TWS: Apr. 26, 2021

Graph of the Week | Economics

5 Tiers * 3 Lines * 15% Debt Limit = Big Defaults

China’s property developers are stirring up concern in the bond markets. What started as a wave of rising defaults among coal producers, local government financing vehicles (LGFVs), and property developers a few months ago has since been pushed forward by property developers alone.

Behind the defaults is a combination of poor cash flow during the pandemic made all the worse by a slowdown in credit for property developers. Even after China contained the virus, developers had little chance to catch their breath as Beijing implemented a policy known as the “three red lines.”

The policy limits the capitalization of banks’ property-related lending based upon a five-tier scale and the three red lines – debt-to-equity, debt-to-cash, and debt-to-assets – and seeks to cap annual debt growth among property developers to 15%. Coming out of a cash-strapped recession, the policy has doused oil on the fire for many property developers and left numerous casualties in the bond markets.

Bottom line: While defaults at big names like China Fortune Land have made headlines, the industry is holding steady at a relatively safe default rate of 2.03% for now. So, don’t panic, but keep a wary eye on this industry, particularly as talks of stimulus rollbacks continue.

Economics | Industry

The Race for Oil Independence Heats Up

China is looking to refine the Asian oil market and distill the US’ spot of top dog as the largest crude oil refiner in the world. Is its intentions slick or crude? You decide!

In April 2020, China refined more crude oil than the US for the first time ever. Analysts aren’t expecting these numbers to slip up any time soon, either, with forecasts predicting China and its mega-refineries will fully overtake the US in refining capacity in 2021.

Meanwhile, the APAC region is losing its footing in the slick oil scene. Its refining capacity is predicted to decrease over the next 2 years by 1.2 million barrels per day – nearly the exact rate that China’s production is set to increase.

Bottom line: China has been hopscotching around the oil market after binging on the black gold during last year’s rare event that saw sellers pay buyers to offload inventory through futures. It’s no secret that much of China’s activity has been fueled by its quest for self-sufficiency – particularly for economic and military interests. As a common denominator between the two, oil independence at all stages of the value chain places an ace into China’s back pocket at a time when the country is challenged by an increasingly challenging international environment.

Finance | Markets

And the Gold Goes to…

It appears the US is no longer the belle of the FDI ball. Last year, China overtook the US as the top destination for new foreign direct investment, courting US$520.6 billion in foreign investment in 2020, a whopping 81% increase from 2019.

How was the US dethroned of its decades-long position? It’d be all too easy to blame the pandemic for the switcheroo; after all, new foreign business investments in the US plummeted by 49% while Chinese markets had the chance to rebound, primp up, and woo investors in 2020.

In reality, the runner-up itself played no small part. The US has been a key contributor (oops!) as American institutions have flocked to Chinese markets, particularly for Chinese 10-year government bonds (double oops!), where yields are 3.2% compared with US treasury 10-year bond yields of 1.7%.

Bottom line: China’s ability to shake the pandemic far earlier than the US continues to reshape global financial markets. While the groundwork had been years in the making, Beijing turned up the heat in its campaign for foreign investment over the past year. In the wake of its success, expect new legislation from Washington in an attempt to reclaim its title as FDI pageant queen rather than gracefully accept its second place prize.

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Industry | Policy

Three Cheers for China’s Giants of Mountainous Proportions

Ain’t no mountain high enough…to keep Chinese regulators from scaling its state-owned companies. Two of China’s state-owned chemical giants have just been given the greenlight to merge into the Everest of chemical companies.

Already large by all standards, you might know Sinochem as one of the first Chinese companies to make it onto the Fortune Global 500. One of China’s top oil companies, top fertilizer producers, and top-so-many-other-things, it can be difficult to keep track of all of Sinochem’s operations. Add ChemChina into the mix, and you get over US$150 billion in annual revenues and the world’s largest chemicals conglomerate which faces virtually no domestic rivals.

Bottom line: While this deal has been in the works since 2016, Beijing’s recent approval is telling of regulator’s shifting focus towards creating the biggest, baddest industry giants out there – particularly in strategic areas. Yet, contrast this new conglomerate with the privately-owned Alibaba, and you see a tale as old as time. To a Beijing increasingly convinced that state-led economies are the bee’s knees, it just goes to show that SOEs remain China’s golden child.

Economics | Technology

Internet Woes? China Goes Above and Beyond to Connect

Remember how roughly 490 million Chinese citizens still don’t have access to the internet? Well, the Chinese government is on a mission to fix that – with outer space!

And with that, a star was born… or rather, a project dubbed by China as “StarNet.” As part of StarNet, China’s state-owned telecoms companies are set to launch 10,000 satellites over the next few years to bring communication and connectivity to even the most rural areas in China. While that may sound like a lot, Elon Musk’s SpaceX satellite network Starlink alone is looking to add another 12,000 satellites into Earth’s orbit. Not that this is a satellite measuring contest, of course – quality over quantity, we always say…

Bottom line: As could be expected, the initiative is mired in controversy, with speculation about the implicit intentions behind China’s satellite push. Regardless of the motive, access to internet connectivity is one of the largest barriers to wealth and economic equality between urban and rural environments. This initiative has the potential to equal the playing field for rural communities in the digital age…or at the very least provide difficult-to-service areas with more universal access to cute doge douyins.

Business | Policy

A Win for Foreign Businesses in China’s New Foreign Investment Law

In the halcyon days before the pandemic, when headlines were dominated by the mundane trials and tribulations of the US-China trade war, China enacted a sweeping new Foreign Investment Law as the worst of the hostilities began to die down. The regulations enshrined in this high-level law provide many of the concessions that the US and other G7 nations with investments in China had long been clamoring for, but also contain provisions to review foreign investments for national security concerns.

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