TWS: Aug. 9, 2021

Graph of the Week | Policy

EdTechs Gets Schooled by Regulators

Regulatory school is back in session after Beijing announced a new policy that bans for-profit tutoring of core curricula, which in turn sent big edtech stocks plummeting in excess of 70%.

Here’s the tea on the big sale:

  • Beijing’s May decision to swap the two-child policy for a three-child policy was met with worry from Chinese parents, who complained that even one kiddo is too spendy.
  • Some Chinese parents spend up to half of their disposable income on education, much of which goes to extracurricular tutoring in order to give their children a competitive edge.

China’s total investment in education sat at 4% of GDP in 2019, but the data hints towards resources lagging behind student population growth – cue after school tutoring. In fact, nearly 75% of K-12 students have been using the after-school education services to narrow the education gap.

Bottom line: China’s ban on for-profit tutoring comes as part of a plan to decrease financial burdens on parents. However, for parents, the new policy may largely miss the mark. Unless families in smaller cities see education resources catch up to those of larger cities, many families will likely replace private education services with 1-on-1 private tutors.

Economics | Markets

China Launches Carbon Trading with Chinese Characteristics

The Olympics aren’t the only thing taking off this season. China’s long-delayed carbon trading market officially launched in mid-July, joining the ranks of 45 other countries that own a carbon trading exchange. Let the games begin!

China’s carbon trading market instantly became the largest in the world at over 2,000 companies and ~4.5 billion tons of carbon dioxide emissions. It initially covers the power sector and sets quotas for the power plants and factories responsible for just over 14% of global carbon emissions. The rules are simple – if a player’s emissions are higher than their allotted quota, they can purchase unused quotas from others at market prices.

Sounds vanilla, no? Well, it never is with China.

China’s quota system uses a feature unique to the Chinese market: emission intensity. As opposed to the global norm of having quotas attached to absolute emissions – or the total amount of carbon that a company produces, it will instead issue quotas based upon the number of emissions per unit of GDP created.

Bottom line: In concept, China’s unique quota system should incentivize companies to go green earlier and faster. In practice, however, it simply rewards companies that are more effective at using energy to drive business activity, which will either incentivize companies to cut carbon emissions – or get better at making money. And, with the price of quotas opening at just US$7.4 per ton as compared to the European sticker price of US$60/ton, we’re placing our bets on the latter. Still, as long as regulators can ensure that the system is enforced, it’s a classic win-win situation that will advance the country’s national priorities without giving up the gold.


Flash Floods Fracture inFrastructure

Damaging floods in the heart of China have sent shockwaves throughout the country. Zhengzhou, the capital of China’s central Henan province, has seen some of the worst weeks of flooding in living memory over the past month.

Nearly a million people had to be evacuated as record rainfall endangered the physical and economic health of Chinese citizens. Zhengzhou, located in the center of China, has developed into a major transportation hub over recent years. Widespread flooding has sent supply chains across all industries into a state of paralysis as major roads and highways remain crippled.

China’s coal industry, for instance, has been particularly affected. While China has significantly increased investment into the renewables industry, the country is still heavily dependent on fossil fuels, with coal making up 60% of its total energy supply. Yet, its largest coal mines are located in the north, and coal is typically transported through the central city of Zhengzhou on its way east and south. The disruption to supply routes has left power plants nationwide scrambling for fuel to meet peak summer demand.

Bottom line: China has long been aware that many of its cities are increasingly vulnerable to the effects of climate change. Although Zhengzhou has been at the heart of the government’s “Sponge City” initiative that looks to employ more natural, low-impact solutions to solve its growing flood vulnerability, the infrastructure is still ill-equipped to handle China’s weather patterns. Expect to see an even more frenzied push into renewables, green solutions, and pilot zones – particularly in regions more susceptible to the rising impact of climate change.

Economics | Policy

5 Down, 5 More To Go: A Run-Down on MofCom’s 14th Five-Year Plan

The next five years will be a mouthful if the Ministry of Commerce (MofCom) has anything to say about it. Last month, China released its 14th five-year plan, laying out a smorgasbord that touched on everything from retail and free trade zones to blockchain.

As you might have guessed, MofCom deals with most things trade-related in and with China. While its FYP is wholly separate from that of the central government, the agency still has a lot on its plate. Over the next five years, China’s trade wizards will focus on:

  • Foreign direct investment. Mofcom will further loosen investment restrictions to spur inbound FDI. The agency forecasts US$700 billion in real absorbed FDI by 2025, which sounds promising but comes amid a push for greater scrutiny on companies looking to set up shop in China and a wave of Chin-anxiety by formerly bullish foreign investors.
  • International trade. MofCom will continue to promote import/export flows. This is in and by itself unimpressive but considering that global trade disputes have become the norm for China as well as the hoopla over the ‘Dual Circulation Plan,’ an economic initiative touted to become a cornerstone of Xiconomics, it’s notable that this section of MofCom’s FYP was business as usual.

Keep in mind that, while MofCom’s FYP may set the trade menu for the next five years, the agency itself doesn’t have the only say. Beijing’s other regulatory bodies will add their own blend of secret spices to China’s upcoming economic feast, as will its global trading partners.

Bottom line: While the ambitious plan comes at a tumultuous period for Chinese trade and investment, Chinese agencies rarely release targets unless they are confident that they can be met. Additionally, once the dust of the latest regulatory crackdown settles, China will look to reassure foreign investors that the domestic market is still on the table, so expect some big overhauls in market regulation. If nothing else, one thing’s for certain – China’s upcoming economic plans are becoming a lot to swallow, and the world is watching to see if the country’s eyes are bigger than its mouth.

Industry | Policy

Cloud Village & Tencent Square Off in China’s Music Streaming Market

Chinese tech giant NetEase Inc. announced a spin-off of Cloud Village, its mobile music streaming service subsidiary, in late May. With a cult-like community that boasts strong user engagement and its unique Music Talent Initiative, Cloud Village stands out among digital music platforms. The company’s IPO proposal comes amid a crackdown on Tencent, the champion of China’s music streaming market, which offers a potential inroad to Cloud Village’s future growth.

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