U.S. China-Trade War: The Impact on the Tech Ecosystem
August 8, 2019 – This week I spoke to 300 venture capital investors at Bloomberg’s Venture Future conference in San Francisco. My VC colleagues on the panel agree that the biggest impact of the trade war on the tech ecosystem in Silicon Valley has been to sharply reduce investment flows from China. You can see a video clip off our conversation by clicking here.
Heightened economic tensions between the US and China manifest in many ways in Silicon Valley. Some are obvious, like tariffs or the ban on selling components to Huawei. Some are not so obvious, such as the subtle tightening of CFIUS reviews of foreign investments into US companies, or the relocation of VC investor offices between Silicon Valley, Hong Kong, and mainland China. All make the work harder for tech investors.
One question was the economic impact of the trade war. As I pointed out, the initial impact of the tariffs was to scare global investors into pulling capital out of China, which pushed the RMB down 10% against the dollar. Ironically, the drop in the RMB almost exactly offset the 10% US tariff on Chinese goods, leaving the dollar prices of affected Chinese goods unchanged. But the price of US goods in China rose 10% due to China’s tariff on some US goods plus another 10% due to the rise in the dollar, or 20% in total. That’s why Chinese imports of US goods fell by about 30% while US imports from China barely budged. To top it off, the Trump announcement a week ago of an additional 25% tariff on $300 billion of Chinese goods has pushed the RMB down again—this time below 7. The US response was to declare China to be a currency manipulator. So, expect more of the same. The trade war is not going away any time soon.
We also discussed the new STAR stock exchange, modeled after NASDAQ, that China announced last month. I pointed out that it will augment the work done by the Shenzhen exchange and deliver more growth and working capital to small Chinese firms.
Finally, we discussed what could go wrong. In my view, recessions don’t just happen because consumers get tired of spending money. They happen because something—usually a credit crisis—blocks the flow of working capital to small companies. The two biggest risks of that happening today are 1) a sudden blockage in the global supply chain that could shut factories down, and 2) a sudden stop in credit markets caused by the collapse of one or more financial institutions in China. The insolvency and regulatory takeover of Baoshang Bank in May was a warning shot. The drop in the RMB, which increases the RMB value of dollar-denominated corporate debt in proportion, is another.