TWS: Aug, 20, 2020

Graph of the Week | Policy

On the heels of Pompeo’s Clean Network initiative, Trump signed two executive orders to prohibit transactions between US companies and WeChat. While the extent of the orders is still unclear, they are a thorn in the side to Tencent’s international expansion campaign for its digital payment service, WeChat Pay.

Tencent’s ambitions have outgrown the Chinese market where it commands 38.9% of domestic mobile payments. With overseas Chinese as its primary users, WeChat Pay concentrates its efforts in destinations that see high Chinese tourism spending and now has over 360 payment service providers across 60+ countries, including 11 in the US. The US welcomed nearly 3 million Chinese travelers with an average budget beyond US$6,000 in 2018 – making it an ideal market for expansion.

Bottom line: The ban indefinitely blocks WeChat Pay transactions in the US – but could be more threatening. Should the Trump administration extend the ban to US companies overseas, WeChat Pay’s international campaign could very well be over. Regardless, with WeChat Pay as the fastest growing segment in Tencent’s portfolio, this latest move in the US-China tit-for-tat spat could well spell trouble down the road for Tencent’s bottom line.

Economics | Industry

Breaking Away From the Benjamins

China and Russia are in cahoots to dupe the dollar – and they’ve been wildly successful. In 2015, 90% of Sino-Russian settlements were conducted in USD, but by 2019 that had dropped to 51%, and finally 46% in early 2020.

The strongest weapon the US holds against China is small enough to fit in a wallet – or so Beijing thinks. A PBOC economist recently told Reuters that the trade war is becoming a financial war, and that “the most lethal tactics have yet to be used.” Should relations continue to chill, China would be ill-prepared to sidestep the impact that sanctions could have on its economy.

Bottom line: While China and Russia have progressed in skirting the US-dominated financial system, de-dollarization still has a long way to go. The USD’s share of global trade is increasing and it still accounts for 60% of foreign reserves – but with the upcoming release of the digital RMB, one thing’s clear: if China has its way, the future will not be all about those dolla dolla bills, y’all.

Further Reading

Economics | Trade

Short Circuiting Trade Deal Shocks No One

The outlook for China’s energy commitments in the Phase One trade deal is running on fumes. Beijing had committed to US$25 billion in total energy purchases from the US in 2020, but as of June, the country had only met 5% of their target at US$1.29 billion.

Phase One trade deal purchase commitments were always over-optimistic. The deal outlined dramatic spending increases in several areas, casting doubts that China would have been able to reroute purchases from other trading partners to the US.

Enter coronavirus and oil price war, and the unlikely became impossible. In 2019, crude oil commanded the majority of China’s energy imports from the US. But, as the oil price war sunk prices to historic lows, China binged on non-US oil imports despite sluggish manufacturing activity – filling strategic reserves instead. With muted industrial demand and little storage for additional purchases, China’s main energy import from the US had been removed from the equation.

Bottom line: We’re not going to say that a failure to meet purchase commitments will turn the US-China relationship nuclear – but in an environment characterized by players looking for any provocation to electrify tensions, energy seems to be the newest frontier heating up bilateral tensions.

Further Reading

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Economics | Policy

The Delinquents Aren’t Alright

Out of a job? Look no further – China’s debt collectors are hiring by the hordes as agencies double their hiring efforts to meet rising loan defaults. Bank-issued card debt has doubled to US$2.4 trillion while delinquency rates have continued to climb.

In mid-June, we found that China’s non-performing loan rates were relatively stable throughout the pandemic, but were poised to rise with stimulus (here’s the link for all of you new to the crew). Well, the time is nigh as cracks from Beijing’s late stimulus are beginning to stir concerns in the financial sector. While authorities affirm that delinquent rates are under control, official figures omit specialist consumer finance firms like micro lenders that are estimated to be facing delinquency rates between 30% to 50%.

Bottom line: Central banks have huge influence over the economy through their ability to adjust interest rates, but rising default rates slash bank lending – removing one of the strongest tools that the PBOC has in its toolbox. Less lending leads to less spending, which leads to less economic activity – a vicious cycle that could bode ill for the Chinese economy if not nipped in the bud quickly.

Further Reading

Industry | Policy

Encryption vs. Surveillance: How the NSL Is Changing Hong Kong’s Tech Landscape

The Hong Kong national security law created a series of provisions that restrict the flow of information and suppress the civil unrest within the region. In the short term, this new law has had a profound impact on the business landscape, creating a series of winners which seek to expand their market share in the local marketplace. In the long term, it will reform the technology landscape in Hong Kong for years to come.

Full Article

Further Reading

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