TWS: Jan. 25, 2021

Graph of the Week | Markets

Breaking the Bank for Baijiu

Kweichow Moutai, a no-name spirits distillery to the average foreign investor, is a legend in Chinese equity markets. The company has one and only one type of product: high-end baijiu. Baijiu, for those fortunate enough to have never crossed paths with the stuff, is a clear spirit popular at Chinese dinner tables, though at 80-120% proof, its lip-numbing taste and paint stripping smell has haunted many an expat.

Moutai gains have consistently outpaced inflation, GDP, and almost every equity index in China. With a market cap of US$400 billion, Moutai is now the third largest company in China’s secondary market, right behind Tencent and Alibaba.

For many, it’s inconceivable that an alcohol producer could become the third largest company in China. Nonetheless, company profits continue to soar. Moutai’s wholesale price increased 47% to US$400 in March 2020, and many customers still complain that they can’t find the opulent baijiu for under US$465.

Bottom line: Moutai’s story is an outlier, but at a time in which new-age tech giants cover headlines across mainstream financial news, it serves as a valuable reminder of the growth and stability of China’s consumer sector, particularly among cultural goods like baijiu that defy booms and busts.


Clear Waters and Blue Skies Ahead for China’s Economy

Watch out America! Forget 2033 – China’s economy is expected to sail past the US economy earlier than expected. New estimates now predict the top two economies to swap places in 2028.

What’s propelling China’s swift gains? Three Cs: COVID, [de]centralization, and consumption.

  1. COVID: China’s early containment of the virus has kept it afloat as it became the first major economy to flip the tables and see positive growth;
  2. [De]Centralization: China’s economy is split between a centralized layer of SOEs in some industries and free markets in others. SOE giants are driving growth through economies of scale in traditional industries abroad while free markets in fast-paced arenas propel innovation full steam ahead at home;
  3. Consumption: China is projected to become a “high-income economy” by 2023, which when combined with the world’s third largest consumer market will help steer the country during its transition into a consumption-based economy

Bottom line: Meanwhile, the pandemic is anchoring the US economy. With the US economy expected to grow at 1.9% while the Chinese economy averages 5.0% between 2021-30, the winds of fortune are blowing in China’s favor as it picks up speed in the regatta for top economic spot.

Industry | Technology

Mr. Xi Finds a New Teacher’s Pet in Edtech

Pencils down everyone, it’s time to get educated on edtech! Chinese officials and investors are doling out extra credit to the industry after it grew by nearly 10% to US$70 billion in 2020.

At the height of the outbreak in China, 300 million students—a dash under the entire US population—made the switch to online learning in just seven days. Edtech has since flourished; in 2020 alone, the industry in China raised nearly US$7.5 billion while housing three out of the world’s top five largest edtech unicorns.

Officials and investors are taking diligent notes. For Beijing, edtech is seen as the “great equalizer” by offering the chance to balance disparities between urban and rural education systems. Meanwhile, investors are giving out gold stars to edtech’s investment opportunities given the industry’s widespread central support and large semi-captive market.

Bottom line: Recognizing the importance of a US$1 trillion domestic education sector to its broader economy, Beijing was one of the earliest advocates for edtech solutions. Early support for this star pupil was instrumental for a quick transition to online learning during the early days of the pandemic and will help China set the curve in addressing societal inequalities over educational opportunities.

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Markets | Policy

Chinese Telecoms Call for Clarity

The NYSE turned heads this month as it took the Cha-Cha-Slide to its trading floor in the lead up to its delisting of three Chinese telecom companies.

The NYSE’s dance came amid an executive order cracking down on US investment in 35 firms linked to China’s military. The first move in the exchange’s delisting routine was to select China’s big 3 telecom companies – China Mobile, China Telecom, and China Unicom to give the boot, but the exchange then pirouetted 180 degrees after taking cues from regulators to leave the companies untouched. Shortly after, the NYSE took it from the top again and reversed its decision. Trading in the Chinese telecoms finally winded down on January 11.

What’s behind the NYSE’s confounding choreography? Apparently, the administration’s sudden directive threw US regulators into disarray, who were then unable to pass down guidance to financial institutions on how to implement Trump’s order – which led to confusion at US exchanges.

Bottom line: The heated dance between US regulators and US-listed Chinese companies has been moving at a dizzying pace, and both sides are holding their breath to see what moves President-elect Biden will bring to the floor.

Industry | Policy

Domestic NEVs Trail Tesla’s Tailwinds

China’s new energy vehicle (NEV) market continues to electrify consumers as competition shifts into overdrive in 2021. The reason for the increasingly heated race? California-headquartered Tesla recently slashed prices on some of its vehicles.

In a market that accounts for 45% of all the world’s EV ownership, the stakes are high for NEV producers in China. Over the past week, Tesla priced its locally manufactured Model Y at CN¥339,999 (roughly US$52,000), or nearly 30% of its original selling price – which led to the company’s website crashing from record-setting traffic as Chinese buyers raced to purchase the discounted electric mid-size SUV. The Model Y price cut inflates pressure on local competitors XPeng, Nio, and Li Auto, who despite the increased competition and diminishing state subsidies, saw sales surge last year.

Bottom line: Beijing originally eyed 2020 as the year to ween its nascent domestic NEV industry off central support, but reversed course amid the pandemic. Subsidies were extended, though only to NEVs under CN¥300,000 – a threshold that green-lit most domestic producers while excluding Musk’s catalogue. Still, Chinese NEVs will need to keep their eyes on the road ahead as Tesla brings the heat with discounts of its own.

Business | Policy

Veiled Intentions & Long-Term Mindset: Beijing Rejects Market-Oriented SOE Reform

A recent string of high-profile SOE defaults have revived hopes for market reform of China’s inefficient state sector. However, despite appearances to the contrary, Beijing continues to push for greater state control over the sector and an augmented role for SOEs in strategic industries and initiatives. As a result, the performance of China’s SOEs has stagnated and the state sector remains a burden to near-term economic growth.

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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