TWS: August 6 – 13, 2020

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Graph of the Week | Economics

Welcome to Econ 101! Today’s lesson: “How has China kept its economy afloat with minimal stimulus during the pandemic?”

In 2020, the US has gone nuclear with a whopping US$2.2 trillion in stimulus via the CARES Act, while China has coolly pushed out US$506 billion in loan buybacks and infrastructure investments. As the US entered a recession, China beat the slump to eke out 3.2% growth in Q2.

‘But how,’ you ask? Well, complex economies can’t be understood by a single indicator…BUT if they could, the national savings rate would be a great place to start. Higher savings rates are more likely to maintain consumption when incomes fall, and while China has lined its banks with savings between 40-50% of GDP since 2008, American rates have hovered between 15-18%. Fast forward, and as China’s June consumer spending nearly closed the gap with 2019 figures, US consumer spending lagged 5% y/y despite the stimulus.

Bottom line: There’s a more complex story to be told, but we live by the KISS principle. To keep it simple: national savings is crucial to healthy consumer spending, and China is living proof. In a twist of irony, poorly targeted fiscal stimulus has been proven to contribute to lower long-term savings, which means that the US could be stuck in a rut.


Economics | Policy

Dukes Up for a Good Clean Fight

He wasn’t bluffing: Tik Tok and WeChat have been put before the firing squad. In just 45 days, Trump’s executive orders banning transactions from both platforms will take effect unless they are sold. This development follows closely behind a new policy aimed at protecting US citizens data and infrastructure from the CCP.

What is this policy? The Clean Network program is a five-pronged plan created in response to national security concerns, especially surrounding China’s access to the personal data of US citizens. Apart from mobile apps, other sensitive telecommunication including vaccine research, and election data were also cited in Secretary Mike Pompeo’s concerns.

Bottom line: While Tik Tok is significant in its own right, banning a goliath like WeChat signals that the US administration is not playing any games. With a broader policy in place, there is bound to be more Chinese companies caught in the crossfire.

Further Reading


Economics | Policy

‘Just Pennies on the Dollar, Abe’

While the West trades blows with China, Japan has been warming up in the corner. Prime Minister Shinzo Abe has offered 87 companies a total of US$653 million in subsidies to move Chinese production back home or expand into Southeast Asia – a small step demonstrative of the cracks appearing in China’s second largest trading relationship.

Just like US Trade Representative Robert Lighthizer’s called for American firms to pull away from China following a drastic shortage of medical supplies early on in the pandemic, Japan has sounded the alarm that its supply chains are also overly-reliant on Chinese production.

The 87 companies are able to decline Abe’s offer – a popular choice given the initiative has failed to impress the crowd. While some companies worry that a transition away from China would be uneconomical given many are ‘in China for China,’ others raise concerns that the program over-emphasizes manufacturing and under-targets R&D.

Bottom line: This is just the first part of Japan’s record economic stimulus package. However, Japanese firms’ reluctance combined with local Chinese governments’ efforts to coax companies into staying may return lower results than Japan had hoped for.

Further Reading


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Economics | Industry

Domestic Globetrotters Score Big for China

Chinese tourism stocks are taking to the skies despite Chinese globetrotters stuck firmly on land. The CSI Tourism Index finished up 22% over the month of July, with investors betting that the pandemic will continue to drive ‘pent up’ tourists closer to home.

China has added several ‘firsts’ under its belt over the past year: first to learn about the coronavirus, first to contain the outbreak, and first to reach economic recovery. It stands to reason then that China’s tourism industry would be the first to rebound. The question remains though, ‘what’s a globetrotter to do when half the globe is still in lockdown?’

Investors are doubling down on the answer. Being the first country to successfully contain the virus, most hotels had re-opened in China by June. Marriott, for example, had re-opened all its hotels in China by June 2nd – far earlier than its European counterparts. And, though hotels are still far from fully booked, booking prices have largely recovered while occupancy rates continue to climb from February lows.

But hotels and airline stocks only show one sliver of the pie. While the domestic tourism industry gains speed, tourists are drooling over duty-free shopping.

In places like Hainan, where authorities increased the yearly cap on duty-free purchases, sales of tax-free goods have skyrocketed. Remember the 22% July gain in the CSI Tourism Index we’d mentioned earlier? A pinch over 18% of that was driven by a 141% surge in China Tourism Group Duty Free Corp stock – placing duty-free stocks as the primary driver of tourism-related gains in China. Regardless, the remaining 4% of gains unattributed to duty-free stocks still stack up nicely against the broader Stoxx Global 1800 Travel & Leisure Index that is down 22.9% in 2020.

Bottom line: Things are far from normal for domestic tourism industry. Flights are still down and hotels still have space to spare. Surveys show that there’s still reluctance to travel – even within the Mainland. But all things considered, with Chinese globetrotters’ suitcases and wallets stuck at home, the domestic Chinese tourism industry is still the prettiest pig in the pen.

Further Reading


Economics | Markets

Sorry BB, It’s Not Me, It’s You

Baoshang Bank is packing its bāos and bags as it files for bankruptcy. The institution has come under intense scrutiny for risky investments, bad loans, and misuse of funds, with regulators firing the final kill shot early this month in their campaign to clean up the financial sector.

Baoshang Bank has long been the centerpiece of Chinese billionaire Xiao Jianhua’s Tomorrow Group Holdings through its role as the conglomerate’s financial war chest. But like so many oligarchs before, Xiao mixed business with pleasure – and used Baoshang funds as his personal piggy bank to do so. In one fell swoop in January, Xiao was charged with bribery and market manipulation while Baoshang was seized by the PBOC. At the end of 2019, Baoshang was roughly US$20 billion in the red with over US$41.75 billion of bad loans on its books.

Bottom line: From start to finish, the story of Baoshang’s rise and fall has been extremely public compared to the typical hushed handlings of other bank failures. Through the takedown, Beijing’s financial watchdogs’ message to the financial industry is twofold: institutions, take heed; oligarchs, bend the knee.

Further Reading


Economics | Industry

Food Fight or Combo Meal? KFC and McDonald’s Scramble for China

Internationally, McDonald’s has long been dominant, but in China, KFC reigns king. KFC has twice as many outlets, with experts having long explained KFC’s dominance through better localization efforts. While this argument holds water, the competitive relationship between the world’s largest fast food chains has also bolstered their mutual success in one of largest and most complex markets in the world.

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