the maturity of the debt. Bondholders representing 22.6% of these bonds voted to exchange their debt for new bonds with sharply lower coupons to be issued by Tewoo’s offshore debt manager, a state asset manager from Tianjin.
“This is one form of default based on our definition,” said Ivan Chung, a Hong Kong-based analyst at Moody’s Investors Service, noting that the debt revamp has resulted in losses for investors.
The debt restructuring plan, first of its kind for a Chinese state-run enterprise in the dollar bond market, came ahead of $300 million dollar bond maturity on Dec. 16, one of the four notes covered by Tewoo’s debt restructuring plan. Tianjin State-owned Capital Investment and Management, its offshore debt manager, said on an investor call late last month that Tewoo is very likely to default on this paper.
For investors who turned down the offers, their dollar bonds will be grouped into a comprehensive debt plan involving Tewoo’s onshore debt, according to Tianjin State-owned Capital.
Tewoo said settlement of the debt restructuring offers are expected to be on or about Dec. 17.
Tewoo’s failure in the dollar bond market, the biggest for a Chinese SOE since the collapse of Guangdong International Trust and Investment Corp. in 1998, is a sign that the worst economic slowdown in three decades is limiting Beijing’s capacity to bail out its weaker state firms. As a result, the authorities appear increasingly willing to use a more market-oriented approach to clean up the mess.
“Tewoo’s default is a landmark case, and demonstrates a growing tolerance for defaults by distressed SOEs,” Cindy Huang, an S&P Global Ratings credit analyst said in a note.
Tianjin “is not an exception” and other local governments with deteriorating fiscal conditions might also see eroding support for their less competitive SOEs, it said.
Tewoo’s crisis came as a wake-up call for investors.
“This is a poor outcome for investors that bought the bonds at par. That said, there is now some track record as to the severity of loss for an SOE-related entity,” said Charles Macgregor, head of Asia at Lucror Analytics.
“Hopefully, these types of restructures will bring more discipline to the market and result in investors properly pricing for the apparent risk,” he added.
Tewoo is owned by the Tianjin government and operates in a number of industries including infrastructure, logistics, mining, autos and ports, according to its website. It also has footprints in countries including the U.S., Germany, Japan and Singapore.
The trader ranked 132 in 2018’s Fortune Global 500 list, higher than many other conglomerates including service carrier China Telecommunications Corp. and financial titan Citic Group Corp. It had an annual revenue of $66.6 billion, profits of about $122 million, assets worth $38.3 billion, and more than 17,000 employees as of 2017, according to Fortune’s website.
Russian weapons were illegally copied 500 times abroad over 17 years, says Rostech
In October, Rosoborontexport declared creation a consultative group for the protection of intellectual property rights within the framework of military-technical cooperation with other countries
"Unauthorized copying of our equipment abroad is a great problem. There have been 500 such cases over the past 17 years. China alone has copied aircraft engines, Sukhoi planes, deck jets, air defense systems, portable air defense missiles, and analogues of the self-propelled medium-range surface-to-air systems Pantsir," he said.
Livadny said that groups of Russian specialists working abroad often managed to expose such illegal copying, but even when such cases are registered, it is impossible to present anything in court, because there are no patents for Russian weapons and equipment registered abroad.
"Such foreign companies as Raytheon and BAE Systems have up to 5,000 patents abroad. They disclose their intellectual property, for they see no risks. In the meantime, neither our Defense Ministry nor defense-industrial complex enterprises have registered patents abroad.
In October, Rosoborontexport declared creation a consultative group for the protection of intellectual property rights within the framework of military-technical cooperation with other countries. The group incorporates officials from the Defense Ministry, federal service for military-technical cooperation, Rostech and Rosatom.
FILE PHOTO: Chinese and U.S. flags are set up for a meeting during a visit by U.S. Secretary of Transportation Elaine Chao at China's Ministry of Transport in Beijing
By David Lawder
WASHINGTON (Reuters) - The U.S.-China trade war is set to enter a new, quieter phase on Wednesday as U.S. President Donald Trump and Chinese Vice Premier Liu He sign an initial trade deal that aims to vastly increase Chinese purchases of U.S. manufactured products, agricultural goods, energy and services.
The Phase 1 agreement caps 18 months of tariff conflict between the world's two largest economies that has hit hundreds of billions of dollars in goods, roiling financial markets, uprooting supply chains and slowing global growth.
Trump and Liu are scheduled to sign the 86-page document, at a White House event before over 200 invited guests from business, government and diplomatic circles.
U.S., China sign 'Phase One' trade agreement, signaling pause in trade war
Michael Collins, David Jackson and John Fritze, USA TODAY
January 15, 2020, 9:41 PM GMT
Trump says US, China have reached deal
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WASHINGTON – The U.S. and China signed a limited trade deal Wednesday, signaling a pause in the nearly two-year trade war between the world's two largest economies and setting the stage for talks for a broader agreement down the road.
The “Phase One” agreement, the product of months of negotiations between officials in Washington and Beijing, calls for China to purchase an additional $200 billion worth of U.S. goods and services over the next two years, including another $32 billion in agriculture products.
China also promised not to pressure foreign companies to turn over their intellectual property for the right to do business there and to refrain from devaluing its currency to give its companies an advantage over foreign competitors.
“Today we take a momentous step – one that has never been taken before with China – toward a future of fair and reciprocal trade,” President Donald Trump said in a White House signing ceremony with Chinese Vice Premier Liu He.
Speaking through a translator, Liu read a message from Chinese President Xi Jinping, who said the deal “is good for China, for the U.S. and for the world."
Trump said he would travel to China soon as the two sides try to negotiate a broader agreement to deal with unresolved issues, such as complaints that China subsidizes its companies to give them an unfair advantage over foreign businesses. A broader deal is not expected to be finalized until after the November election.
Meanwhile, the U.S. will keep in place most of the tariffs it imposed on $360 billion in Chinese products as trade tensions between the two countries escalated over the past 18 months. But Trump said those tariffs could be removed if a broader deal is reached.
The limited agreement signed Wednesday allows Trump to claim a political victory as he faces an impeachment trial in the Senate and gears up for the November election. But analysts question how much the U.S. really got out of the deal.
“This is largely a deal on Chinese terms,” said Robert Daly, director of the Wilson Center’s Kissinger Institute on China and the United States, a non-profit research organization that seeks to promote better U.S.-China relations. “There is nothing we know about this deal that China wouldn’t like. And there is nothing we know about this deal that China probably wouldn’t have been willing to do some time ago.”
U.S. consumers won’t get much of a financial reprieve from the deal, economists say, because while the truce helps consumers avoid the pain of further tariffs, it doesn't erase all the earlier ones.
“The most important element of this deal is what didn't happen: further tariffs," says Gregory Daco, chief U.S. economist at Oxford Economics. "The risk of more tariffs isn’t going to materialize, and that’s the biggest gain for Americans.”
Other critics said the deal is only an election-year placeholder designed to push the toughest trade issues beyond Trump's reelection bid.
"All the big trade issues between the U.S. and China remain unaddressed and punted into the future," said David Rothkopf, a senior trade official in President Bill Clinton's administration. "It is a Potemkin Deal, a sham."
President Donald Trump and Chinese Vice Premier Liu He sign the U.S.-China trade agreement in the East Room of the White House.
Trump, however, insisted the agreement is “a transformative deal" and said it would benefit American farmers, manufacturers and other workers who have been hurt by China's unfair trade practices.
Trump and Chinese officials announced the agreement in mid-December, signaling the first signs of a pause in trade tensions that rattled financial markets across the globe.
For months, the two countries hit each other with punishing tariffs in a trade war triggered by U.S. accusations that Beijing steals technology from American companies and pressures them to hand over trade secrets so they can do business in China.
At the height of the dispute, Trump set tariffs on more than $360 billion in Chinese imports, including farm equipment, motorcycles, mopeds, electronics, plastics and washing machines. China retaliated with tariffs on more than $110 billion worth of U.S. goods, including agriculture products, cars, auto parts, chemicals, whiskey, cigars, clothing and TVs.
As part of the Phase One deal, the U.S. agreed to shelve plans for tariffs on another $160 billion in Chinese goods that had been set to take effect Dec. 15. The U.S. also said it would cut by half the 15% tariff rate it imposed on $120 billion of Chinese goods Sept. 1.
China promised to buy an additional $200 billion in American goods and services over the next two years. Roughly $87 billion of that will be in U.S. manufactured goods, including industrial machinery, iron and steel and vehicles.
Another $32 billion of the Chinese purchases will be in agriculture products, such as oil seeds, meat, cereals and cotton; $52 billion will be in U.S. energy goods, including liquefied natural gas, crude oil and other refined products; and $38 billion will be in services such as business travel, financial services and insurance.
China also promised to open its financial markets to U.S. companies, address concerns about protecting the intellectual property of American companies doing business there and enact new guidelines for how it manages its currency.
But analysts remain skeptical.
Most of the agreement involves China making commitments to change its practices on matters such as forced technology transfers and intellectual property protection, but it's unclear how the U.S. can make sure China follows through, said Chad Bown, a senior fellow with the Peterson Institute for International Economics, a nonpartisan, nonprofit think tank in Washington, D.C.
There are enforcement mechanisms in the agreement, but no one seems to know how they might be applied if the U.S. believes China is in violation, Bown said.
"There are still a lot of open questions as to how this going to work in practice," he said.
China has a long history of failing to buy as many U.S. products as it has promised, Daly said, and even if the Chinese live up to their commitments this time, there remain questions about whether U.S. farmers could produce enough crops to fill their orders.
What's more, critics said, the issues still on the table will be difficult to resolve and raise questions about whether a broader agreement can be reached.
“If we make significant progress, that would be a very good thing,” said Craig Allen, president of the U.S.-China Business Council, a nonprofit group representing American companies that do business in China.
But "these are very difficult issues," Allen said. "We have a hard time getting along even with the Canadians. How are we going to resolve all of these issues with the Chinese?”
Harvard University Professor and Two Chinese Nationals Charged in Three Separate China Related Cases
The Department of Justice announced today that the Chair of Harvard University’s Chemistry and Chemical Biology Department and two Chinese nationals have been charged in connection with aiding the People’s Republic of China.
Dr. Charles Lieber, 60, Chair of the Department of Chemistry and Chemical Biology at Harvard University, was arrested this morning and charged by criminal complaint with one count of making a materially false, fictitious and fraudulent statement. Lieber will appear this afternoon before Magistrate Judge Marianne B. Bowler in federal court in Boston, Massachusetts.
Yanqing Ye, 29, a Chinese national, was charged in an indictment today with one count each of visa fraud, making false statements, acting as an agent of a foreign government and conspiracy. Ye is currently in China.
Zaosong Zheng, 30, a Chinese national, was arrested on Dec. 10, 2019, at Boston’s Logan International Airport and charged by criminal complaint with attempting to smuggle 21 vials of biological research to China. On Jan. 21, 2020, Zheng was indicted on one count of smuggling goods from the United States and one count of making false, fictitious or fraudulent statements. He has been detained since Dec. 30, 2019.
Dr. Charles Lieber
According to court documents, since 2008, Dr. Lieber who has served as the Principal Investigator of the Lieber Research Group at Harvard University, which specialized in the area of nanoscience, has received more than $15,000,000 in grant funding from the National Institutes of Health (NIH) and Department of Defense (DOD). These grants require the disclosure of significant foreign financial conflicts of interest, including financial support from foreign governments or foreign entities. Unbeknownst to Harvard University beginning in 2011, Lieber became a “Strategic Scientist” at Wuhan University of Technology (WUT) in China and was a contractual participant in China’s Thousand Talents Plan from in or about 2012 to 2017. China’s Thousand Talents Plan is one of the most prominent Chinese Talent recruit plans that are designed to attract, recruit, and cultivate high-level scientific talent in furtherance of China’s scientific development, economic prosperity and national security. These talent programs seek to lure Chinese overseas talent and foreign experts to bring their knowledge and experience to China and reward individuals for stealing proprietary information. Under the terms of Lieber’s three-year Thousand Talents contract, WUT paid Lieber $50,000 USD per month, living expenses of up to 1,000,000 Chinese Yuan (approximately $158,000 USD at the time) and awarded him more than $1.5 million to establish a research lab at WUT. In return, Lieber was obligated to work for WUT “not less than nine months a year” by “declaring international cooperation projects, cultivating young teachers and Ph.D. students, organizing international conference, applying for patents and publishing articles in the name of” WUT.
The complaint alleges that in 2018 and 2019, Lieber lied about his involvement in the Thousand Talents Plan and affiliation with WUT. On or about, April 24, 2018, during an interview with investigators, Lieber stated that he was never asked to participate in the Thousand Talents Program, but he “wasn’t sure” how China categorized him. In November 2018, NIH inquired of Harvard whether Lieber had failed to disclose his then-suspected relationship with WUT and China’s Thousand Talents Plan. Lieber caused Harvard to falsely tell NIH that Lieber “had no formal association with WUT” after 2012, that “WUT continued to falsely exaggerate” his involvement with WUT in subsequent years, and that Lieber “is not and has never been a participant in” China’s Thousand Talents Plan.
According to the indictment, Ye is a Lieutenant of the People’s Liberation Army (PLA), the armed forces of the People’s Republic of China and member of the Chinese Communist Party (CCP). On her J-1 visa application, Ye falsely identified herself as a “student” and lied about her ongoing military service at the National University of Defense Technology (NUDT), a top military academy directed by the CCP. It is further alleged that while studying at Boston University’s (BU) Department of Physics, Chemistry and Biomedical Engineering from October 2017 to April 2019, Ye continued to work as a PLA Lieutenant completing numerous assignments from PLA officers such as conducting research, assessing U.S. military websites and sending U.S. documents and information to China.
According to court documents, on April 20, 2019, federal officers interviewed Ye at Boston’s Logan International Airport. During the interview, it is alleged that Ye falsely claimed that she had minimal contact with two NUDT professors who were high-ranking PLA officers. However, a search of Ye’s electronic devices demonstrated that at the direction of one NUDT professor, who was a PLA Colonel, Ye had accessed U.S. military websites, researched U.S. military projects and compiled information for the PLA on two U.S. scientists with expertise in robotics and computer science. Furthermore, a review of a WeChat conversation revealed that Ye and the other PLA official from NUDT were collaborating on a research paper about a risk assessment model designed to decipher data for military applications. During the interview, Ye admitted that she held the rank of Lieutenant in the PLA and admitted she was a member of the CCP.
In August 2018, Zheng entered the United States on a J-1 visa and conducted cancer-cell research at Beth Israel Deaconess Medical Center in Boston from Sept. 4, 2018, to Dec. 9, 2019. It is alleged that on Dec. 9, 2019, Zheng stole 21 vials of biological research and attempted to smuggle them out of the United States aboard a flight destined for China. Federal officers at Logan Airport discovered the vials hidden in a sock inside one of Zheng’s bags, and not properly packaged. It is alleged that initially, Zheng lied to officers about the contents of his luggage, but later admitted he had stolen the vials from a lab at Beth Israel. Zheng stated that he intended to bring the vials to China to use them to conduct research in his own laboratory and publish the results under his own name.
The charge of making false, fictitious and fraudulent statements provides for a sentence of up to five years in prison, three years of supervised release and a fine of $250,000. The charge of visa fraud provides for a sentence of up to 10 years in prison, three years of supervised release and a fine of $250,000. The charge of acting as an agent of a foreign government provides for a sentence of up to 10 years in prison, three years of supervised release and a fine of $250,000. The charge of conspiracy provides for a sentence of up to five years in prison, three years of supervised release and a fine of $250,000. The charge of smuggling goods from the United States provides for a sentence of up to 10 years in prison, three years of supervised release and a fine of $250,000. Sentences are imposed by a federal district court judge based upon the U.S. Sentencing Guidelines and other statutory factors.
Assistant Attorney General for National Security John C. Demers, United States Attorney Andrew E. Lelling; Special Agent in Charge of the FBI Boston Field Division Joseph R. Bonavolonta; Michael Denning, Director of Field Operations, U.S. Customs and Border Protection, Boston Field Office; Leigh-Alistair Barzey, Special Agent in Charge of the Defense Criminal Investigative Service, Northeast Field Office; Philip Coyne, Special Agent in Charge of the U.S. Department of Health and Human Services, Office of Inspector General; and William Higgins, Special Agent in Charge of the U.S. Department of Commerce, Office of Export Enforcement, Boston Field Office made the announcement. Assistant U.S. Attorneys B. Stephanie Siegmann, Jason Casey and Benjamin Tolkoff of Lelling’s National Security Unit are prosecuting these cases with the assistance of trial attorneys William Mackie and David Aaron at the National Security Division’s Counterintelligence and Export Control Section.
The details contained in the charging documents are allegations. The defendants are presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.
These case are part of the Department of Justice’s China Initiative, which reflects the strategic priority of countering Chinese national security threats and reinforces the President’s overall national security strategy. In addition to identifying and prosecuting those engaged in trade secret theft, hacking and economic espionage, the initiative will increase efforts to protect our critical infrastructure against external threats including foreign direct investment, supply chain threats and the foreign agents seeking to influence the American public and policymakers without proper registration. Harvard University Professor and Two Chinese Nationals Charged in Three Separate China Related Cases
China cuts tariffs on £57.8bn of US imports in trade truce
China has cut tariffs on 75 billion dollars (£57.8 billion) of US imports in a trade truce with Washington as Beijing struggles with a costly virus outbreak.
The cuts follow last month’s signing of a Phase 1 agreement towards ending a long-running tariff war over Beijing’s technology ambitions and trade surplus.
Both sides have made conciliatory gestures but the lingering dispute threatens to chill global economic growth.
The reductions follow American tariff cuts last month on Chinese goods.
There was no indication Beijing altered its own cuts in response to the rising cost of efforts to contain a coronavirus outbreak that have depressed business activity by closing factories, restaurants and shops.
“The next steps depend on the development of the Chinese-US economic and trade situation,” said a Ministry of Finance statement.
“We hope to work with the United States towards the final elimination of all tariff increases.”
The tax rate on some 916 items including soybeans, pork and fish was cut from 10% to 5%, effective on February 14, the ministry said.
The rate for 801 items including car parts will be cut from 5% to 2.5%.
Washington hiked tariffs on Chinese goods in 2018 in response to Beijing’s multibillion-dollar trade surplus and complaints it steals or pressures companies to hand over technology.
China retaliated by increasing duties on American goods.
Under the Phase 1 deal in October, Washington cancelled planned additional tariff hikes and Beijing committed to buying more US farm exports.
However, most tariff hikes imposed previously by both sides on billions of dollars of each other’s goods are still in place.
China Discovers Underwater Spy Drones In Its Waters
The secretive world of naval underwater surveys rarely breaks the surface. Now recent events are briefly shining a light into the darkness.
In the Adriatic, a Croatian fishing vessel caught one of the U.S. Navy’s undersea sensor systems last week. That mysterious object has largely been explained. Meanwhile, China has held an awards ceremony for fishermen who alerted authorities after discovering similar devices in their nets. The devices may have been operating in international waters, but still in China’s backyard, as they see it. We can infer that some of these devices may belong to the U.S. Navy.
The Unmanned Underwater Vehicles (UUVs) found by China are generally small, but they can gather ... [+]
H I Sutton (Author)
China has been holding the annual awards ceremonies since 2016. This year 11 fishermen were rewarded for handing over unidentified underwater vehicles which they had found. The number of devices was not reported, but in 2018, nine were handed over.
The vehicles themselves are not being displayed, but are reported to include ones of foreign origin. By implication, this means that they are operated by other navies in or near Chinese waters. If so, their role is likely to be intelligence gathering. The information they collect could include measuring the depth, noise, salinity and currents. This seemingly mundane data could provide submariners with a tactical advantage in future operations, making them better informed about local conditions. Which is why navies invest so much in these activities. And why they are often conducted discretely, or even covertly.
The Jan. 13 ceremony took place in Jiangsu province on China's eastern coast, facing the East China Sea. These waters are of interest to South Korea and Japan, as well as the U.S. Navy and potentially other global players. American submarines in the region are based in Pearl Harbor and frequently visit ports in Guam, South Korea and Japan.
Jiangsu province is not the only area where China finds foreign underwater devices. The scale of the incidents is hard to measure because most are not reported in the media. There is patchy information on a few of these incidents however. In 2012 a fishing boat from Hainan Island discovered a torpedo-shaped drone in the South China Sea. That titanium drone had satellite communications and cameras. It was reported as an American device in Chinese media. Confusingly, photographs of it are now being used to illustrate the latest award ceremonies.
In December 2016, China seized an underwater drone from the U.S. Navy oceanographic survey ship USNS Bowditch. She is the same class of ship as the one which lost the device off Croatia last week. The innocent -ooking glider, painted high visibility yellow to aid recovery, was termed a Littoral Battlespace Sensing-Glider (LBS-G). It was later handed back to an American warship.
Unmanned platforms are popular for intelligence gathering because they do not endanger a crew if caught or lost.
China is not alone in facing this manner of unwanted attention. North Korea has a large torpedo-like intelligence gathering drone on display in the capital, Pyongyang. That device is possibly a U.S. Navy submarine-launched drone. China Discovers Underwater Spy Drones In Its Waters
New Data Shows U.S. Companies Are Definitely Leaving China
Apr 7, 2020
U.S. companies are leaving China thanks to the trade war. They’ll leave even more thanks to the pandemic.
Sorry, Davos Man. Your China-led globalization is going out of style like bell bottoms.
Global manufacturing consulting firm Kearney released its seventh annual Reshoring Index on Tuesday, showing what it called a “dramatic reversal” of a five-year trend as domestic U.S. manufacturing in 2019 commanded a significantly greater share versus 14 Asian exporters tracked in the study. Manufacturing imports from China were the hardest hit.
Last year saw companies actively rethinking their supply chain, either convincing their Chinese partners to relocate to southeast Asia to avoid tariffs, or by opting out of sourcing from China altogether.
"Three decades ago, U.S. producers began manufacturing and sourcing in China for one reason: costs. The trade war brought a second dimension more fully into the equation―risk―as tariffs and the threat of disrupted China imports prompted companies to weigh surety of supply more fully alongside costs. COVID-19 brings a third dimension more fully into the mix, and arguably to the fore: resilience―the ability to foresee and adapt to unforeseen systemic shocks," says Patrick Van den Bossche, Kearney partner and co-author of the 19-page report.
The main beneficiaries of this are the smaller southeast Asian nations, led by Vietnam. And thanks to the passing of the U.S. Mexico Canada Agreement, Mexico, for all its problems with drug cartels, has become a favorite spot for sourcing.
(I told a million of you this last month...)
In 2020, the trade war seemed to be on pause. Sadly, it gave way to a global pandemic that emanated from the Hubei province in China. The new SARS coronavirus has literally closed the economies of the Western world and created a public relations nightmare for China.
Not only that, companies were unable to get supply online in February and early March due to factory closures there, stalling business in the U.S.
Once China got up and running, the U.S. was hit between the eyes with the deadly COVID-19 disease caused by the rapidly spreading new SARS. Even if China was fully healed, the U.S was stuck in sick bay.
The full extent of the societal and economic trauma the coronavirus pandemic may cause is unknown still, the Kearney report’s authors wrote. But whatever the outcome, a return to status quo China trade pre-pandemic is unlikely.
Kearney predicts companies “will be compelled to go much further in rethinking their sourcing strategies, (and) their entire supply chains.”
(That sounds about right...)
Specifically, the Kearney report’s authors wrote that they expect companies will be increasingly inclined to spread their risks, as opposed to relying solely on China as this pandemic has exposed them.
China is the go-to source for ibuprofen, hazmat suits, rubber gloves, surgical masks, ventilators. Probably toilet paper, for all we know. How this is not a national security issue is something being raised by senators including Josh Hawley (R-MO) and Tom Cotton (R-AK).
The threat going forward of political anger toward China, not to mention future pandemics stemming from China (the first SARS came from there in 2002-03), means that companies will want to hedge their supply chain strategy by spreading their risks.
That doesn’t mean a full abandonment of China. It does mean China’s days as the go-to manufacturing hub for the Western world are over.
The Index Explained
The Reshoring Index compares U.S. manufacturing gross output to import data from 14 Asian low-cost countries.
To gauge the U.S. Reshoring Index, Kearney first looks at the import of manufactured goods from China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka, and Cambodia; and secondly looks at U.S. domestic gross output of manufactured goods.
They then calculate the manufacturing import ratio (MIR) — the result of dividing the first number by the second. The U.S. Reshoring Index is the year-over-year change in the MIR, expressed in basis points (1 percent change = 100 basis points).
The numerator of the MIR is the sum of the value of all manufactured imports from those 14 Asian countries— which decreased from $816 billion in 2018 to $757 billion in 2019, a contraction of 7% at a time of solid American economic growth.
According to Kearney, the contraction is almost exclusively driven by the decline in imports from China, which fell the most at 17% due to tariff costs.
The only way for the U.S. to make itself attractive to corporate investment is to get its costs on par with China. While it cannot compete with China on labor costs, the U.S. can compete on corporate taxes, an abundant and qualified blue collar labor force, and by implementing environmental regulations that don’t force companies to overspend on technologies and consultants that just end up eating into their bottom line.
President Trump likes to say that his tariffs are being paid for by the Chinese. It is U.S. importers, of course, that pay the duties at the ports. But the Chinese partners of the U.S. company suffers because the U.S. importer is now paying more for Made in China. That reduces the cost benefit of using China as an export hub.
The resulting 98-basis-point jump in the Kearney Reshoring Index is by far the biggest annualized change in favor of U.S. companies in five years.
Vietnam Wins Asia. Mexico Winning Americas.
The Kearney China Diversification Index (CDI) tracks the shift in U.S. manufacturing imports away from China and to other Asian countries on the list.
China is still the leader, but she is increasingly losing share in the Trump years.
In 2013, the base year for the CDI, China held 67% of all U.S.-bound Asian-sourced manufactured goods. By the second quarter 2019, its share collapsed 56%, a decrease of more than 1,000 basis points.
Of the $31 billion in U.S. imports that shifted away from China, some 46% was absorbed by Vietnam, sometimes by the same Chinese suppliers who left the mainland. Vietnam exported an additional $14 billion worth of manufactured goods to the U.S. in 2019 versus 2018 as a result of that shift.
Mexico is the China of the Americas.
Kearney introduced its Near-to-Far Trade Ratio (NTFR) this year. It tracks the movement of U.S. imports toward nearshore production in Mexico. The NTFR is calculated as a ratio of the annual total dollar value of Mexican manufactured goods to the U.S., divided by the dollar value of manufactured imports from the Asian 14, including China.
Since 2013, the NTFR has hovered steadily between 36% and 38% —meaning for every dollar of U.S. manufacturing goods from Asia, there were approximately 37 cents worth of manufacturing imports coming from Mexico.
That changed with the USMCA.
Mexico has gone from 38% to 42%. On a dollar-value basis, total manufacturing imports from Mexico to the U.S. increased 10% between 2017 and 2018, from $278 billion to $307 billion, and by another 4% between 2018 and 2019, to a total import value of $320 billion, based on the Kearney report.
"The door for these insurgents was clearly opened by ongoing U.S.–China trade disputes, as their gains were mainly in product categories impacted by tariffs," says Yuri Castano, Kearney manager and co-author of the study. "Apparently, the trade war jolted U.S. companies to start rethinking and reshaping their supply networks."