TWS: Dec. 7, 2020

Graph of the Week | Markets

Wall Street and Washington Take a Break

Capitol Hill is taking the fight back to financial markets, and on Wednesday the House passed “The Holding Foreign Companies Accountable Act,” which could potentially delist unruly Chinese firms from US stock exchanges. 

The legislation easily passed through the Senate in May and now only awaits President Trump’s signoff. News of the bill shook markets, and the Chinese index BKCN underperformed the S&P 500 by 6% at the end of last month, despite having doubled the S&P’s performance YTD.

Despite the short-term tremors, Wall Street is breaking from Washington. Even while Capitol Hill has sought to remove Chinese equities from pension funds and now potentially delist companies, investors are increasingly upping their stakes in Chinese businesses. Foreign investors’ holdings in Chinese equities and bonds have more than quintupled in the past five years alone.

Bottom line: A September survey by HSBC Qianhai Securities showed that almost two-thirds of the 900 global institutional investors questioned are planning to increase their investment in China by an average of 25% over the next year. Given the sharp recovery of the Chinese economy and Beijing’s push to further open financial markets, most investors are willing to face these new political risks.

Finance | Markets

EUR the Apple of My Eye

Back in August, we confidently declared “alchemy is impossible” and made the bold assumption that money couldn’t be created out of nothing. Boy, were we wrong…

Negative interest rates have allowed Beijing to raise Euros at a discount, with the PBOC plucking the low-hanging fruit via a €4 billion bond issuance.

European investors are smacking their lips over €750 million of Chinese bonds offered at a -0.15% yield. While already favorable to other comparable options like German bonds at -0.50%, the deal is even sweeter as the European Central Bank (ECB) floods the market with cash, which will further lower rates and drop the value of the Euro. By comparison, the PBOC’s -0.15% looks like a golden apple waiting to be picked as the gap between it and ECB yields widens.

Bottom line: For China, this offers a delicious win-win situation. Beijing can now raise foreign capital while getting paid at the same time. The investment can be stored in a vault at no cost (netting a 0.15% gain), lent out at higher rates elsewhere, or bought back at a discount should the RMB continue to strengthen against the Euro. Meanwhile, the PBOC has found an untapped demand that will allow it to dilute USD dominance in its foreign exchange holdings.

Industry | Technology

They See Me Rollin’, They Droolin’

For all our fried chicken fanatics out there, rejoice! Chinese KFCs are the first to roll out self-driving cars for the sole purpose of delivering bucket after bucket of original recipe to those looking to finger-lick their way through the pandemic.

Filled to the brim with fast food, food trucks the size of Mini Coopers are popping up across Shanghai’s busiest streets to sling savory snacks to hungry citizens, contact-free. At the most delectable intersection of self-driving cars and smart-locker technologies exists the latest innovative idea to come out of the COVID era.

Hailed as the five-star General of localized marketing in China’s fast-food battlefield, KFC began its fight for the Chinese consumer in 1987 when it opened its first branch in Beijing. It now operates almost 6,000 restaurants—2,000 more than in the US—in more than 1,100 cities across the country.

Bottom line: On Day 1 in ‘Business 101,’ students learn the concept of “Adapt or Die.” Innovations like this make it clear to see how the pandemic is forcing companies to adapt to shifting consumer habits during these unprecedented times. What remains to be seen is to what extent a concept from Day 2 – “First Mover Advantage,” will help extend the Colonel’s reign in the market.

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Business | Policy

Cracking the Case on Innovation

Patent infringers, beware. China is on the hunt for anyone looking to violate intellectual property (IP), and has placed a bounty of 5 times the holder’s loss in punitive damages for those copycats who skirt the line.

After 12 long years, the country has finally made an update to China’s Patent Law (CPL) to strengthen IP protections. Super sleuths may be wondering: ‘if Chinese IP law has been such a longstanding point of tension between Beijing and the world, why is China just now picking up this cold trail?’

Here’s a hint: research. Beijing knows that the equation—tougher protections + local enforcement = incentive for innovation—is the secret formula for continued breakthroughs in key industries like technology and pharmaceuticals. Sweetening the deal is peace of mind for foreign investors looking for opportunities in emerging industries, and a warm invitation to foreign companies looking to collaborate with the Chinese market.

Bottom line: With this update, China is making ground on its central priorities of self-reliance, strategic innovation, and foreign investment inflows. All clues now point to regional discussions on localized enforcement and a potential refresh to IP-related case arbitration practices.

Economics | Finance

Curtain Call As Taiwan Joins the Trade Troupe

Taiwan is the latest member to join the troupe dubbed as an ‘alternative to China’s Belt and Road initiative,’ and for its opening act it will use high-yield bonds, backed by political support from the US, to attract Taiwanese investors to the show.

With 16 countries and the US’ International Development Finance Corporation as its ringmaster, the group aims to finance infrastructure development projects for developing countries in Asia and South America. Though still in its infancy, the initiative has already raised US$4 billion for projects across the Indo-Pacific.

The biggest difference between this and China’s OBOR? Loan underwriters. While OBOR deals are largely funded by Beijing through state-owned enterprises, the US and its co-stars will look to the markets for increased transparency while raising capital.

Bottom line: This initiative not only provides an answer to the increasingly vocal worries over Beijing and its opaque debt diplomacy practices, but also pits the US and Taiwan on the tightrope against China’s global infrastructure spree. Given the widespread collaboration between traditional US allies in the region, it’s unlikely that the incoming Biden administration will close the curtain on the program anytime soon.

TCG’s Best of the Best

Stay Smart With TCG’s Shuǎng Stories

To bring you the freshest China news on the block, we read. A lot. Here are some of our crew’s favorite reads of the week:

Jack Ma, P2P Lending, Responsibility, Legacy

Where most coverage zigs, Kevin Xu zags in his alternative perspective on Jack Ma’s grand speech at the Shanghai Bund Summit. Instead of the humdrum story of Ant’s likely drop in future IPO valuation and forgone investment opportunity, Kevin discusses the potential impact of Ma’s bold call for regulatory change in China’s financial system to create a more equitable and open playing field for all. Read more here.

Chinese Fintech, Techfin and Digital Currency

With the trial launch of China’s Central Bank’s Digital Currency (DCEP), hype around Ant’s blocked IPO, and other fintech IPOs on the horizon, there’s never been a better time to get smart on China’s burgeoning fintech scene. Check out an engaging interview between Dao Insights and Yassine Regragui to learn about the latest and greatest in this dynamic industry. Read more here.

Finance | Policy

What Ant’s IPO Flop Means for China’s Consumer Finance Industry

In the run-up to Ant Financial’s behemoth IPO, the fintech giant’s suspiciously light balance sheet triggered the release of draft rules by Chinese regulators that would significantly impact the firm’s operating model. Consequently, Ant’s IPO was delayed, and investors went home disappointed. While regulators’ concerns were not unfounded, the consequences of these new regulations resurface big questions about the future of China’s consumer finance industry.

Full Article

Further Reading

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