TWS: August 27-31, 2020

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Graph of the Week | Economics

A Battered PBOC Enters the Race

The People’s Bank of China has held firm on interest rates in 2020, embracing a cautious “slow and steady wins the race” attitude for its monetary moves. The approach may prove foolhardy as real interest rates – interest rates adjusted for inflation – have risen alongside a quick drop in inflation, dampening the mood for consumer demand.

While inflation saw month-to-month drops as high as 27% in May, the PBOC has barely nudged its 1-year loan prime rate – the benchmark rate for commercial lending – from its 2020 peak of 4.15% in January to its current standing at 3.85%.

The race may not be over for the PBOC as it grinds forward with two subtle monetary moves: in back-to-back fashion, the PBOC recently injected CN¥150b and CN¥50b worth of net funding into the financial system via a medium-term lending facility and bank bond purchase.

Bottom line: While the central bank continues to hold rates constant, this quick move to lubricate the financial system follows a few relatively quiet months from the PBOC. Well aware of the threat that rising rates presents to China’s economic recovery and never one to throw in the towel, expect more hands-on monetary policy to follow from the ever-weary PBOC.


Economics | Markets

Seeing Through the Stimulus

If you’ve seen the Netflix documentary, The American Factory, then you’ve heard of Fuyao Glass, China’s largest car glassmaker. As demand for cars tanks amid the global crisis, the famous factory – and many like it – face severe layoffs.

China has driven to the top of the list as the world’s largest automotive manufacturer since 2009, feeding into its robust secondary industry that has been responsible for over 60.8% of China’s Q2 2020 GDP growth. While the sector’s abnormally high growth can be boiled down to the overproduction and stockpiling of goods, as well as government stimulus, the question still remains: ‘If the industry is booming, why so many layoffs?’ Unfortunately, without foreign demand from the US and Europe, companies like Fuyao have hit gridlock as operations stall and the company runs on fumes.

Bottom line: As much as state-backed stimulus programs can assist certain sectors and industries, pumping out aid isn’t as simple as pushing out glass on an assembly line, and companies like Fuyao are paying the price.


Economics | Policy

Dual Circulation: All Smoke and Mirrors?

The once murky crystal ball is sharpening up to reveal a clearer picture of the newly unveiled ‘dual circulation strategy.’ Xi has caught a glimpse of the future and now seeks to strengthen China’s economic resilience by striking a balance between globalization and self-sufficiency. 

Eerily reminiscent of China’s supply-side structural reforms (SSSR) of 2015, which also sought to remedy the mismatch between domestic production capabilities and frothy domestic demand, China is turning inwards to decrease its exposure to global fluctuations in demand. In response, Beijing brewed up a few initiatives like Made in China 2025 and the Mass Entrepreneurship and Innovation program to spur technological innovation and strengthen the “weak links” in the domestic economy.

Bottom line: SSSR has been President Xi’s miracle elixir for all (well, most) of China’s economic woes since 2015. Despite the bureaucratic hurdles, monopolized sectors, and weak IP protection rights that challenge the economic framework, bubbling innovation and high-end manufacturing may get China closer yet to its goal of domestically-driven sustainable, long-term growth.


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Industry

Git in Line or Git Gone: China Looks for a Re-Deal

Beijing has gone all in on its bet for Gitee to become China’s top open source hosting platform. The platform recently won the bid for the Ministry of Information Technology’s 2020 open source hosting platform project, and will work alongside universities and companies to create the Github of China.

China is rolling the dice on cloud computing, big data, and AI as the country’s main drivers of growth down the road and, to hasten domestic innovation, has fostered a strong open source culture for firms to share code within the industry. Behind the push lies the omnipresent headache that China has been grappling with across the board – overreliance on the West. In 2019, GitHub restricted certain countries’ access to its platform after they were sanctioned, and given the current climate, China isn’t leaving its future to the luck of the draw.

Bottom line: Losing access to GitHub’s repositories and community of developers would be a huge loss for China’s tech industry. While building an alternate GitHub is an ambitious undertaking, Beijing sees Gitee as insurance for a seat at the high rollers’ table. So, with so much riding on this, who’s feeling lucky?


Markets

‘Moo-ve Along, Mengniu’

A major cash cow for China and Australia is running out of milk. A plan made late last year for China’s Mengniu Dairy to acquire Australia’s Lion Dairy just turned sour as Australian regulators decided to block the US$430 million deal.

The transaction was called off in a last-minute stand, citing a conflict of national interest. The reversal comes at the culmination of growing tensions between China and the Land Down Under over recent years, and the Aussie request for an investigation into the origins of the coronavirus in April has spoiled relations further. China has since suspended beef imports from 4 major meat processing plants in Australia, implemented a tariff of 80.5% on Australian barley exports, and just last week, announced an anti-dumping probe on Australian wine imports.

Bottom line: Clearly Sino-Australian relations have not aged well, and Mengniu is the latest casualty in the terse exchanges between Australia and China. The tit-for-tat game is looking udder-ly too familiar these days, and it is yet to be seen if China will step back from its aggressive rhetoric towards Australia like it has towards the US. Otherwise, companies on both sides will be searching for greener pastures until the cows come home.


Economics | Trade

Chinese Demand Taps OBOR to Redraw Global Oil Map

Oil is critical to ensuring China’s growth over the next few decades, and securing it has become a top priority for the nation. By financing multiple OBOR development projects to circumvent key oil supply chains through the Strait of Hormuz and Strait of Malacca shipping lanes, China has chipped away at competing oversight in these regions, allowing it to secure access to resources while strengthening relationships with OBOR partner countries.

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