Trade Data Confirms Decoupling Well Underway
CME: Offshore RMB (
CNH1!), Micro RMB (MMNH1!)
On April 5th, the Bureau of Economic Analysis reported the latest U.S. global trade data. For the first two months of 2023, total export and import were $328.9 and $489.7 billion, respectively. U.S. international trade balance was $160.9 billion in deficit.
Export growth was very strong, at 9.5% year-over-year, while import was up modestly (+0.5%). As a result, trade deficit was reduced by 25.8B from last year period.
My analysis focuses on Exhibits 14 and 14a of the report, which detail global trades by trading bloc and country in 2022 and 2023, respectively. Here are what I found:
• NAFTA: Canada and Mexico together have total trade (import plus export) of 245.6B. NAFTA is the largest US trading partner with a 30.0% share. So far in 2023, we see trading growth of 8.5% and 1.3% in share gain y/y.
• EU+UK: Total trade is 173.9B, up strongly +20.2% y/y. This is the second largest trading bloc with a market share of 21.2%, up 2.8% y/y.
• China+HK: Total trade is 98.6B, down sharply -14.5% y/y. Traditionally the largest US trading partner, China is now the 3rd largest, with a 12.0% share, down 2.6% y/y.
• India: Total trade 20.1B (-1.1% y/y) with a 2.46% share (-0.1% y/y)
• Vietnam: Total trade 19.1B (-3.0% y/y) with a 2.33% share (-0.2% y/y)
• Taiwan: Total trade 19.2B (+72.2% y/y) with a 2.35% share (+0.9% y/y)
Shifting of Global Supply Chain
The U.S. has determined to reduce its reliance on China for manufactured goods. Decoupling aims to shift global supply chain out of China. Where would they go to?
• On-shore: moving manufacturing back to the U.S. (Made-in-America);
• Near-shore: moving manufacturing to NAFTA partners Canada and Mexico;
• Moving to democratic countries with shared values, including the European Union, Asia (Japan, Korea, India, Vietnam, Taiwan) and South/Central America.
Based on BLS nonfarm payroll data in March, total employment in manufacturing sector is 12.98 million. This is 600K more comparing to March 2017 level, before the US-China trade conflict. Manufacturing jobs are coming back to the U.S.
What does the strong growth in trading with NAFTA, EU and Taiwan tell us? It shows the shifting of supply chain. This growth comes at the expense of China, which is the only major US trading partner that suffered a decline in both trading volume and market share.
Implications of Decoupling
Shifting of supply chain has long-term implications.
Bringing manufacturing back to the U.S. means job creation as well as consumption and taxes. Companies may receive government incentives to offset the cost of relocation. In the long run, getting out of the expensive cross-ocean shipping and the punitive Trump-era tariff would lower the cost of production. Near-shore production in Canada and Mexico also benefits from a more reliable supply chain and lower transportation cost.
Southeastern Asian nations have average labor cost at 1/3 or less comparing to workers of similar skills in coastal China. Vietnam and India prosper in recent years by taking production of clothes, shoes, toys, and low-end electronics away from China.
What is the implication of trade decoupling on exchange rate? It will result in devaluation of Chinese Yuan against the US dollar.
Firstly, currency exchange rate reflects the interest rate differential in the short-term.
• US Fed Funds rate is 4.75%-5.00%, and China Shibor is 1.374%;
• The Fed could raise rate again, while China’s central bank is easing to support the lackluster growth in economy. The widening US-China rate differential would cause RMB to devalue, holding all else constant.
Secondly, exchange rate represents the relative strength between two economies in the long run. Decoupling has a positive impact on US economy, but a really negative one on China.
Since China abandoned Zero-Covid policy last November, its economy has not rebounded as previously hoped. Export-oriented industries are seeing the horror of disappearing orders and clients. The housing sector, the bedrock of China’s economy, is suffering from a bust of real-estate bubble.
Dedollarization: Fact or Fiction?
Rhetoric about the pending doom of US dollar goes viral in recent weeks. While the Greenback is being challenged, no other candidate is capable of replacing it as global reserve currency.
According to the BIS, 88% of international trade was settled in US dollars in 2021. The Fed estimates that from 1999 to 2019, dollar settlement accounted for 96% of international trade in the Americas, 74% in the Asia-Pacific region, and 79% elsewhere.
IMF reports that the percentage of central bank reserve by currency in 149 countries is: US dollars, 59%; Euro, 20%; Japanese yen and pound sterling, 5% each; RMB, 3%; Others, 8%.
A global reserve currency could retain its status for well over 100 years before being replaced by another. British pound was the last reserve currency since the start of 1800s. It wasn’t until the establishment of Bretton Woods system in 1944 when the US dollar became its replacement. At that time, the U.S. has been the largest economy for forty years and held over 70% of the world’s gold reserve.
In a worst-case scenario, if an upstart currency were to successfully challenge the US dollar, its downfall would be decades away. If your investment horizon is months or years, this is not something stopping you from owning dollar.
Trade Idea
CME Offshore RMB (CNH) futures is settled at 6.8516 on Monday. The contract has a notional value of $100,000 and is quoted as the number of Chinese Yuan per $1.
The next Fed meeting is on May 2-3. According to CME FedWatch, futures traders are pricing in a 71% chance that the Fed would raise 25 basis points. If the Fed raises rate and China’s central bank does nothing, futures price shall go up by mechanical calculation.
Holding or selling 1 CNHUSD future requires 118,500 in minimum margin. If the exchange rate moves 1 tick, or $0.0001, the futures account would gain or lose 10 Yuan.
Micro RMB futures (MNH) is 1/10 of the standard size CNH contract with a
10,000 notional. Margin requirement is also 1/10 of the original, at 
1,850.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
CNH1!), Micro RMB (MMNH1!)On April 5th, the Bureau of Economic Analysis reported the latest U.S. global trade data. For the first two months of 2023, total export and import were $328.9 and $489.7 billion, respectively. U.S. international trade balance was $160.9 billion in deficit.
Export growth was very strong, at 9.5% year-over-year, while import was up modestly (+0.5%). As a result, trade deficit was reduced by 25.8B from last year period.
My analysis focuses on Exhibits 14 and 14a of the report, which detail global trades by trading bloc and country in 2022 and 2023, respectively. Here are what I found:
• NAFTA: Canada and Mexico together have total trade (import plus export) of 245.6B. NAFTA is the largest US trading partner with a 30.0% share. So far in 2023, we see trading growth of 8.5% and 1.3% in share gain y/y.
• EU+UK: Total trade is 173.9B, up strongly +20.2% y/y. This is the second largest trading bloc with a market share of 21.2%, up 2.8% y/y.
• China+HK: Total trade is 98.6B, down sharply -14.5% y/y. Traditionally the largest US trading partner, China is now the 3rd largest, with a 12.0% share, down 2.6% y/y.
• India: Total trade 20.1B (-1.1% y/y) with a 2.46% share (-0.1% y/y)
• Vietnam: Total trade 19.1B (-3.0% y/y) with a 2.33% share (-0.2% y/y)
• Taiwan: Total trade 19.2B (+72.2% y/y) with a 2.35% share (+0.9% y/y)
Shifting of Global Supply Chain
The U.S. has determined to reduce its reliance on China for manufactured goods. Decoupling aims to shift global supply chain out of China. Where would they go to?
• On-shore: moving manufacturing back to the U.S. (Made-in-America);
• Near-shore: moving manufacturing to NAFTA partners Canada and Mexico;
• Moving to democratic countries with shared values, including the European Union, Asia (Japan, Korea, India, Vietnam, Taiwan) and South/Central America.
Based on BLS nonfarm payroll data in March, total employment in manufacturing sector is 12.98 million. This is 600K more comparing to March 2017 level, before the US-China trade conflict. Manufacturing jobs are coming back to the U.S.
What does the strong growth in trading with NAFTA, EU and Taiwan tell us? It shows the shifting of supply chain. This growth comes at the expense of China, which is the only major US trading partner that suffered a decline in both trading volume and market share.
Implications of Decoupling
Shifting of supply chain has long-term implications.
Bringing manufacturing back to the U.S. means job creation as well as consumption and taxes. Companies may receive government incentives to offset the cost of relocation. In the long run, getting out of the expensive cross-ocean shipping and the punitive Trump-era tariff would lower the cost of production. Near-shore production in Canada and Mexico also benefits from a more reliable supply chain and lower transportation cost.
Southeastern Asian nations have average labor cost at 1/3 or less comparing to workers of similar skills in coastal China. Vietnam and India prosper in recent years by taking production of clothes, shoes, toys, and low-end electronics away from China.
What is the implication of trade decoupling on exchange rate? It will result in devaluation of Chinese Yuan against the US dollar.
Firstly, currency exchange rate reflects the interest rate differential in the short-term.
• US Fed Funds rate is 4.75%-5.00%, and China Shibor is 1.374%;
• The Fed could raise rate again, while China’s central bank is easing to support the lackluster growth in economy. The widening US-China rate differential would cause RMB to devalue, holding all else constant.
Secondly, exchange rate represents the relative strength between two economies in the long run. Decoupling has a positive impact on US economy, but a really negative one on China.
Since China abandoned Zero-Covid policy last November, its economy has not rebounded as previously hoped. Export-oriented industries are seeing the horror of disappearing orders and clients. The housing sector, the bedrock of China’s economy, is suffering from a bust of real-estate bubble.
Dedollarization: Fact or Fiction?
Rhetoric about the pending doom of US dollar goes viral in recent weeks. While the Greenback is being challenged, no other candidate is capable of replacing it as global reserve currency.
According to the BIS, 88% of international trade was settled in US dollars in 2021. The Fed estimates that from 1999 to 2019, dollar settlement accounted for 96% of international trade in the Americas, 74% in the Asia-Pacific region, and 79% elsewhere.
IMF reports that the percentage of central bank reserve by currency in 149 countries is: US dollars, 59%; Euro, 20%; Japanese yen and pound sterling, 5% each; RMB, 3%; Others, 8%.
A global reserve currency could retain its status for well over 100 years before being replaced by another. British pound was the last reserve currency since the start of 1800s. It wasn’t until the establishment of Bretton Woods system in 1944 when the US dollar became its replacement. At that time, the U.S. has been the largest economy for forty years and held over 70% of the world’s gold reserve.
In a worst-case scenario, if an upstart currency were to successfully challenge the US dollar, its downfall would be decades away. If your investment horizon is months or years, this is not something stopping you from owning dollar.
Trade Idea
CME Offshore RMB (CNH) futures is settled at 6.8516 on Monday. The contract has a notional value of $100,000 and is quoted as the number of Chinese Yuan per $1.
The next Fed meeting is on May 2-3. According to CME FedWatch, futures traders are pricing in a 71% chance that the Fed would raise 25 basis points. If the Fed raises rate and China’s central bank does nothing, futures price shall go up by mechanical calculation.
Holding or selling 1 CNHUSD future requires 118,500 in minimum margin. If the exchange rate moves 1 tick, or $0.0001, the futures account would gain or lose 10 Yuan.
Micro RMB futures (MNH) is 1/10 of the standard size CNH contract with a
10,000 notional. Margin requirement is also 1/10 of the original, at 1,850.Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
Jim W. Huang, CFA
jimwenhuang@gmail.com
jimwenhuang@gmail.com
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