The Golden Eagle and The Rabbit - A Fable?

Mexico has supplanted China as the largest import partner of the US.

Key Points:

·     In 2023, the Year of the Rabbit, the Chinese economy is battling headwinds on a number of fronts.

·     For an economy built on property development and exports, they are in serious trouble on both aspects.  Time will tell what steps the Chinese government takes to support their property developers, such as Evergrande.

·     Moreover, Chinese exports to the US have fallen sharply, despite the robust performance of the US economy.

·     A number of factors have helped to contribute to this –other countries (e.g. Bangladesh) undercutting China on costs, subtle and not-so- subtle actions by the Biden administration to cut back on Chinese imports in certain areas, to a post-COVID shift in US supply chains from ‘just in time’ to ‘just in case’.

·     For the last point, this ‘onshoring’ approach has been particularly beneficial to Mexico. Over the last 6 months, US imports from China have fallen by -14% while increasing by 11% from Mexico, whose ‘national animal’ is the Golden Eagle.  As a result, we have the quite extraordinary situation where Mexico is now a larger trading partner for the US than China.

·     Another sign that one needs to be cautious and diligent when determining an allocation to China, while the US continues to remain the dominant global economic force – both in terms of US dollar strength and portfolio exposure.