TWS: Sept. 7, 2020

Graph of the Week | Economics

When a pandemic breaks loose and you’re locked down, what should you do? Turn to Netflix and binge Avatar, of course. Since the onset of the pandemic, millions of new users worldwide have joined the bandwagon for paid video-streaming platforms in 2020.

Amazon has taken home a pretty penny as its Prime Video service tacked on an additional 48 million subscribers this year. Yet, while China boasts the world’s largest digital consumer base, Chinese consumers aren’t as willing to fork over the dough for paid video services. iQiyi and Tencent Video, China’s two largest streaming services, added a meager combined 17 million users this year.

Although China has led a crackdown on piracy in recent years, axing 700,000 links for illegally downloaded content in 2017, piracy remains a major issue for media producers. From 2010 until 2022, China is expected to lose an estimated CN¥68 billion to media piracy, more than half of 2020’s estimate online streaming revenues.

Bottom line: Illegal downloads are still a big issue in China and have serious implications for media and gaming firms. With Chinese entertainment companies lagging behind as a result, new IP protections may soon be coming to a domestic market near you.

Economics | Policy

The Perks of an Early Recovery

China’s service sector is being roused into rebound as it expands at its fastest rate since January 2018. Official August non-manufacturing PMI is up to 55.2 from July’s 54.2, pushing it one point further above the crucial 50-point benchmark that marks expansion.

While factory floors in China have been operating at pre-virus levels for months, Beijing has struggled to breathe life into hazy consumption, thus leaving the service sector in a daze. August’s non-manufacturing PMI gains were lifted by newfound consumer confidence, largely driven by stability in China’s outbreak containment success. As Beijing eases virus control measures, heavily-impacted sectors like entertainment and tourism are waking up from their deep slumber.

Bottom line: These latest numbers show that the service sector is beginning to slowly close the gap between itself and manufacturing, while suggesting that Beijing’s stimulus is finally helping promote much needed equilibrium in its economic recovery.

Economics | Finance

Walking the Financial Tightrope

Chinese banks are juggling a host of problems, and cracks in their routine are starting to show. In H1 2020 earnings reports, China’s 4 largest banks saw profits slide by at least 10%, marking their biggest drop in over a decade.

While Beijing compels institutions to provide cheap funding, defer payments, and increase lending to small businesses in the wake of the outbreak, banks are feeling the heat as they forego CN¥1.5 trillion in profit to comply. Further flaring the flames are waves of bad loans – CN¥3.4 trillion worth, to be exact – cascading down after years of irresponsible activity increases non-performing loan totals. US sanctions are topping off the already wobbly act, which have begun to impact certain Chinese banks as they take precautions to avoid losing access to much-needed dollar liquidity.

Bottom line: With the banking system under strain from officials to help maintain economic activity amid negative earnings, even China’s largest banks find themselves in a perilous balancing act as past lending practices come back to haunt them. With US sanctions looming, should any more issues be thrown into the mix, China’s ambitions to maintain a quick recovery could come tumbling down.

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Business | Markets

The Biggest, but Not the Baddest

In a real who’s who of enterprise, the updated S&P Fortune 500 list revealed that China has made history by outpacing the US by a slim margin of 3 companies. This is the first time that the US has not led in the index, unmasking yet another step forward for China’s role in the global economy.

The index has been used to track companies’ rise and fall from economic prowess. By no means is China new to the game – since 2000, the country’s number of Fortune 500 companies has increased twelve-fold. That said, the US still leads the index in terms of annual revenue generated by American firms, topping China’s US$8.3 trillion by an additional US$1.5 trillion. Further muddying the standings is that 91 of China’s 124 firms on the list are state-owned, suggesting that the corporate playing field may be uneven among its contestants.

Bottom line: The US’ dethroning as the leader in Fortune 500s may have made headlines, but the bottom line is that everything boils down to, well, the bottom line. US companies continue to out-earn their Chinese counterparts – even on uneven grounds. Regardless, an upcoming year looming with sanctions and delistings will certainly shake up next year’s standings of the Fortune 500’s who’s who.

Economics | Policy

Simon Says, ‘I’ll Let You Know’

ByteDance is caught in an intense game of bureaucratic red light/green light as the world’s two largest economies flex their muscles. Following the US ban on Tiktok, Beijing flashed the stop sign on AI tech exports, restricting the transfer of new computing and data processing technologies.

The move marks Beijing’s first update to the list of restricted technologies in over 11 years, leaving room to speculate as to the intent behind the sudden overhaul. As the new export restrictions will likely require ByteDance to obtain Beijing’s go-ahead to sell TikTok, it begs the question: where does this leave the impending sale? Before waiting for an answer, American companies like Triller, Oracle, Microsoft, and Walmart had already begun sprinting to the negotiating table, at least until news of China’s new export laws surfaced – RED LIGHT!

Bottom line: With Beijing and Washington in the midst of a never-ending cycle of cat and mouse, policymakers on both sides of the Pacific are changing the name of the game for companies on the daily. ByteDance is surely just the first of many to come to be caught in the midst of the world’s least fun game of stop and go.

Economics | Industry

Booming Chinese Healthcare

A wave of baby boomers larger than the entire population of Brazil is about to retire, and China’s middle-class wants to go on a healthcare shopping spree. In the last 10 years, GDP per capita has increased from US$2,100 to US$10,000, with many retirees treating themselves to higher quality medical services.

With roughly 20% of China’s population heading towards retirement, many sectors stand to benefit over the next decade. Social security is predicted to go dry by 2035 and is often used by the government as a stimulus tool, suggesting that private insurance options will see a rise in popularity. In addition, the wealthier of the bunch may prefer private hospitals and clinics for a more individualized experience. From medical equipment to health food, every facet of the healthcare system will need to step up for the families who want nothing but the best for their elderly.

Bottom line: The surge of retirees is a huge opportunity for the private sector to fill the gaps where public healthcare isn’t quite cutting it. As the pandemic has made everyone more aware of the existing shortcomings in public facilities, the domestic healthcare system has a tall order to fill.

Economics | Markets

Stimulus + Subsidies = Spending (Who’d a thunk it?)

Western Europe’s Electric Vehicle market has overtaken China’s, with a whopping 500,000 autos rolling off lots over the first 7 months of 2020. While the difference between the two markets’ sales was marginal – around 14,000 cars – bumpy roads could be in store as Beijing tightens its stance on the EV market.

China had one of the world’s most progressive EV subsidy policies, offering both monetary and non-monetary incentives, but has since reduced central support for the market. Generous policy had driven domestic EV sales to first place globally with 45% of the world’s EV ownership in 2019.

Europe, by contrast, came in second at 24% ownership. Its trick to zooming to first? Subsidies. Thanks to tougher emission standards in the market, governments are offering strong incentives to meet stricter environmental requirements.

Bottom line: China’s EV firms are heavily domestically-concentrated, having only exported 4,700 EVs in 2019 – but the fast-tracked EU market has turned heads, with many Chinese EV companies drawing up plans to enter the EU. Depending on policy decisions by Beijing and other governments across the globe, we could see China’s massive economies of scale translate into an expansive fleet of strong global players.

Industry | Policy

China’s Energy Paradox: Green Energy-Driven Fossil Fuel Investment

China is leveraging its global leadership in green energy development to engage OBOR nations in overseas green growth initiatives. However, in the shadows of China’s green campaign exists a more calculated game to secure its own economic interests through the not-so-green methods of shrouded fossil fuel infrastructure investment and debt entrapment.

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