TWS: May 14, 2020

Business | Economics

The Trade Talks Saga Resumes

Chinese Vice Premier Liu He spoke with US Trade Representative Robert Lighthizer on Friday to revisit the agreements laid out within the US-China Phase One trade deal.

China has made a push over the past month to bolster agricultural reserves with 30+ million tonnes of imports from America. Aside from the US$30b agricultural import stipulation, the Phase One deal called for China to commit to $200b more in American imports than 2017 levels over the next two years.

While China may be on track to reach the first commitment, broader US imports fell by 5.9% year-over-year in the first four months of 2020, putting the broader goal at risk. Despite the coronavirus-induced impact on supply chains, China will need to find a way to import an additional US$70b worth of goods before the year is out to have a chance at meeting its objective.

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Business | Economics

The Trade Talks Saga Resumes Pt. 2

Amid continued pressure on Beijing to boost imports from the United States, China has released a list of 79 US products eligible for waivers from retaliatory tariffs imposed at the height of the trade war. The waivers will primarily apply to products including ores of rare earth metals, gold ores, silver ores and concentrates and be valid from May 19 through May 18, 2021.

Since penning the deal, relations between the two nations have continued to sour while global economic throughput has collapsed – calling into question the ability for China to meet increased purchase requirements or for US suppliers to meet any increased demand.

Muddying the situation further are threats from the Trump administration to terminate the deal should China fail to meet its purchase commitments. Poignantly, China’s Global Times has also claimed that some government advisors have begun urging Beijing to invalidate the trade deal and negotiate one more favorable to China.

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Business | Markets

Alternative Healthcare Finds a Market

As an alternative to commercial health insurance, China’s mutual aid industry is booming. These online platforms are estimated to reach 450 million users by 2025, tripling participants in just 5 years. Large companies like Alibaba and Tencent command the largest market share, with many competitors jumping on the bandwagon in the past year.

The first mutual aid industry white paper revealed that out of 58,000 respondents, 70% stated that they were not covered by commercial health insurance. Instead, they choose to pool their wealth, which is then used to pay out members’ medical claims. Many program participants come from lower-tier cities and rural areas, and 80% report that mutual aid programs make them feel more secure.

This industry benefits from strong financial backing, a digital payments infrastructure, and loose regulations. As healthcare awareness continues to spread, it will be interesting to follow the future of the industry – will mutual aid platforms fit into the rising demand for a diverse and comprehensive health care system or will they be hunted like P2P lending players?

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Markets | Economics | Policy

Foreign Investment to Calm Domestic Woes

China is removing its purchasing cap for qualified foreign investors within Chinese markets. The move is intended to stabilize China’s balance of payments amid a turbulent global trade environment and a significant drain on foreign reserves.

Reality may fall short of intention, as just US$111b out of the total US$300b quota had been used in April. Regardless, the decision to scrap the nearly 20 year-old policy indicates Beijing’s mounting concerns surrounding weak global demand, US-China trade negotiations, and weakening foreign exchange reserves.

Caught in the midst of transition between a manufacturing- and consumer-based economic model, China’s economy is particularly susceptible to systemic disruption. Hit hard on both fronts by a currency seeing its steepest monthly fall in over 25 years and slumping global demand, Beijing is turning to financial reform to attract foreign investment as a patch for the wound.

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Business | Markets | Policy

US IPOs: a New Challenger Approaches

In April, Xi Jinping approved an IPO reform on Shenzhen’s ChiNext as part of a broader economic restructuring strategy to counter the effects of COVID-19. Official implementation of a U.S.-style IPO system is set for August, a little over a year after the July launch of the system in Shanghai’s STAR Market.

The registration-based IPO system has looser regulations surrounding profitability and price volatility, including allowing companies to list before turning a profit. In addition, it uses a fast-tracked process in which IPO applications are vetted by the exchange instead of the China Securities Regulatory Commission.

This streamlined process is designed to lure Chinese tech start-ups back to China’s IPO market and provide more capital for them to stave off the economic slump. IPO reform is just the latest initiative in a series of China’s hands-on efforts to mitigate the economic fallout from the pandemic, undoubtedly with more to come.

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Business | Economics | Policy

Looking Back to Move Forward

While major global economies turn to stimulus packages, China has instead drawn from its bag of tricks to implement policies ranging from rent forgiveness to bad debt forbearance.

Amid high unemployment and its first economic contraction since the 1970s, Beijing is wary of the deferred pressures that stimulus could introduce into the economy and has instead elected to prioritize long-term industry stability, particularly within the hot real estate market. Despite unprecedented economic turmoil, home prices in Shenzhen still “rose 5.2% in March from a year earlier” as business owners have begun capitalizing on cheaper credit – and there are fears that a stimulus program could have an added impact.

Meanwhile, local governments are following a “build it and they will come” model for infrastructure projects, but ROI is all but guaranteed when building in the areas crippled by widespread urban migrations. Considering the bad debt load that has plagued Beijing since a 2008 stimulus package, the government is wary to initiate broader commitments at the national level that may further exacerbate existing vulnerabilities.

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Markets | Business

China Bets Pay Off for Hedge Funds

Thanks to a market rebound as the second largest economy reopened to the world, China-focused hedge funds posted their best monthly performance since 2015. The Eurekahedge Greater China Hedge Fund index climbed 9.7% in April, bringing YTD performance to a 2.5% gain. Many funds’ performance were further lifted by heavy exposure to small and mid-cap companies, a sector that outperformed the CSI 300 benchmark index.

By contrast, global funds tracked by Eurekahedge also saw their strongest monthly increase in years at 3.7%, though YTD performance remained in the red at -4.6%. With many Western markets lagging and debt markets on edge, investors are looking at Asia as a diversification strategy. Aware of the opportunity, China may seek to convert its early recovery into boosted foreign investment inflow as a means to contain the economic implications of recent CNY volatility.

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Economics | Finance

The Rise of the Renminbi: the Costs and Benefits of Internationalization

In its push for an international RMB, China squares off against the “impossible trinity,” an economic principle stipulating that no open economy can simultaneously manage exchange rates, control monetary policy, and allow for full capital mobility. In recent years, China has attempted to juggle all three at once, but seen limited success. To reap the benefits of a fully internationalized RMB, China must consider the pros and cons of taking a bolder step towards one side of the triangle.

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