This has been a good month for Chinese stocks. An excellent month.
The CSI 300 benchmark index of stocks in Shanghai and Shenzhen is up 9.0% since August 7.
Chinese stocks are the world's best major performer this year, now with a 2019 gain of 31.1%. But the vast majority of those gains came in January and February. They lost their way in late April, when it became clear that the talks aimed at settling the U.S.-China trade war had stalled.
In August, they got their bounce back. Will they now retain that spring in their step?
There was a false dawn in June, when Chinese stocks had a month almost as good as August. That was undone by yet another setback in the tariffs back-and-forth that continues to disrupt global supply chains.
How wide-reaching is the impact of the trade war? Well, far greater than I initially expected, that's for sure.
A survey by Nomura (NMR) shows that companies are indeed responding in two ways. Of their sample study of 56 companies producing in China, 37% have now expanded capacity with new factories in third countries. Another 27% have diverted trade by maximizing the existing capacity of their operations already in third countries.
So two-thirds of manufacturers in China have reacted with a production shift of some sort. The remaining third did not have a clear and obvious response to the trade war - meaning they may follow suit, just a little slow.
Vietnam has been the major beneficiary of this shifted trade. It's next to China of course, so there are some logistical benefits. It also has a Communist government, albeit one that is even more business-friendly than the Chinese.
Taiwan and Thailand have also seen significant gains in production moved or diverted out of China. Mexico is the biggest non-Asian country to see an increase in trade.
There is "scant evidence," Nomura concludes, that any significant number of companies have moved production back to the United States. In their survey, 5% of companies said they had done that.
In terms of industry, 73% of the production shifted has been in electronics, clothing, and electrical equipment, in that order of magnitude.
Vietnam is interesting because it has gained both low-end production in apparel, as well as high-end electronics. Otherwise, the clothing and footwear has gone to countries that have even cheaper labor and production costs than China, such as Cambodia, Bangladesh and Burma.
That's a shift that was already going on, and would have gone on without the trade war anyway. The tariffs have merely sped the process up.
Japan has seen reshoring and the inbound movement of foreign companies alike in high-end capital-expensive machinery production. Both Taiwan and Thailand have gained in electronics. Those changes were unlikely to take place without the trade war, although China was moving up the food chain into the production of higher and higher-margin technology.
Stocks to watch as these trends play out include Mitsubishi Electric (MIELY) , which has been shifting production of U.S.-bound machine tools used in metal processing from Dalian in China to Nagoya in Japan. Toshiba (TOSYY) has been doing the same. Komatsu (KMTUY) plans to shift production of hydraulic-shovel parts to Japan and the United States, out of China.