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Global Treasury

Preparing for a China Schism?

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September 09, 2019

By Joseph Neu

Between the trade war and Hong Kong, it’s time for finance to have a contingency plan in case supply chains fray. 

The pivot away from globalization by the US, China and perhaps other nations is not a certainty by any means. But global companies must move forward with contingency plans for more fragmented markets and compartmentalized supply chains—if not all-out financial and economic “war.”

The supply-chain redo. For most multinational corporations, the supply-chain redo starts with China (though the increased likelihood of a no-deal Brexit makes UK-EU supply chain connectivity an issue, too). For the last year or more, MNCs, especially in tech and telecom, have been planning and shifting supply and assembly to points outside China to the extent possible. What started as a commercial/tariff management exercise and picked up intensity when a trade deal did not materialize before the summer is now something far more pressing.

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Compartmentalization. One way to think about supply-chain redos is with compartmentalization. Supply chains and distribution channels built for China and for China-influenced economies and markets may need channels distinct (e.g., China-based) from non-China or US-influenced economies and markets. MNCs should look hard at which economies and markets fall into either sphere, and to what degree.

  • Huawei’s release of its own operating system, Harmony OS, is telling of this trend: A separate OS may emerge for the China sphere more broadly.
  • This may be the next phase of a transition from a firewall to having a distinct platform.

Beyond suppliers. Hong Kong-based firms that appear to have sided with the protesters, for example, are now being called out by the PRC. This has an impact beyond Hong Kong-based suppliers and extends to partners and even airline choices.

  • Per Bloomberg: “Chinese state-run companies have told employees to avoid taking Cathay Pacific Airways Ltd. flights, according to people familiar with the matter, widening the fallout for Hong Kong’s dominant air carrier after workers took part in anti-Beijing protests and strikes.”

Financial suppliers. Treasurers should be supporting with finance solutions the efforts by business units to redo supply chains and compartmentalize relationships. This includes addressing the risk contingencies for necessary funding and liquidity, but also requires treasury to look at its own financial suppliers.

  • Relationships with China-based banks should be at a premium for the China sphere, for instance.
  • Relationships with non-US affiliated local banks in alternative supply-chain locations might also be worth considering.

Treasurers should be supporting with finance solutions the efforts by business units to redo supply chains and compartmentalize relationships.  

A financial “war.” Perhaps the biggest risk for MNCs is that the US-China trade war escalates into a more broad-based financial and economic war.

  • Per Bloomberg: “The US’s labeling of China as a currency manipulator ‘signifies the trade war is evolving into a financial war and a currency war,’ and policy makers must prepare for long-term conflicts, Chen Yuan, former deputy governor of the People’s Bank of China, said at a China Finance 40 meeting.”

Preparing for fallout: In addition to financial services suppliers, treasurers should look closely at the currency of billing and related exchange-rate risks and capital controls.

  • China may step up internationalization of the RMB and promote alternative payment transmission channels to SWIFT (see China international payments system).
  • As the WSJ reports, China has introduced a number of new capital-control mechanisms that it can relax or tighten.
  • "'The willingness of the Chinese authorities to allow the yuan to weaken suggests that they are comfortable with the ability of existing administrative measures to prevent large capital outflows,' said Khoon Goh, head of Asia research at ANZ in Singapore, in a note to clients.”

I hope this schism does not happen—I think a China connected with the world is a better place. But it’s now time to be prepared for a breakdown in trade relations.

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