TWS: May 21, 2020

Economics | Policy

The Bell Tolls for Thee, Debt Diplomacy

As the pandemic continues to disrupt the global economy, developing countries are struggling to pay back OBOR-related loans. Requests for debt refinancing or forgiveness have become commonplace and the inability to honor these loans undermines China’s initiative to become the default financier for developing nations. Facing mounting defaults, China must now choose to either absorb the financial burden or risk losing goodwill by applying additional financial pressure on developing countries.

China’s lending to the developing world exceeds that of the World Bank or IMF at approx. US$520 billion. Chinese loans have been uniquely structured – typically defined by higher interest rates and shorter maturities, giving Chinese banks the ability to invest in poorer countries with higher risk of default.

To date, the China Development Bank has chosen a more lenient approach to debtor requests. For example, the credit line to Sri Lanka was extended, interest rate lowered, and repayment timeline delayed by two years. However, there is still contention on how China will handle additional countries’ requests for relief as global economic woes deepen.

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Business | Markets | Economics

Jiangsu Takes the Gold

While domestic consumption and trade lags around most of the country, China’s powerhouse province, Jiangsu, is showing signs of life. In April, Jiangsu reported a 7.6% month-over-month increase in total trade (exports and imports), and an impressive 19.1% rise in exports from April 2019. Known as a powerhouse for exports, Jiangsu holds second place among provinces for annual export and GDP figures, trailing only Guangdong.

Two features have contributed to Jiangsu’s strong April performance. First, Jiangsu’s production capabilities largely gravitate towards essentials: textiles, agriculture, construction materials, natural resources, etc. Second, Jiangsu was comparatively lower in confirmed coronavirus cases, and the province’s economic reopening was much more effective, which led to a swifter recovery than many other parts of the country.

Regardless, imports still remain muted at similar levels as the prior year. While work has largely resumed in the province, consumer demand remains low and foreign suppliers are far from prepared to supply the Chinese market.

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Markets | Business

Asset Managers: ‘Time to Consider China?’

While Western economies remain closed, many parts of China are seeing work resumption levels as high as 85-90%. To capture this opportunity, asset managers are quickly rebalancing their portfolios for broader China exposure, which has the potential to remain a longer-term trend. As of March, allocation to Chinese stocks among US asset managers reached US$2 trillion, an increase of 20% from 2019 and 17% from 2014.

Data from fund flow tracking firm EPFR shows that equity funds have been offloading positions across the globe but are relatively bullish on China. While the lockdown exposed vulnerabilities in most markets, its impact on Chinese exchanges has been comparatively muted. The Shanghai composite is down 5.2% YTD compared to an 11.1% drop in the S&P 500.

In a May 6 report, Morgan Stanley recommended investors buy Chinese A-shares rather than NYSE-listed counterparts to hedge risks. Chinese equity markets tend to be more inward looking and freer from the institution-driven swings in US markets, and the transition to Chinese equities may allow investors to better diversify in a tumultuous market.

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Business | Policy

DoC & Huawei Say Their Final Goodbyes

A recent series of events in the US-Huawei clash has quickly ended the trade détente experienced since high-level talks in mid-April. Beginning Friday, the Department of Commerce administered new rules barring Huawei and its suppliers from using American-made inputs in the semiconductor manufacturing process. Companies will need to apply for licenses to continue supplying chips, but it is likely that all requests with ties to Huawei will be denied.

Later in the day, Chinese state-owned investment funds made a move of their own by injecting $2.2 billion into the Semiconductor Manufacturing International Corp., the largest domestic chipmaker in China. With the current and planned funding, the chipmaker intends to ramp up monthly production of 14-nanometer wafers from 6,000 to 35,000.

Beijing’s move shows clear intent to reduce Huawei’s American independence, but the transition may be rocky. Taiwan Semiconductor Manufacturing Co. counts Huawei as its second-largest customer, with it accounting for 15-20% of its annual revenues. Following the Friday news, TSMC has officially halted all new production orders from Huawei Tech.

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Markets | Business

Caught at a Crossroads

Luckin Coffee makes headlines again as the Nasdaq stock exchange announced plans to delist the company after news surfaced that it had been inflating sales by up to US$310 million. The notice was filed Tuesday, citing “public interest concerns” surrounding fabricated sales accounts and lack of transparency. The move follows Nasdaq’s recent proposal for more stringent requirements on IPOs.

The first requirement would require companies to raise at least US$25 million or a quarter of their post-listing market value in an attempt to increase liquidity and dilute insider holdings. The second includes additional listing criteria based upon the qualifications of the listing company’s auditors. While some scrutinize these actions as aligning with the decoupling of US and China, others claim that Nasdaq’s efforts to promote stronger listing criteria is paramount to creating sound securities markets.

Although intended to increase transparency and accountability, these measures may end up limiting US investors’ ability to easily access emerging market returns and properly diversify portfolios.

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Business | Economics | Policy

Blockchain Finds a Home in Pearl Delta Trade

Chinese financial regulators recently co-published a strategy to finance infrastructure development in the Guangdong-Hong Kong-Macao Greater Bay Area. Among the strategy’s five pillars was an emphasis on spurred innovation within financial services, with a plan to build a blockchain-based financing platform.

The platform would allow for participating banks to share and exchange relevant trade information in a safe and reliable way. The announcement closely follows the recent April launch of China’s nationwide Blockchain-based Service Network, a platform that offers companies low-cost blockchain cloud-computing services. It also precedes the anticipated release of the digital RMB.

Since Xi Jinping announced China’s Fintech Development Plan in 2019, the technology has become the critical foundation that will support many of China’s other technological ambitions such as cloud computing, 5G, digital currency, and more. The pandemic has also added another level of urgency by bringing a heightened awareness to the need for digitization. As China continues to make strides in its pursuit of leadership in technology innovation, we will likely see increasingly frequent blockchain utilization.

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Business | Policy

China Doubles Down on AI

By 2018, China-focused VCs had allocated US$8.1 billion into AI deals, a 27-fold increase in 5 years. Fast forward to today, and Beijing has recently announced that it is doubling down on its AI bet – initiating two new batches of AI projects to the tune of US$140.7 million.

The new projects will support development efforts in data intelligence, swarm intelligence, cross-media intelligence, hybrid intelligence and intelligent systems to be targeted for application across healthcare, supply chain, and city governance.

China’s bet on AI can be traced back to 2017 when the State Council issued a plan for AI development and defined the industry as a major growth engine for the country’s future economy. To date, China has established 11 AI pilot zones across the nation that offer a conducive environment for innovation development and testing.

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Business | Industry

Dead Wrong: AIA and Ping An’s Life Insurance Duel for China

The narrative of AIA and Ping An is one familiar to Western brands that enter China – with many fallen prey to the pitfalls of misaligned cultural values. AIA had not fully weighed the taboo of death when it entered the Chinese market and faced significant challenges when selling insurance – stymieing its growth and providing the perfect opportunity for China’s now largest life insurer to seize the market.

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