China Economic Perspectives 17 December 2018UBS Research THESIS MAP
PIVOTAL QUESTIONS Q: What's the impact of the trade war on exports and businesses
The UBS Evidence Lab survey of 200 Chinese manufacturing exporter/supplier CFOs in November 2018
shows that higher tariffs have already had a negative impact on most businesses (63%) and most
companies expect the trade war to escalate. Export orders have declined and most companies
exporting to the US have shipped exports earlier than usual. Almost a quarter of the companies that
reported negative impact from the trade war said they have already laid off workers, and more have
cut domestic capex. We expect China’s export growth to slow significantly in 2019, with goods export
growth in USD terms down from 11% this year to 4% in 2019, and export volume growth slowing by
about 3ppts (China economic outlook 2019-20). More
Q: What are companies' plans for layoffs, capex and supply chain relocation
The CFO survey shows that 34% of the respondents plan to lay off workers in the next 6 months.
Over 1/3 of the respondents (half of those that directly export to the US) have moved some export
production overseas in the past 12 months, and 33% plan to move in the future. Half of those who
plan to move say the trade war is the dominating factor for their move. Of the 65 companies planning
to move some production overseas, 92% say they would move before the end of 2019, suggesting an
imminent negative impact on manufacturing capex in the coming year. More
Q: Can tax rebates, subsidies and RMB depreciation help
35% of survey respondents have received some government help and another 35% are about to
receive it. The subsidies are equivalent to <1% of overall profits for exporters to the US. More
exporters to the US have received a higher tax rebate. The impact of RMB depreciation seems to be
limited, with 45% of firms seeing a positive effect but 36% reported a negative effect, perhaps
because RMB depreciation increases their costs of imported inputs. The respondents say government
subsidies and support can help reduce layoffs, and we expect the government to extend similar
support in 2019. More
UBS VIEW
We expect China’s exports to slow sharply from 11% in 2018 to 4% in 2019 in USD terms due to
higher tariffs and trade-war related uncertainties. Export volume growth is expected to slow by 3 ppts.
We think weaker exports will lead to slower manufacturing investment, and job losses & weaker wage
growth, which should weaken consumption in 2019. We see the government easing macro policies to
support growth, and provide some subsidies and tax cuts to support employment, but USDCNY will be
kept around 7.
EVIDENCE
The special CFO survey shows that export-oriented companies have already been negatively affected by
the trade war as orders declined. Some firms have cut jobs and capex, and others are planning to do so
soon. 1/3 of firms surveyed plan to move some production overseas in the next 6-12 months.
Source:Those who are subject to US tariffs. UBS Evidence LabSource:Those negatively affected by US-China trade war.
UBS Evidence Lab
0%
10%
20%
30%
40%
Exporters to USSupplier to US
Down by 1-10%Down by 11%-20%
Down by 21%-30%Down by 31%-50%
Change of US-related export orders compared with the
time before US tariffs came into effect 0%10%20%30%40%50%
Already laid off employees
Plan to lay off employees
in the next 6 months
Already cut wages
Already cut domestic
capex
None of the above
Large firms
Small & Medium firms
Total
China Economic Perspectives 17 December 2018PIVOTAL QUESTIONS l
Q: What's the impact of the trade war on exports
and businesses
UBS VIEW
The UBS Evidence Lab survey of 200 Chinese manufacturing exporter/supplier
CFOs in November 2018 shows that higher tariffs have already had a negative
impact on most businesses and most companies (63%) expect the trade war to
escalate. Export orders have declined and most companies exporting to the US
have shipped exports earlier than usual. Almost a quarter of the companies that
reported a negative impact from the trade war say they have already laid off
workers, and more have cut domestic capex. We expect China’s export growth to
slow significantly in 2019, with growth of merchandise exports in USD terms
slowing from 11% this year to about 4% in 2019, and export volume growth
slowing by 3ppts. We expect weaker exports will lead to job losses in export and
related sectors, and dampen wage growth and manufacturing investment in 2019
(China economic outlook).
EVIDENCE
Most companies reported a negative effect from the trade war and expect
an escalation. 63% of all the respondents said the trade war has had a negative
impact on their export-related businesses (though only 2% say it's significant),
while 25% and 13% reported no impact and positive impact, respectively. A
higher share (77%) of firms that export to the US or supply to firms that export to
the US saw negative impact. Interestingly, 45% of those who do not export to or
supply to companies that export to the US also saw a negative impact. Only 28%
of the respondents expected a deal or truce on the trade war while 72%
expected an escalation of the tariffs, of which 41% expect a full-on trade war
where 25% tariffs are imposed on all Chinese exports. Keep in mind the survey
was conducted before the December 1 Xi-Trump meeting, which produced a 90-
day truce. Among those respondents whose companies export goods to the US,
over half (51%) expect a full-on trade war scenario.
Figure 1: Impact of US-China trade frictions on export-
related business
Figure 2: Expectation of US-China trade war
Source:All respondents. UBS Evidence LabSource:All respondents. UBS Evidence Lab
0%
20%
40%
60%
80%
100%
TotalExporter or
supplier to
US
Exporters to
US
Supplier to
US
Don't export
to US
Total negative effect
Impact of US-China trade frictions on export-related business
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
TotalExporters to USSupplier to USDon't export to
US
Expect a deal soon/trade war to cool down; tariffs to be rolled back
US will impose 25% tariffs on all CN exports
10% tariff will increase to 25% in Jan 2019 and stops there
China Economic Perspectives 17 December 2018Export orders to US decreased after US tariffs were imposed. 97% of the
respondents that export directly to the US say some (an average of 23%) of their
direct exports to the US are subject to higher tariffs while 96% of those that
supply to firms that export to the US say some of their products (an average of
11%) are subject to higher tariffs. 86% of companies that have products on the
tariff lists reported a decline in orders of those products following the rise of
tariffs, most of them reporting a drop of 10-30% of orders for those affected
products. The more wide spread decline seems to be in machinery and equipment
sector where 98% of exporters in this sector saw orders drop, and 30% saw their
orders of their affected products decline by over 30%. 92% of consumer
electronics also saw orders declining, 50% of which by 20-30%.
What's puzzling is that although most companies expected the trade war to
escalate and most have already experienced a drop in export orders for products
on the tariff lists, only 21% of companies in general and 32% of those exporting
to the US expect their total future export orders to decline. This is perhaps because
expectations of general global demand remain solid.
Figure 3: Change of export orders for products subject to
higher tariffs after they came into effect
Figure 4: Decline of export orders by sector after higher
tariffs came into effect
Source:Those who are subject to US tariffs. UBS Evidence LabSource:Those who are subject to US tariffs. UBS Evidence Lab
Most exporters reported front-loading and have cut export prices. 99 of
111 (89%) firms doing business with the US said they shipped orders earlier than
usual due to trade tariffs, mostly in July and August. The share of companies doing
front-loading dropped to 15% in October, but 79% of firms say they plan to
continue bringing forward exports before January 2019. This is consistent with our
deep dive into exports to the US which showed evidence of front loading at the
macro level. In addition, most (68%) of the 108 companies that produce or supply
goods to the US subject to higher tariffs reported price cuts. The ratio is
significantly higher among large companies, as 61% of large companies cut their
prices by 11-20%. By sector, 91% of machinery and equipment companies
reported price cuts, 79% cut by 11-20%. This is likely due to the high export share
of companies in this sector in the sample. Going forward, 48% of companies with
goods subject to higher tariffs say they are very likely to lower prices in the next 6
months, and 41% say they are somewhat likely to do so.
0%
10%
20%
30%
40%
Exporters to USSupplier to US
Down by 1-10%Down by 11%-20%
Down by 21%-30%Down by 31%-50%
Change of US-related export orders compared with the time before US
tariffs came into effect
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Machinery&
equipment
ConsumerelectronicsAppliancesITTextiles &clothingMetalproductsFurniture& daily
goods
Auto &parts
Down by 1-10% Down by 11%-20%
Down by 21%-30% Down by 31%-50%
Change in US-related export orders after US tariff came into effect。