TWS: May 28, 2020

Graph of the Week | Finance

China has been one of the last major global economies to greenlight a stimulus package to aid its ailing economy. Facing high unemployment and its first economic contraction since the 1970s, Beijing has been wary of the deferred pressures that stimulus could introduce into its economy; however, with pervasive unemployment, conservative consumer spending, and sluggish global demand, China’s economy needs a jolt of electricity to jumpstart its recovery.

With tax revenues remaining stable amid ballooning expenses since the onset of the pandemic, the government is now considering leveraging up to boost public spending and inject much needed liquidity into its economy. While the gap between government expenditures and revenues has widened over recent months, it is still aligned with deficits incurred during periods of normalcy.

What still remains to be seen is how far Beijing will allow the gap to extend among its intensified spending efforts.

Economics | Policy

Beijing Greenlights Increased Spending

On Saturday, Cong Liang, secretary-general of the National Development and Reform Committee, pointed to China’s comparatively low debt load, suggesting the nation could take on more leverage. This follows Premier Li Keqiang’s recent announcement that Beijing would issue more bonds to inject liquidity into its ailing economy.

According to 2019 data, while other countries sport debt-to-GDP ratios ranging between 70% to 106%, China was significantly lower at just under 40%. However, the IMF has produced secondary figures for the nation, estimating that accounting for China’s massive local-level debt would raise China’s debt rate to over 80%. Further raising eyebrows are plans to use the bond proceeds to drive domestic infrastructure projects, which have historically struggled to generate sufficient returns to pay back the interest.

Taking these factors into consideration, China’s plan to increase borrowing will be met with skepticism. In the past month, China has introduced a string of new fiscal initiatives, suggesting that debt leverage is just the latest, and will not be the last.

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Economics | Policy

Hello Chinese Dream, Meet Coronavirus

The National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) has met for the annual ‘Two Sessions’ plenum after its 78-day delay.

The ‘Two Sessions’ releases critical policy announcements year after year; 2018 was a prime example, with Xi Jinping using the plenum to announce the scrapping of the presidential term limit that paved the way for his indefinite rule. Given the current circumstances, much of the conference will be held via teleconference, which may slow the pace of policy ratifications in 2020.

Beijing painted their vision of China as a post-pandemic great power, with discussions thus far centering around China’s role in the global environment as well as domestic issues relating to the pandemic: economic growth, public health, poverty alleviation, jobs and new legislation.

Breaking from the rosy rhetoric, Premier Li Keqiang also took the spotlight as the second in command broke with 20 years of tradition by abandoning Central growth goals. Despite the optimism behind China’s ‘V-shaped recovery,’ lawmakers remain uncertain as to the road ahead and their decision to break from tradition shows a conservative approach to recovery efforts.

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Business | Economics | Policy

Beijing Goes to Bat for SMEs

Emerging from the Two Sessions comes new supportive initiatives for ailing market players hurt by the pandemic. In a government work report at the annual national legislative session, Premier Li Keqiang announced that the government will continue to aid the operations of market entities, particularly for SMEs.

Chinese economists have emphasized the crucial role that SMEs play within a healthy economy as they employ 80% of the country’s population. To aid SMEs, the government plans to loosen location restrictions on business registrations while also increasing efforts to assist entrepreneurs. Poignantly, China will also aim to reduce corporate operating burdens by over CN¥2.5 trillion in 2020.

These new policies will be added onto an already extensive list of supporting measures that China has taken to support businesses since the outbreak.

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Markets | Economics | Policy

Me Against the World…with Chinese Characteristics?

Economists around the globe want to know what the 14th five-year plan will entail. Serving as the framework for China’s economic strategy between 2021 and 2025, the official plan will not be formally released until March 2021. However, research shows that discussions at the Two Sessions have focused on a path to self-reliance while still encouraging foreign inflows.

Citing the impact of coronavirus and frosty international relations, China is turning to its rapidly growing domestic population as its primary economic driver to offset a reliance on foreign markets, especially in the technology sector. The country has faced an increasingly hostile global tech trade environment and seeks to overcome this by leveraging its “whole-country system” to boost domestic R&D investment. All the same, China is not abandoning international markets, especially when the country plays such a central role in global supply chains.

5-year plans have historically been ambitious, but the initial conversation speaks volumes about the current reality facing China and how the nation is grappling to find economic stability.

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Markets | Economics | Policy

Beijing Sends a Message Down Under

Coal is the latest Australian commodity to be hit by China’s new export limitations, occurring within days of restrictions on barley and beef. As one of Australia’s top four exports to China, the commodity is now banned from use in state-owned power plants.

Earlier, the Chinese Ministry of Commerce had announced an 80.5% tariff on Australian barley imports, citing official concerns over market dumping practices and causing a 20% drop in price. Additionally, four Australian meat processing plants representing a combined ~30% of US$3.5b worth in beef exports have been suspended from exporting to China due to compliance issues.

Beijing’s latest trade restrictions are seen as a message of disapproval towards Australia’s call for an independent inquiry into the origins of the coronavirus. Although these actions will be felt in the land down under, Australia still has a number of aces up its sleeve to use as leverage – namely coking coal used in steelmaking and iron ore exports that China relies on for its 1 billion-tonne-a-year steel industry.

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Markets | Economics | Business

China’s Capital Winter Catches a Virus

New data on China’s VC industry reveals a grim reality: while the economic impact of the coronavirus batters portfolio investments, investors are shying away from early-stage funding. Adding to the woes, only 170 startups were founded in the first 4 months of 2020 – a marked drop from 1,980 in the same period last year. SMEs represent over 90 percent of Chinese enterprises, contribute over 60% to Chinese GDP, and account for 80% of nationwide jobs in the country.

Despite the economy making progress in its recovery, investors have been slow to pump money into young startups. As of April-end, early-stage fundraising (angel & seed rounds) comprised a meager 13% of total fundraising, down from 33% five years earlier. In comparison, the less-risky series B stage accounted for nearly 29%, up from 19% five years earlier. While there are still opportunities to fundraise in certain industries, the trend is clear – the remainder of 2020 will continue to challenge startups’ resiliency.

To stay in the know while on the go, TCG put together an overview of China’s VC Investment Industry. Check it out to get smart on the state of Chinese investments.

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Business | Economics | Trade

The Complex Reality Behind the US-China Decoupling

While the pandemic reveals the dangers of overreliance on a single nation’s production facilities, Washington is calling on American MNCs to shift supply chains away from China. However, the economic relationship between the world’s top two economic powers is complex and a rushed decoupling could sink the global economy to unprecedented depths. Instead, both nations should carefully consider how to effectively diversify the risk of economic overdependence while continuing to maintain healthy trade relations.

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Further Reading

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