TWS: Apr. 5, 2021

Graph of the Week | Economics

Fed vs. PBOC: As Different As Night & Day

As the CNY holiday rolls around, Beijing’s policymakers typically like to dump funds into the economy to spur business activity. Things ran a bit differently this year as broad money supply (M2) rose just 9.39% and 10.1% during the months of Jan/Feb.

On the other side of the planet, the US’ approach has been night-and-day different. As US stimulus continues to drive the money supply higher, there is concern that this could impact the Chinese market.

While the two economies are closely intertwined, Beijing has faith in its comparatively mild stimulus activity. Sun Guofeng, head of the PBOC monetary department, said, “The positive effect of China’s normal monetary policy stance is emerging…and we must keep our monetary policy steady.”

Over the long term, the market agrees. Yields reflect the prevailing opinion that cutting stimulus checks in US will cause little impact on China’s monetary policy, which is heading further to normalization.

Bottom line: As China continues along its strong path of recovery, the PBOC’s resolve remains firm. The central bank will continue to taper money supply growth, both putting pressure on red-hot areas of the market while ensuring that credit shrinkage does not leave a swath of business closures in its wake.


Industry | Tech

All You Need Is a Chip and a Chair

It’s no secret that the past year has seen its fair share of supply chain hiccups (Ever Given, we’re lookin’ at you).

From masks and other PPE during the early stages of the pandemic to automotive plants shutting down over a lack of semiconductors, US companies have learned firsthand the risks of overdependence on foreign supply chains.

POTUS to the rescue

That’s where POTUS comes in. President Biden has taken a seat at the table, signing a new executive order to review dependence on foreign materials and onshore critical US supply chains in semiconductors, pharmaceuticals, and other cutting-edge technologies.

While the order doesn’t mention China by name, it’s a sure bet that it was spurred by concerns of Chinese influence over US supply chains – particularly in the semiconductor industry. Washington has been going all in in its push against China’s growing chip capabilities in plain-to-see policies, like the CHIPS Act of 2020 and more recently, bipartisan support for up to US$37 billion of industry funding to reshore US chip manufacturing facilities.

An industry in decline

Chip dependence on China is not a gamble the US is willing to take. Yet, the numbers show a troubling trend for the country once at the helm of the industry.

American companies currently account for 47% of global chip sales; however, as the importance of semiconductors grows, the US share of global chip manufacturing has dwindled. The US once produced 37% of the world’s chips in 1990 but has since sunk to just 12% and is projected to drop to 9% over the next decade. Meanwhile, during the same period, China’s global market share is expected to balloon from 15% to 25%.

But anyone who’s played a round of poker knows that a chip and a chair is all you need to stay in the game. Policymakers on both sides of the aisle in Washington have rallied to bet on the industry’s ability to bounce back – given enough subsidies – as the ante for chip dependence grows.

Bottom line: The 14th Five-Year Plan and Vision 2035 development strategy have shown China’s hand. Beijing plans to ramp up spending in its tech sector and shore up concerns over foreign chip dependence. With stakes this high as both countries go all in, it’s on Washington to play its cards right to maintain its position as the global chip leader.


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Economics

Frigid Sino-Arctic Relations Heat Up

Icebreakers aren’t doing much to help China’s global image.

No, not the verbal pleasantries… we’re talking about literal icebreakers that are being used to expand China’s polar presence in the Arctic Ocean and Southern Ocean near Antarctica.

We’ve all heard of the Belt and Road Initiative – AKA OBOR AKA BRI, but what you may not know is that infrastructure projects are just the tip of the iceberg. Discussion over the lesser known “Polar Silk Road” has been getting more heated lately after polar exploration was cited as a “front line” priority in the 14th five-year plan at this year’s Two Sessions.

The earth’s poles have blistering economic and strategic value that have just opened up amid shrinking ice caps. Not only are the poles estimated to house 13% of the world’s undiscovered crude oil, 30% of undiscovered natural gas, and huge reserves of rare earths, but they also offer faster – and potentially – strategically safer shipping routes.

Bottom line: Unsurprisingly, China’s push for influence in the region has been met with an icy reception. With pushback from Canada, Denmark, Finland, and Sweden, as well as international concerns over the impact of increased icebreaking in the fragile Arctic ecosystem, Arctic relations are about to get a bit frostier.


Finance | Policy

Ant Plays a Round of Cat ’n Mouse

In late 2020, China’s banking regulators announced a new policy subjecting third party lenders to tough banking regulations. The new requirements would require lenders to keep 30% of each loan on hand, cap personal loans, limit banks’ ability to co-lend with online lenders, and impose geographic restrictions on lending operations.

For Ant and others, the new regulation would mean a complete restructuring of their lending models. For example, Ant currently holds about 2% of each loan on its balance sheet, while the rest is bundled into securities and sold. This allows Ant to obtain instant liquidity on its assets, which is then used to issue more loans and keep the cash pouring into Ant’s bottom line.

Ant has put its best and brightest on cooking up a plan to avoid a complete overhaul. Their solution? Search and replace “microlending” with “consumer finance.” By shuffling its microlending business under its new consumer finance arm, Ant will be able to maintain its higher leverage ratios and continue to lend cross-regionally.

Bottom line: Because Ant and other lenders bear minimal risk on their loans, they have every incentive to focus on loan volume rather than quality – not unlike the factors that inspired the ’08 financial crisis. Still, Ant’s game of restructuring was a foreseeable reaction to regulators’ overcorrection, and until equilibrium is reached, expect to see more of this cat and mouse play-by-play between regulators and fintech companies.


Business | Economics

The Long March Abroad for China’s Swelling Ranks of Global Giants

Chinese companies are increasingly looking towards foreign markets to unlock new growth opportunities abroad while diversifying away political risk at home. Haidilao and Tencent are two prominent examples of companies that have successfully entered foreign markets. While the two giants have vastly different approaches to expansion, together they have formed the golden standard by which other emerging companies seek to grow their global footprint.

Full Article

Further Reading

China Business Newsletter

TWS: Apr. 19, 2021

China Business Newsletter

TWS: Apr. 12, 2021

China Business Newsletter

TWS: Mar. 29, 2021

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