TWS: July 9, 2020

Graph of the Week | Economics | Policy

One Country, 1.5 Systems for Dummies — a Brief Dive into Hong Kong’s Fall

Given the recent brouhaha over the new national security law in Hong Kong, we thought we’d take a moment to focus on what makes the law so controversial, why it happened now, and its implications on HK, China, Taiwan, and the rest of the world. Okay team, BREAK!

One Country, Two Systems 101

The One Country, Two Systems system of governance was formulated by Deng Xiaoping – the man who opened China to the world in the ‘80s and coined the term ‘socialism with Chinese characteristics.’ At its core, the governance framework allowed for lost Chinese territories to reunite with the Mainland while retaining their own economic and administrative systems.

The model was meant to be a solution to China’s ‘Taiwan problem.’ Since the country/province (it’s complicated, folks) separated from the Mainland in 1945, China has spent a staggering amount of resources into paving a road for reunification and restoring the Middle Kingdom to its former glory before foreign powers uprooted the country in the 19th and 20th centuries.

So, when Hong Kong was returned in 1997, China saw an opportunity to put the framework on display for Taiwan to prove how harmonious a reunification could be.

Hong Kong Gradually Eclipsed

The Pearl of the Orient also became the de facto launching point for foreign businesses that wanted access to the vast Chinese market, but also valued the familiar business culture, transparent legal system, and favorable trade environment of the former British colony.

FDI soared as multinationals from across the globe scrambled to set up their Asian headquarters in the city. Between 2003-15, inbound investment totals skyrocketed by 875%, which then drove consistent GDP growth and earned the city significant standing in domestic and foreign policy decisions.

But all good things come to an end, and as China began to transition from a production economy to a consumer economy, Beijing’s priorities shifted towards developing a more domestic-driven economic framework.

By attracting vast sums of FDI through Hong Kong, then trapping it within its borders via strict capital controls, China was able to direct huge inflows of liquidity towards first and second tiered cities. Ultimately, China’s cities quickly became megalopolises that eclipsed Hong Kong in GDP size and growth rate.

Removing the Liability

To reduce reliance on the city, Beijing began regionalizing Hong Kong’s economy into the greater Pearl River Delta – a hub of 9 cities in Guangdong – which cannibalized many of Hong Kong’s unique advantages. With FDI now distributed among large Mainland cities, comparatively lagging growth, and shifting national priorities, the role that Hong Kong would play in China’s future was up in the air.

The city’s success as a model of the ‘One Country, Two Systems’ framework remained important as Beijing’s hunger for reunification with Taiwan grew. The Mainland became increasingly active in Taiwanese politics to support candidates that promoted stronger cross-strait economic integration.

Meanwhile, Hong Kong’s pro-democracy campaign caught fire during 2014’s umbrella revolution, which helped spark increasingly divisive Taiwanese elections around the topic of cross-strait relations and culminated in the re-election of pro-democracy candidate Tsai Yingwen – who severely undermined Beijing’s ambitions.

When all was said and done, Beijing saw a city that had become a liability to its central priorities – but lacked its former influence in domestic affairs. The answer? A sweeping national security law to bring the city back into the fold.

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Economics | Policy

Take That, Mom & Dad

In the biggest win for the digital OG lifestyle since teen gamers started taking home millions from Fortnite, the Chinese government is now classifying competitive gamers and bloggers as “employed.”

In late 2019, Beijing set nationwide restrictions via curfews for online gamers and limitations on the total time that netizens can spend gaming per day. Several gaming companies were also required to pull or cancel development on games that could be foreseen as ‘too addictive’ for one of the world’s largest gaming market.

But just as the pandemic has flipped everyone’s lives upside down, so too have Beijing’s views on gaming reversed. Our guess? It’s all about that job rate, baby. Labeling recent graduate gamers, freelancers or e-commerce shop operators as workers make the country’s unemployment rates look better on paper, and by extension, artificially boosts the country’s economic indicators.

Bottom line: With more graduates flooding into a market with fewer jobs, China is worried about unemployment and the drag it has on an otherwise recovering economy.

Further Reading

Economics | Industry

Pharma Bro’s Worst Nightmare

In a nod to Beijing’s top economic initiatives, tech and scientific workers have overtaken finance professionals as the highest-paying jobs in China. Tech and healthcare have been designated as cornerstone industries for the country’s future economic drivers, with the government throwing its full weight behind the industries’ developments.

Beijing’s priorities have driven mountains of public and private capital to the industries – and the impact has been noticed. With top candidates prioritizing opportunities at China’s tech goliaths, financial institutions are struggling to attract top talent…an issue only further exacerbated with 2019 tech employee salaries averaging nearly 23% higher than those of financial professionals. Medical workers’ wages also edged above the financial industry’s ~US$19,000 average annual wages.

Bottom line: China is looking inward to further boost domestic R&D spending while initiating policies to maintain its global leadership in technology and smart manufacturing innovation, which is driving capital and talent into its tech and healthcare industries.

Further Reading

Business | Industry

The Great Tariff Exodus Has Begun

Pack your bags honey, we’re going to Indonesia! Alpan Lighting products is the latest manufacturer to shift its production away from China, choosing to settle in central Java and invest a cool US$14 mil to build a new factory there.

Companies like Alpan have taken off their rose-tinted glasses and faced the cold hard reality: straggling tariffs from the US-China trade war are not ending anytime soon. With China’s rising labor costs already smudging the metaphorical glasses, rising geopolitical tensions are making countries like Vietnam, Thailand, Indonesia, and Malaysia more attractive by the minute. It’s not personal, China – just good business.

Bottom line: Companies have always been exploring cheaper ways to produce their goods – but are now also assessing how to manage political undercurrents. An exodus may also be the needed nudge for Chinese factories to continue shifting towards higher-valued added production, further aligning with Beijing’s ‘Made in China 2025’ policy.

Further Reading

Economics | Policy

P2P Lending on Life Support After COVID

China’s once great peer-to-peer (P2P) lending industry has returned to the headlines as Hangzhou’s largest microlender, Weidai Financial Information Service Co., is busted for illegal fundraising. Weidai will face a probe and potential asset seizures by local authorities, and borrowers are being urged to quickly repay outstanding loans or risk dings to their social credit scores.

Beijing had led a major crackdown on China’s questionable shadow banking industry between 2017 and 2019, with the PBOC beginning to inhibit business licenses for new P2P lenders in late 2017. Since then, the government has cracked numerous bad eggs for fraudulent activity – of the 2,680 lenders at the end of 2016, only 139 remained in March 2020.

The industry has succumbed to a flurry of intense regulatory scrutiny…and the outbreak may deliver the knockout punch. While Beijing advised surviving firms to transition into small cash loan providers or intermediaries, the pandemic has inhibited their ability to pivot.

Bottom line: By the end of 2019, microlending accounted for less than 2% of national lending to SMEs – and with the way things are going, this blip may just fade from the radar.

Further Reading

Finance | Markets

The Rise of the Renminbi: The Reality of Bilateral Swap Agreements

In the third article in “The Rise of the Renminbi” series, TCG explores the role of bilateral swap agreements (BSAs) in China’s RMB internationalization ambitions. Despite Beijing’s hopes that the initiative would foster increased RMB-denominated trade, results have been lackluster thus far. Regardless, BSAs may play an increasingly important role in the sustainable offshore circulation of the redback over the long-term.

Full Article Here

Further Reading

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