TWS: Aug. 2, 2021

Graph of the Week | Trade

Tariffs? Never Heard of Her…

Despite a prolonged tit-for-tat trade war capped by a global pandemic, the US and China have seen their trade volumes soar to new heights. According to China’s General Administration of Customs’ latest data:

  • China exported a total of US$46 billion worth of goods to the US in June.
  • Meanwhile, US imports also surged to US$14 billion, which sits alongside pre-pandemic highs.

The US isn’t alone in its splurge. The UK, Singapore, and Germany have all greatly accelerated imports of Chinese goods to support recovery consumerism. The UK imported US$7 billion from China in June, beating pre-pandemic records.

June was a booming month for Chinese exporters across the board, despite outbreaks of COVID-19, port closures, and volatile commodities prices. Eased lockdown measures and an uptick in vaccination rates have underpinned the demand growth.

Bottom line: Remember those US$350 billion dollars’ worth of tariffs put in place during the trade war? Well, with American consumerism driving huge purchases from China, importers are simply shifting the cost of those duties onto consumers, pushing up short-term inflation. The Phase 1 trade deal is set to expire at the end of 2021, so now may be the right time for the Biden administration to consider some new tactics.

Economics | Finance

The E-CNY: Coming Soon to a Wallet Near You

The future is nigh, y’all. The People’s Bank of China just released an updated whitepaper outlining the latest status of the e-CNY – an all-in central bank digital currency called the DCEP that aims to become a bona fide substitute for Chinese cash.

China is the perfect testing ground for the DCEP. The domestic market is the global leader in digital payments and has the highest penetration rate for digital wallets across the globe. A 2019 PBOC survey confirmed our hunch; everybody and their laolaos (grandmas) are going digital with their payments:

  • WeChat Pay and Alipay have a stranglehold on the market with combined ownership of over 90% of China’s mobile payments.
  • 46% of respondents didn’t use cash in a single transaction in 2019.

China can cash in on this opportunity with the e-CNY and cut costs associated with circulating paper currency. The e-CNY:

  • Will circulate in tandem with cash and be loosely linked to bank accounts.
  • Will carry no interest and transactions won’t carry fees.
  • Can be operated independently of bank accounts.
  • Can be used without internet access.

The e-CNY is currently better suited for domestic payments and pilot programs supporting over 70 million retail transactions have shown promising results.

Bottom line: Beijing has shown an all-out assault towards financial regulation over the past few years and the benefits of a DCEP rollout for regulators are staggering. Not only would China’s large non-banking population be able to receive targeted stimulus at the tap of a button while stopping Chinese counterfeiters dead in their tracks, but it would also give the PBOC top-down insights into financial trends within the domestic economy that could be acted upon according to central interests.

Finance | Markets

‘Bottoms Up’ For Fund Managers in China’s Debt Markets

It’s no secret that debt has been a headline theme in 2021. And, while Beijing is busy sweeping it under the rug, foreign distressed debt managers are instead looking to welcome China’s risky debt with welcome arms.

Warburg Pincus, a US$60 billion dollar PE fund, is launching an asset management joint venture in China to target distressed opportunities. Partnering with Wensheng Asset Management, the firm has committed US$600 million to non-performing loans and rescue financing.

With the introduction of Beijing’s “three red lines” policy, which will clamp down on lending to debt-laden property developers, a host of distressed opportunities could soon arise for debt managers. While industry veterans like Blackrock, Brookfield Asset Management, and Oaktree Capital have been picking up risky Chinese loans for some time now, the post-pandemic onslaught of defaults may motivate more distressed asset managers to hop on the bandwagon.

Bottom line: Beijing knocked down regulatory hurdles for distressed debt investors, and risky debt in domestic markets is on the rise. Sounds like a golden ticket for investors, right? Well, maybe not. Huarong Asset Management, one of China’s big four state-owned distressed debt managers, saw its profits drop 90% y/y during the pandemic as delinquent loans turned into defaults. Long story short? Risky debt is just that…risky – and the Chinese market has risk abound.

Business | Policy

There’s No Place Like Home for China’s Giants Marching Abroad

Tencent’s domestic woes

Earlier this month, China’s tech giant Tencent Holdings was blocked from merging two Twitch-esque Chinese video game streaming sites, Huya and Douyu. Because Tencent owns a 37% stake in Huya, which controls more than 40% of the Chinese game streaming market, and 38% of Douyu, which commands closer to 30% of the market, a merger of the two would have given the company behind WeChat unprecedented control over the industry.

Tencent has long been China’s biggest gaming company. In 2020, the company owned over half of the mobile gaming market, backing popular games like Honor of Kings, Arena of Valor, PUBG Mobile, and swaths more. In the desktop and console gaming worlds, Tencent also owns a direct or indirect stake in Call of Duty, League of Legends, Fortnite, and other blockbuster titles.

What’s so special about China’s gaming market?

The company’s foray into the game streaming market would’ve extended its command over China’s massive gaming and e-sports industry. In 2020, the Chinese e-sports market was valued at US$385 million and estimated to grow at a compounded rate of 17% until 2023, which places it at roughly 35% of the total global e-sports industry. Lockdowns from the pandemic also drove record numbers of Chinese gamers online, which has further boosted the Chinese e-sports market size.

The blocked merger was significant as it marks the first time that China’s market regulator, SAMR, rejected a merger deal concerning an internet company. Regulators across most industries have been unyielding in their crackdown on anti-competitive practices lately, and the tech industry has not been spared. In late 2020, regulators also released draft regulation intended to reign in domestic tech companies by prohibiting industry norms like exclusivity clauses, consumer behavior-based marketing, and generally dodgy sales tactics – which has hurt Frankensteins at home but opened up space for newer companies like TikTok’s creator, Bytedance, to compete in the world’s second largest e-sports market.

China’s tech giants go global

As state regulators continue to strangle domestic markets, many of China’s major gaming companies have looked abroad for a breath of fresh air.

While some tech companies like Huawei have had a hard time establishing themselves in the West, Chinese gaming companies have had an easier go, and may in fact be some of the country’s biggest success stories.

Tencent has been leading the march. The internet giant recently announced the creation of Uncapped Games, a new studio in Los Angeles focused on RTS games within Tencent’s Lightspeed and Quantum Studios Group – a name already well known for their involvement with the hit game PUBG.

This is just the latest example of Tencent’s foray abroad. Unknown to most gamers, Tencent profits from many popular titles. It owns Riot games, the US-based developer studio behind League of Legends and owns a 40% stake in Epic games, another US agency behind Fortnite. It holds a majority stake in Supercell, the Finnish mobile gaming powerhouse behind Clash of Clans and owns a minority stake in Bluehole, the South Korean corporation behind the massively popular PUBG. In 2019, it also announced a new partnership with The Pokémon Company to develop new mobile games. The list goes on; look into the background of a popular game, and there is a decent chance that Tencent or one of its subsidiaries is involved.

Bottom line: For decades, China turned a blind eye to its domestic darlings in hopes that they would grow to become global giants. It’s clear that regulators have recently made the decision that these companies which once ruled with free reign domestically have become strong enough to tussle with the best of them across the globe – and thus must now be leashed at home. Sudden and swift regulatory crackdowns domestically are driving companies out, and Tencent’s journey may just be the beginning as China’s sleeping giants begin their march abroad.

Industry | Policy

Chinese Aquaculture Grows Alongside Global Appetite for Fish

China is both the world’s largest consumer of seafood and largest producer of farmed fish. As incomes rise and consumer demand for seafood grows, overexploitation in the fishing industry is on track to become a major global issue. In this article, we explore how China’s aquaculture industry can adapt to ensure a high value yet environmentally sustainable end product.

Full Article

Further Reading

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