Free trade and integrated supply chains are a thing of the past. Today, China and the U.S. are slugging it out over who will dominate the world – with Huawei the symbol of a fight that will last a long time, says Daryl Liew, head of investment and portfolio management at Reyl in Singapore.
What do you make of the markets this year so far?
We had a good start to the year. Then, trade moved back to the agenda again. But this isn’t just about trade – the U.S. strategy is more about containing China’s rise because the U.S. administration perceives China as a threat.
Is there a specific issue that drives the U.S. administrations strategy to contain China?
Huawei! The company is huge, it’s the No. 1 in telecom equipment and the No. 2 in smartphones. China will not let Huawei go down. The problem with Huawei is that the conflict isn’t about sanctions as such but is a reflection of national security considerations.
«The Chinese government will roll out 5G across the whole country in its bid to develop smart cities»
The U.S. says Huawei allows China to spy, while Chinese laws demand a backdoor in the telecommunication firm’s software. How can you solve such a conflict? It will far more difficult. Trump says that Huawei will be part of a deal. I’m not sure what type of deal it will be in the end.
Why is Huawei so important for China?
The U.S. was an industry leader with respect to the 4G technology. Think about all the new businesses that were launched with the help of 4G – Facebook, Uber, you name it. China wants to do the same thing with 5G.
The Chinese government will roll out 5G across the whole country in its bid to develop smart cities, with autonomous vehicles. This is key to China’s long-term strategy to be a leader in the technology surrounding 5G. The U.S. strategy is to curtail that and its approach towards Huawei will disrupt the roll-out.
How important is 5G really?
The country with the strongest navy used to be the superpower of this world because it was able to control merchant shipping across the globe. In the past, we had Britain take that role, later the U.S. took over. Now China has obviously been investing a lot of money into its military power.
«The U.S. will do everything it can to put Huawei out of business»
But maybe, the new age won’t be about shipping physical goods anymore. The new goods are telecom and the country that controls 5G, the satellites and communications systems will be the new superpower. Value is being created thanks to telecommunications. That’s why I believe the Huawei battle is the one we need to look out for because it will determine things to come.
How successful is the U.S. administration in its fight against Huawei?
Emerging markets and some developed markets as well will continue using Huawei technology. That has upset the U.S. and they are trying to get all allies to ban the Huawei technology. But even if their allies don’t agree to stop dealing with Huawei, the U.S. will do everything it can to put Huawei out of business.
The export control ban will be quite significant in that respect. Huawei has been stockpiling components for months, but if the situation persists, the company will eventually be forced to cease its operations. And this is significant in terms of the 5G rollout.
Markets can’t really expect a solution to the problems that exist between the U.S. and China?
The tensions between the U.S. and China won’t go away. No trade deal will solve the issues. The world we know is no longer. Global free trade, global supply chains – these are things of the past.
«The world has to adapt to this new environment»
In a best-case scenario, the leaders of China and the U.S. will decide at the G20 meeting in Japan at the end of the month to restart negotiations. They do get along on a personal basis. But they have a lot of factions within their own administrations they need to satisfy.
What is the view from the inside of China?
The 70th anniversary of the Communist Party and the 30th anniversary of Tiananmen Square are important factors in this conflict. There is a strong need for China not to be seen to be bullied around. It looks as if China decided to say – if the U.S. wants to fight, we will fight.
We have two superpowers here – an established and an upcoming one. The two are now battling it out. So, even if they resume negotiations and agree on a deal, it doesn’t mean that the issues I mentioned will be off the table. The tensions will come back again and again. The world has to adapt to this new environment.
What does this mean for business?
A very good question. We may be going back to the times of different supply chains for each market. Maybe will have companies that produce products for each market individually.That would mean turning the clock back…Yes, it would be totally inefficient. But I can’t see any other way of solving the national security issue. The one big problem is trust. If trust has broken down, how do you remedy that? The country of origin issue is a big problem going forward. The situation is incredible, but the way the discussion is heading, it looks the inevitable result.
Maybe we will get a whole new business based on the blockchain around this issue of country of origin – the supply chain audit.
A loss of trust for the stock market is poison.
Yes and no. In such trade battles, you always have winners and losers. Vietnam, for instance, is seen as one of the beneficiaries of the U.S.-China conflict, because a lot of companies are moving there.
Where do you see the markets towards the end of the year with the uncertainty we’re in?
The situation for sure has deteriorated from six months ago. The two big negative factors for Asia have been the escalation of the trade war and the poor development of the global economy.
I don’t think we’ll have a recession this year, because even as figures show a slowdown, the economy is not falling off a cliff. And I can’t see there’s a recession around the corner if the U.S. economy is creating so many jobs. So I’m not sure about a rate cut by the Fed, but the fact they’re not hiking is good for many Asian economies.
«The Hong Kong development has significant implications»
I’m cautiously optimistic at least for Asia for the next several months, but it depends on a deal being agreed in the next few months. The slowdown in global trade has affected corporate earnings across Asia, which, instead of increasing, are forecast to contract this year. This is why markets have wobbled. So once the deal gets done, orders can come back and then we will see earnings rise again.
What is your take on the recent demonstrations in Hong Kong?
Difficult to say. Hong Kong was promised 50 years of autonomy. In recent years, it appears that China has been cracking down quite a bit on political opponents and people who are hiding their money.
The whole thing has significant implications though. If you are looking for a place to locate your company in, Hong Kong was considered as part of China, but an autonomous region, where you could go about your business pretty freely. Events of recent years seem to indicate that things are tightening up. Which means that Hong Kong is losing some of its relevance and multinationals will reconsider whether they need to be in Hong Kong.
Who stands to profit?
Singapore is a beneficiary of the problems that Hong Kong is currently facing. Companies may decide to simply move their headquarters down to Singapore.
What is China’s long-term plan for Hong Kong in light of these events?
A few months ago, China presented the Greater Bay Initiative, whereby they are planning to integrate Hong Kong, Macao, Shenzhen, and several other southern Chinese cities into a mega-bloc area.
The government has an idea of how to integrate Hong Kong and Macao into the plans for Southern China. But so far, this is all very much a grand idea and nothing much has been implemented in terms of policy at all.
Daryl Liew is the head of investment and portfolio management at Reyl in Singapore. Liew, who has a Masters in Business Management from Asia Institute of Management previously worked for Providend in Singapore. At Reyl, Liew is a member of the investment committee.
