TWS: July 26, 2021

Graph of the Week | Economics

China’s GDP Slows to Silver to Win the Gold

Last week, the National Bureau of Statistics published Q2 GDP results, reporting 7.9% y/y growth. Down from a shocking 18.3% in Q1 and slightly missing forecasts of 8.0% for Q2, the results still paint an optimistic picture for China’s economic recovery.

Equally encouraging is the country’s stabilizing consumer spending, which has been caught in a long game of catch up. While retail sales missed forecasted targets in the first two months of the quarter, June figures clocked in at 12.1%, beating expectations of 11%. Increased job security and stable macroeconomic conditions have encouraged consumers to loosen the grip on their wallets.

Still, it’s safe to say that nothing is ever truly safe. Looking forward to the latter end of the year, China’s growth will likely continue to slow, and key growth contributors like exports will take a hit. Nonetheless, policymakers are on it as the PBOC cut banks’ reserve requirement ratio (RRR) by 0.5% last week, a hint that Beijing is aware of what lies ahead.

Bottom line: Though Q2 saw a step down from the record levels achieved across all major indicators in the previous quarter, its 7.9% growth should keep Beijing on the course to reach the 6% annual GDP growth target set at the beginning of the year.

Business | Economics

Lying Flat to Fight the Man

“What do we want?” – “Nothing!” When do we want it?” – “Now!” A passive labor movement has been gaining traction on the Chinese web ever since a post about tangping, or “lying flat,” first appeared on Chinese 4chan a few months back.

In a country defined by the 9-9-6 workplace that expects employees to work from 9am-9pm 6 days a week, the symbolic word has gone viral among younger employees across China who are frustrated with a lack of work-life balance.

So, what do these angsty youth really want? Here’s what many within the movement are advocating for:

  • A minimalistic lifestyle.
  • No marriage, no children, no purchasing homes, and, of course, no overtime.

The “lying flat” movement is not the first of its kind – nor will it be the last. Many in the younger generation are protesting the economic conditions in which they’re entering the workforce:

  • Cost of living inflation is outpacing wage growth. China’s decades of unprecedented economic growth brought about the largest wealth creation event in human history; however, while this wealth continues to drive up the cost of living in China’s first-tier cities, slowing economic growth is keeping wages relatively stagnant.
  • Limited upwards mobility. Management positions across many industries are still occupied by the older generation in rigid top-down management structures.
  • Lack of labor protection laws. Labor-related arbitration in China is both expensive and time consuming, nor does it guarantee compensation. In most cases, workers accept the workplace abuse and simply find new employment instead. This is particularly prevalent in China’s burgeoning gig economy, in which it’s estimated that anywhere between 20-35% of the working-age population has already entered.

Bottom line: China’s younger generation has the dangerous combination of being the country’s most educated generation and most attune to the social power of the internet. Unsurprisingly, however, Beijing is unimpressed. With China’s ambitious development goals bound to its workforce, it’s not hard to imagine why policymakers are looking to nip the movement in the bud. Yet, to maintain peace among the ranks, expect to see reform across high-impact supporting industries while maintaining high pressure work conditions across China’s tech and other strategic industries.

Business | Policy

“The Great Decoupling”: A Saga Continued

Biden may be the new boss, but things so far aren’t looking too different in Washington. Following in Trump’s YUGE footsteps, 23 more Chinese companies were added to the US’ blacklist in July over concerns of Xinjiang-related human rights violations. While we’re counting, this marks the 4th time since 2018 that the US Department of Commerce has added to the Entity List.

The new wave of restrictions follows Beijing’s pivot towards Hammurabi-ism, as Chinese policymakers went biblical and released an eye-for-an-eye Anti-foreign Sanctions Law (ASL) in late June:

  • The ASL is a tit-for-tat style counter-sanctions law against individuals and organizations involved in carrying out sanctions against any Chinese firm.

Chinese companies affected by foreign (read: US) sanctions can then sue those intermediaries in Chinese courts for what will assuredly be a hefty sum:

  • This could hoist the financial burden of US sanctions off the backs of targeted Chinese companies and onto US MNCs.
  • At risk companies include producers in the semiconductor industry, clothing & apparel companies caught in the crosshairs of the Xinjiang cotton ban, and financial institutions that withhold services to blacklisted individuals and organizations.

Things are getting tense

Sanctions being levied left and right, oh my what a fright!

As Beijing calls the US blacklist a “senseless attack” on Chinese companies, Washington has raised warning flags over what is seen as increased operating risk for American businesses in Hong Kong. Some recent portentous developments have been:

  • The recent shuttering of Jimmy Lai’s Apple Daily, a pro-democracy newspaper in Hong Kong.
  • Growing cybersecurity concerns for US data held in Hong Kong.
  • Draft laws that would form one of the strictest anti-doxxing privacy regimes in the world.
  • The Anti-foreign Sanctions Law that could be extended to Hong Kong-based companies under last year’s far-reaching National Security Law.

This all sets an uncomfortable atmosphere for US firms with operations in HK, where tensions are already mounting due new policies that target foreign companies and their employees. For foreign investors and companies on the ground, navigating the US-China minefield may prove a tough cat to skin.

Bottom line: Should tensions continue to grow – which is likely to happen – Chinese policymakers will be cornered into tapping into the new ASL or risk looking like a paper tiger. We expect the harshest punishments to be levied on US policymakers (i.e. unenforceable), while MNCs caught in the crossfire get symbolic slaps on the wrist for appearances. Beijing knows it must be careful to tread the line between swinging its economic might against these companies while still providing a sufficiently stable operating environment to deter firms from accelerating their supply chain exodus out of China.

Business | Industry

Weighing the Opportunities & Risks Within China’s Biopharmaceutical Industry

China’s biopharmaceuticals is an often overlooked yet quickly growing industry. In recent years, various regulatory reforms have transformed the industry, nurturing it into a global competitor. Many foreign investors are interested in taking advantage of the local industry’s streamlined product registration process and robust development incentives. However, there are still risks that investors should remain cognizant of when planning their entrance strategy into the Chinese biopharmaceutical market.

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