The Impact of the US-China Trade War on Chinese Firms' Investment

Abstract

We study the effects of the US-China trade war on Chinese firms' investment using the detailed quarterly financial data of Chinese listed firms merged with firm-level Chinese customs data. We construct the firm-level measures of direct trade exposure and the financial measures of indirect exposures to the US-China trade tension using firms' equity responses during the trade war escalation periods. We document that the trade war reduced Chinese firms' investment by two percent. In particular, we find significant heterogeneous firms' responses to the trade war, depending on their firm characteristics. Chinese firms that are more dependent on exports to the US have lower stock returns; large firms and state-owned firms suffer more compared to small firms and private-owned ones.

Keywords:

• Trade policy
• US-China trade war
• Chinese listed firms
• investment
• event study

JEL Classifications:

• F10
• G12
• G14
• O24

Acknowledgments

The authors wish to thank Zuzana Fungáčová, Risto Herrala, and Riikka Nuutilainen for their helpful comments and discussions, as well as seminar participants at Bank of Finland. Authors’ personal views only. Do not necessarily reflect those of the institutions that authors are affiliated with.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Notes

1 The firm-level customs data are updated until 2016, while the industry-level customs data are updated until 2018. Since we are conducting the firm-level empirical exercise, we use the firm-level customs data.

2 There is a growing literature measuring the uncertainty' impact on firms' performances including investment. Recent literature measures the uncertain impact of the recent trade war on US firms, such as Caldara et al. (2020) and the impact of Brexit, including Bloom et al. (2019). Previous literature discusses about uncertainty include Bianconi et al. (2021) and Huang et al. (2019).

3 In Huang et al. (2018), they use Google Search Index to track trade war escalations in the United States. Since Google is banned in China, we use Baidu Search Index instead to track the Chinese market's response.

4 Since the stock price is the net present value of the cash flows of the firm, changes in prices (i.e. stock returns) could reflect either change in the expected cash flows or the rate at which they are discounted. We emphasize the former in our discussions and applications.

5 2017 is the nearest year before the US-China trade war escalation.

6 Data source: Foreign Agricultural Service of United States Department of Agriculture (USDA)

7 Here, the US income ratio is calculated through methods described in section 3.1. We assume the listed firm's income from the United States only contains its exports to the United States. Therefore, we use firm-level Chinese Customs Data in 2016 to infer the firms' dependency on the United States.

8 We set the trade tension index as a constant before the first quarter of 2018 in the regression. The index level is set the same as the index's average level at the end of 2017 before the first quarter of 2018. We used the index directly after the first quarter of 2018. Even though the trade tension index captures the 'global' tension intensities, the US-China trade tension is almost the global trade tension starting from 2018.

9 Here, we measure growth rate as the year on year growth rate to eliminate the seasonality of data since we are not including time fixed effects in the regression.

10 Specifically, we use the year-on-year growth rate of operating income, changes of the ratio of cash flows to total capital, changes of the ratio of profit to total capital, Tobin's Q, the year-on-year growth rate of cash holdings. The time period we are using in the regression is 2010Q1–2019Q2.

11 Comparing to the US estimates, the impact of trade uncertainty leads to a 1 percent decline in the US firms' investment.

12 Using the equity return to measure firms' indirect exposure to the trade war, the impact of the trade war on firms' investment is slightly larger than that of the direct measures using firms' trade volume. It might be that the indirect effect takes time to emerge, hence we might need a longer time series to test for this.

13 We take the averages of firms' capital levels across all quarters in our sample and cut the sample using the median.

14 Similar findings are also mentioned in Benguria (2019), and they find that large firms tend to experience lower revenue and profits due to the exposure to the trade war. Another consistent evidence is that the recent divergence between the official PMI and Caixin PMI. The purchasing managers' index (PMI) is an economic indicator that surveys purchasing managers at businesses that make up a given sector. In China, both the Bureau of Statistics and Caixin publish the PMI, respectively. Starting from July 2019, there exists a divergence between the two PMI. Caixin PMI tends to show improvement in economic conditions, while the official PMI from the Bureau of Statistics is still indicating the slowdown of the economy since Caixin PMI surveys small firms in China. In contrast, the official PMI covers larger firms and bigger samples in comparison. This also shows that larger firms are more severely impacted by the trade war compared to small firms.

Additional information

Notes on contributors

Yanliang Miao

Yanliang Miao is a Chief Strategist and Managing Director at China International Capital Corp (CICC). He holds a Ph.D. in Economics and Public Policy from Princeton University. He now lives in Beijing and serves as an Adjunct Professor at the National School of Development, Peking University.

Xuan Fei

Xuan Fei is an economics researcher specializing in international trade, macroeconomics, and spatial economics. She currently lives in Beijing.

Jingyi Sun

Jingyi Sun is a second-year PhD student in Economics at Peking University. She now lives in Beijing, China. And her research focuses on international trade.

Hao Yang

Hao Yang is a senior analyst covering global macro and strategies. He graduated from Peking University as a Ph.D in macro economics.