Balloons, Taiwan and Made in ChiMexico: A Chinese Threefor
Daily SITREP for Tuesday, February 7, 2023
The extent of yesterday's earthquake in Turkey and Syria is becoming clear and many difficult days of search, rescue and recovery lie ahead. Although tragic, something like this is outside the scope of this newsletter and I can’t do justice to such a fast-moving event so I won’t be continuing to cover the response unless there is a significant development. (As a reminder, there are many reputable organizations providing relief in the affected areas and they would appreciate your support if possible but do check the credentials of any organization before donating.)
Meanwhile, there were three stories concerning China over the last few days that were of interest (no prizes for guessing what one of them was). Each is interesting in its own right but combined, they touch on three of the biggest issues concerning China right now: China-US trade, China-US great power rivalry and Taiwan.
Earthquake Damage and Deaths Rise in Turkey and Syria
The death toll and number of injuries in Turkey and Syria continue to following Monday’s 7.5 magnitude earthquake and an almost equally strong aftershock. The response is hampered by the widespread damage to infrastructure, the snow, rain and cold, and the already dilapidated state of large parts of the affected areas. Live coverage on the BBC.
Three Stories on China
🎈 1: The Balloon
Chad Fish, via Associated Press
The Chinese balloon over the US last week was:
A - An accident?
B - An out-of-the-ordinary provocation by China?
C - A routine activity that the US normally ignores but used as an excuse to pull out of talks this time?
D - A mix of the above?
At the moment, the correct answer is ‘E - We don’t know’, but we do know that the incident has cranked up tension between Beijing and Washington, just when it seemed that both countries were taking steps to calm things down.
There’s enormous pressure on President Biden to ‘retaliate’, but China already believes that shooting the balloon down was provocative, so any additional action could trigger a tit-for-tat cycle that would be very dangerous. See Balloonberg Bloomberg for more.
🇹🇼 2: Taiwan’s Opposition to Visit Beijing
The leader of Taiwan’s main opposition party, KMT deputy chairman, Andrew Hsia, will visit Beijing this week. The KMT is more open to dialogue with the mainland than President Tsai Ing-wen’s Democratic Progressive Party (DPP) and Beijing refuses to open dialogue with President Tsai. See Reuters for more.
🇲🇽 3: Made in ChiMexico
A recent New York Times story took an in-depth look at Chinese companies setting up in Mexico to take advantage of its established manufacturing base and proximity to the US. A switch in the US away from extended supply chains to ‘nearshoring’, the duty-free advantages of North American trade deals, and the ability to mark goods as ‘Made in Mexico’, make this highly advantageous for Chinese firms.
Chinese automobile manufacturer Lizhong's factory under construction in Monterrey, Nuevo León. Photo Luis Antonio Rojas for The New York Times
This is good for the Mexican economy, and workers, and America itself, which will have more reliable supply chains However, it’s also a significant complication in the US-China economic relationship, probably deepening the US dependence on China as many firms may not look past the Made in Mexico label. What that means if tensions between Beijing and Washington spill over is unclear, but it does make the relationship even more complicated. The full story is worth a read. See the full story in the NTY.
On to the numbers
Relative Values (90-Days)
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Potentially impacting: Fuel prices | Gound shipping costs. | Plastic prices | Changes to fuel subsidies (potentially leading to unrest) | Cost of living (especially transport and heating) | Changes to traffic volume/transportation choices | Demand for automotive products | Theft and smuggling.
Brent Crude is very low for this 90-day interval. Prices decreased moderately over the last 21 days after significant fluctuation but may be moving back up.
Iron and Steel
Potentially impacting: Cost of construction projects | Construction project timelines | Cost/availability of raw materials | Infrastructure project timelines/costs | Cost and availability of finished metal goods | Value of scrap | Value of 2nd hand equipment/vehicles.
Iron and Steel remain very high for this 90-day interval. Prices ended relatively flat over the last 21 days after slight fluctuation.
Market Volatility (VIX-US)
Potentially impacting: Availability of capital for investment | Interest rates| Share prices | Consumer confidence | House prices/rent | Financial certainty/uncertainty | Financial models | Stock-based compensation values.
Market Volatility (VIX) is very low for this 90-day interval. The index increased moderately over the last 21 days after significant fluctuation.
Potentially impacting: Bread, pasta, couscous & noodle prices | Changes to food subsidies (potentially leading to unrest) | Cost of living | Movement from low-income to food insecure to undernourished | Increased theft or graft in loosely governed areas | Demand on charities.
(No change) Wheat remains very high for this 90-day interval. Prices ended relatively flat over the last 21 days with little fluctuation.
Ocean Freight (FBX)
Potentially impacting: Supply chain costs (direct and indirect) | Supply chain delays | Port capacity/throughput speed | Customs clearance | Availability of goods and materials | Consumer demand/hoarding.
(No change) Shipping (FBX) is very low for this 90-day interval. Prices decreased moderately over the last 21 days after significant fluctuation.
The balloons we should all be paying attention to.
Lightsabre dueling is being recognized by fencing bodies around the world. You can join the US league here.