'China is 'losing' the trade war' is probably true, but also irrelevant

China needs us to buy its stuff more than we need its stuff, but it's all just noise relative to the stuff that really matters

• China needs the trade war to end (maybe)

• bond defaults have disappeared from a multi-trillion dollar market

• chinese manufacturing margins compressing, rise of unprofitable companies

• it’s because of the tariffs, but actually it’s got nothing to do with tariffs

• we’ve got more alike than we’d like to think

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China is losing the trade war is probably true, but also irrelevant

Random Walk is going to offer two somewhat contradictory ideas about trade wars in sequence:

• China needs us to buy their stuff, more than we need to buy their stuff;

• Actually, tariffs don’t matter that much because commerce is like water and it finds a way.

Both of these points will come together in one “actually we’re not so different,” coup de grace.

Now that I’ve told you where I’m going, please join me for the (shortish) journey.

China is losing the trade war, badly

The first point is really a response to the consensus view which is something like “while tariffs will overwhelm the US with spiraling costs and empty shelves, China will just take their business elsewhere, nary an eye blinked.”

I don’t think that’s quite right.

You see, China has become the seller of things to the entire world by design, but it’s not a strategy that originates from a position of strength. It’s a tactical response to an aging (and shrinking) population, whereby domestic demand is in serial decline. For the Chinese economy to grow, therefore, it’s gotta find demand elsewhere—in this case, literally everywhere in the world where people buy things.

If China exports stuff like its economy depends on it, it’s because that’s exactly what it does. Without exports, China stops growing.¹

That being the case, the notion that China could lose access to the biggest consumer market in the world without missing a beat is preposterous. Likewise, the notion that it’d be harder for the US to find substitute stuff than for the Chinese to find a substitute 300 million of the richest people in the world is also preposterous.²

“China will just sell its stuff elsewhere.” Really? To whom?

China is already selling its stuff everywhere. So, where in the couch cushions does China find new willing buyers for billions of dollars worth of microwaves and high-end lighting that Americans now won’t buy? Is there a remote, but numerous and wealthy, Amazonian tribe that’s just a Starlink away from getting the fast fashion bug?

It doesn’t and there isn’t. Obviously.

The point is that China needs the trade war to end, and in the meantime, is experiencing some real economic pain.

Chinese bond defaults have disappeared (lol)

Indeed, China is taking such a beating that Chinese bond defaults have all but disappeared:

FT

After rising in both 2023 and 2024, by 2025 there has been exactly one Chinese corporate bond default in the entire $4T+ on-shore bond market.

Very curious.

Now, one possible explanation for the disappearance of Chinese defaults is robust growth and strength.

The other (more likely) possibility is that the Chinese government is making defaults disappear because, if they didn’t, then everyone would know how much trouble they were in:

Ying Wang, a managing director at Fitch Ratings, said in a written comment that China’s bond market was . . . “predominantly composed of state-owned issuers.” [and] that central and provincial governments had emphasised “minimising public bond defaults among state-owned enterprises to mitigate systemic risk, often prioritising bond repayment over private debt obligations.”

Another analyst, who asked to remain anonymous, said that after a lot of “cleaning up of debt”, the bond market was “now more the domain of the state-owned companies”, and that credit quality had improved “as a consequence of that.” The person added that “implicit government support tends to be highest when the economic picture is more uncertain,” and was currently likely to be “incredibly strong given the economic backdrop.”

S&P data shows only a handful of defaults from state-owned enterprises in recent years, alongside significantly more private-sector defaults.

So, just following the breadcrumbs . . . issuers are increasingly state-owned, and the state tends to lend support when the ‘economic picture is more uncertain,’ and state-owned defaults have disappeared,

Idk, could be a coincidence. Data in China is notoriously unreliable, and I’m obviously no expert.

Or, the reason that defaults are disappearing is because the Chinese government is making the distress disappear because, if they didn’t, then there would be a lot more distress.

And there would be a lot more distress because China is taking a beating in the trade war.

Chinese manufacturing is increasingly unprofitable

Here’s another one to file under “actually, China is losing the trade war.”