TWS: Jan. 18, 2021

Graph of the Week | Economics

A Dash of Reform Brings Home the Bacon

China’s foreign exchange reserve piggy bank has been growing fatter as the USD slumps against the RMB and countries across the globe go ham for Chinese pandemic-related exports. In November, Chinese reserves climbed by more than US$50 billion to US$3.17 trillion, settling at their highest level since 2016.

Meanwhile, the RMB’s race higher may just be starting. As the RCEP and CAI trade deals are penned into action, Beijing is gradually freeing the RMB to ‘float’ more in international markets. The PBOC also announced a new settlement rule that will take effect in February, which will cut red tape over RMB trade restrictions and beef up global demand for the neglected currency.

Bottom line: Despite Beijing’s best efforts to internationalize the RMB through initiatives like OBOR, traders have shied away from the currency over concerns on China’s tight capital controls and limited international liquidity. With a freer valuation and more robust trading and settlement system for the RMB, Beijing expects traders to wake up and smell the bacon as stronger demand drives up the yuan and fattens that piggy bank into a hog.

Economics | Trade

A Toast to 2021 and Beyond

Chinese officials had a lot to raise their glasses to in the final months of 2020. After penning the world’s largest free trade agreement with the RCEP, Beijing also toasted another diplomatic victory when nearly a decade of negotiations concluded with a new EU-China trade pact on the cusp of New Year’s Eve.

The EU-China Comprehensive Agreement on Investment, or CAI, is one of China’s most ambitious agreements yet, opening access to EU investment in areas like telecommunications, manufacturing, advertising, and financial services. While it does not cure all the ailments plaguing the EU-China relationship, the agreement does address a number of trade complaints, including forced technology transfers, transparency in state subsidies, and joint venture requirements.

It’s all about timing

CAI is a big deal (pun intended), and highlights China’s efforts to portray itself as a torchbearer of globalization and open markets during a period defined by isolationism. While CAI’s roots date as far back as 2012, the stars have only just aligned for EU and Chinese officials to pen a deal.

The past eight years have brought winds of change for Chinese industries, who have scaled with the country’s breakneck growth. Now confident in its domestic giants’ abilities to defend their home turf, Beijing has begun prioritizing its hunt for foreign capital over protecting its once-fledgling markets.

Meanwhile, four years of friction with the US have been capped by a pandemic that continues to challenge European economies. CAI will pave inroads for stronger EU-Chinese trade while leveling the playing field for EU businesses in suit with other pacts like the RCEP and the US-China Phase One trade deal.

One step forward, two steps back?

Critics of the deal are skipping the celebrations, though, over concerns that CAI is evidence that Beijing can continue to silence accusations over forced labor and human rights violations by flexing its economic muscles. 

Bottom line:  CAI marks a landmark in EU-Chinese relations, but Brussels has taken a risk by penning the agreement on the eve of a changing White House. With the stroke of a pen, Beijing not only advanced its goals for foreign investment and struck a blow to European critics of its human rights violations, but more importantly, also anchored the EU’s ability to meet Biden’s goals of coordinating a more hawkish approach to China between the two transatlantic allies.

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Economics | Trade

All Magic Comes With a Price

Voilà! In its latest act, China has made the economy of an entire country disappear after revising its 2019 economic growth from 6.1 to 6.0.

How much of a difference can 0.1% make? As it turns out, a lot. 0.1% not only makes a world of difference come the end of the semester (good luck convincing your teacher to bump that 89.9% up to an ‘A’), but by cutting its numbers, China took a page out of Houdini’s trick book and made US$67 billion, or an economy the size of Ghana, disappear before the world’s very eyes.

While no good magician reveals their secrets, there’s no illusion hiding the sleight of hand behind China’s act (hint: it rhymes with “frayed door”). Manufacturers had been hit hard at the height of the US-China trade war in 2019, as both countries slapped tariffs worth US$550 billion on Chinese goods. The true economic impact is still being unraveled.

Bottom line: While revisions to GDP are not uncommon, China’s reduction illuminates the very real impact of the trade war on the nation. With a possible Act II to the US-China trade dispute as the incoming administration takes the stage, economists may soon find themselves sitting in the audience for more vanishing acts in the future.

Business | Policy

Santa Brings No Coal for a Naughty China in 2020

It’s lights out for China as cities around the country go dark to save electricity. Coal buyers have found themselves jostling for a spot in line as roaring factories and frigid temperatures heat demand for the resource in scarce supply.

While China may be a top dog in green technology development, most of the nation’s power is still generated by coal. During the pandemic, Beijing had reduced coal imports to spur domestic activity, while officials later banned coal imports from Australia, the world’s largest coal exporter, in December.

However, surging factory activity from a recovering global economy and colder-than-normal winter temperatures have strained state grids, while domestic miners have struggle to singlehandedly meet the needs of an entire nation.

Bottom line: While some factors behind the coal shortage are out of Beijing’s control, many are direct repercussions of decisions made by top officials to flex the muscles of China’s political economy. With MNCs around the globe already re-evaluating their reliance on Chinese supply chains, any further disruptions to production could warm business leaders to the idea of diversifying away from China sooner rather than later.

Economics | Technology

E-commerce Lends a Hand to Eradicating Rural Poverty in China

In 2015, President Xi committed to eradicating rural poverty by the end of 2020, and despite the economic distress brought on by the pandemic, China declared its momentous victory. While a mix of state policy and private sector support were key to the campaign’s success, digital technologies such as e-commerce played a pivotal role in improving the quality of life in rural areas and have brought China one step closer to realizing a moderately prosperous society.

Full Article

Further Reading

China Business Newsletter

TWS: Oct. 18, 2021

China Business Newsletter

TWS: Oct. 11, 2021

China Business Newsletter

TWS: Oct. 4, 2021

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