TWS: Feb. 15, 2021

Graph of the Week | Economics

A New Year, Same Story

In most regards, things seem to be quiet on the economics front for China. However, sneaking through the cracks are rumblings over diverging price indicators. China’s producer prices rose for the first time in a year in January, hitting 0.3% y/y growth. On the other hand, core consumer prices – excluding food and energy – fell 0.3% y/y, marking the Core CPI’s first decline in more than a decade.

Economists speculate that the divergence comes from investors’ change in their risk appetite. Until recently, China’s economy has enjoyed an abundance of liquidity, and commodities have been a good place to park cash. The shift has not gone unnoticed, though, with Xiao Fu, head of commodities research at BOCI Global Commodities, noting an “overwhelming optimism toward commodities this year.” The bullish commodity market has pushed the prices of key industrial inputs like copper and iron higher, leading to a rise in PPI.

Bottom line: As for the drops in the CPI, the holiday season plays a role, but there are still concerns that weak demand is exerting influence as well. All in all, producers are producing at a higher cost, while consumers are consuming at a lower cost, pointing to the continued unbalanced growth of China’s economy into early 2021.

Industry | Technology

PayPal’s Not Playin’ Around

If cash is king, then PayPal is plotting a coup. After quietly acquiring Chinese digital payment company GoPay, PayPal just made history as the first foreign company to provide online payment services in China.

No matter how you slice it, digital payments are a big deal in China. The country boasts the largest digital payments transaction volume and ranks top three in the world for percentage of cashless transactions across 776 million mobile payers domestically.

For a market this large, industry competition is surprisingly sparse. Big name players like Alipay and WeChat Pay command 90% of Chinese digital payment market share, with a number of smaller players fighting for the scraps. Instead of rolling the dice, PayPal plans to target Chinese entrepreneurs in overseas markets – an area where Chinese giants don’t reign king.

Bottom line: With cross-border B:C e-commerce expected to reach US$4.8 trillion by 2026, even a small piece of the pie will earn a pretty penny. PayPal already has a strong foothold in the global payments market – if it can charm overseas Chinese businesses with the stamp of Beijing’s approval behind it, PayPal may be on its way to becoming China’s first foreign financial darling.

Economics | Finance

The Not-So Debonair Debt Trap Gains Its Wings

In China’s dance with debt, bankruptcy courts have become the ballroom and HNA Group the latest belle of the ball. The Fortune 250 company has filed for bankruptcy after getting caught flat-footed in debt.

Once a humble airline, HNA Group is now well-versed in many dances. The conglomerate spans seven industries and is notorious for its acquisition-hungry past. But, as its eyes outgrew its stomach, it brought on too much debt to finance its purchases.

After a sharp downturn in revenues in 2020, HNA found itself short on US$27.5 billion in outstanding bonds and US$20 billion in loans despite selling stakes in major brands like Hilton and Swissport. It’s now in a waltz with regulators over its future – and while some want to restructure the Group, others are concerned about shady historical financial practices and may instead opt to let it go belly up.

Bottom line: Beijing’s tango to deflate domestic debt will be one of its most challenging choreographies yet. Relaxed lending and heavy central stimulus from the pandemic are compounding on top of preexisting systemic bad debt, which have begun exposing financial cracks that will require the dance of a lifetime by all involved—regulators, institutions, and companies—to shimmy out of.

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Economics | Industry

Shenzhen Housing: A Tale of Fire & Ice

“Cold” is not often used to describe the southern city of Shenzhen, but it is the best word for its commercial real estate market. Rent for top offices in the tech hub have been dropping for 2 straight years as vacancies remain high.

Shenzhen is best known as the Chinese Silicon Valley and plays home to internet giants like Huawei and Tencent. Yet, despite the blazing growth of many internet firms during the pandemic, the city’s office vacancy stood at a chilling 25.1% by the end of 2020.

So, landlords are trying to warm up to nouveau riche with flexible arrangements and customized facilities. Most recently, the famed architecture firm, Zaha Hadid Architects, unveiled designs for a one-of-a-kind office space in Shenzhen’s new business district, linked by a sweeping bridge connecting attractions like a hotel, convention center, retail space, and galleries to attract tenants.

Bottom line: It pays to be a loaded company looking for an office in Shenzhen right now, because who doesn’t want to be wined and dined with sea views and galactic-looking architecture? But, with the last decade bringing a fiery rise in the cost of living and a hot residential real estate market putting property ownership out of reach for most, Shenzhen is losing out to more affordable cities also courting high potential companies.

Policy | Trade

Katherine Tai: A Look at Biden’s Tough New Trade Representative

Boasting bipartisan support and a track record of effective work in US-China relations, US Trade Representative Katherine Tai shows unique promise for repairing trade relations that have bottomed at all time lows. Given her support in Washington and emphasis on cooperation over competition, Tai’s confirmation may mark a turning point in US foreign policy on China.

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