from Follow the Money

Did Huawei’s Chip Stockpiling Bring China’s 2018 Trade Surplus Down?

China's 2018 trade surplus fell by a bit more than I would have expected, and it wasn't all because of higher commodity imports. Imports of manufactures were strong relative to export growth. Could that have been caused by Huawei stockpiling chips?

June 12, 2019

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Between the chips needed for its networking equipment and the chips needed for its smartphones, Huawei accounts for a significant share of global semiconductor demand under normal conditions. CSLA’s Sebastian Hou puts that number at “8 to 9% of global semiconductor demand, without the inventory buildup”.

That’s significant. The United States makes—as opposed to designs—just over 10 percent of the world’s chips…

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And Huawei’s demand is reported to have been larger than usual over back half of 2018. The company is reported to have stockpiled somewhere between three months and a years’ worth of chips.

Enough to try to wait out President Trump.

Or at least to provide a bridge to a time when Huawei’s own in house chip designs are ready. Oh, and many of those Huawei (HiSilicon) chips are made by TSMC, the same Taiwanese firm that manufactures a lot of U.S. designed chips—the world is, well, complicated.

While Huawei has not officially confirmed the stockpiling, a spokesperson did note that “all companies have business continuity plans… [it is the] only responsible way to do business.”

And I don’t find the stockpiling claims to be totally implausible. A big build-up in Huawei’s chip inventory would actually fit with the trade data.

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Let me see if I can explain why persuasively.

Historically, China’s manufactured imports have tended to grow a bit more slowly than its manufactured exports. China basically has been substituting its own production for imported components.

This wasn’t a terribly controversial point. The ECB found the same thing back in 2016. So did the IMF. It is also easy to see in the trade data. From 2004 on, the growth in China's imports of manufactures has lagged the growth in its exports.

China's Manufactured Imports vs. Exports (T12M sums, YoY change, USD Billions)

And in recent years, the growth in China’s imports from Asian electronic component exporters (Japan, Malaysia, Korea, Taiwan, Singapore) lagged the growth in China's exports of electronics (the green line below).

China's Manufactured Exports vs. Imports from Asia (T12M, YoY Change, USD Billions)

That well-established pattern didn’t hold in 2017 and 2018. Both the growth in China’s manufactured imports and the growth in China's imports from the "chip" suppliers were a bit stronger than trend.   

Of course, some of the run up in imports from Korea and Taiwan—the main chip producers and exporters (remember that U.S. firms rely heavily on contract manufacturers)—was simply the run up in chip prices. A real analysis would need to deflate the semiconductor trade data with an index of semiconductor prices. The big recent falls in China's imports from Korea and Taiwan are largely (but not entirely) a function of falling chip prices.

South Korea Exports China vs the United States (t12m sums, yoy change, usd billions)

 

Taiwan Exports China vs the United States (t12m sums, yoy change, usd billions)

But it does make Huawei’s stockpiling claim a bit more plausible than otherwise would be the case—especially as the threatened sanctions against ZTE clearly created a strong incentive for China’s big electronics importers clearly had an incentive to prepare for future sanctions.

Apart from the tactical impact on China's resilience in the face of the escalating trade war, if this story is true it also suggests that the fall in China’s surplus in 2018 was, well, a bit artificial. Or rather that China was pulling forward at least some imports, not just pulling forward exports to beat the tariff. Of course, in 2019, there will be even bigger distortions…

At the end of the day, the impact of Huawei's stockpiling of U.S. designed chips (off a base of around $20 billion) isn't going to that big ... 

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