Graph of the Week | Economics | Trade
“You’re only as strong as your weakest link” may be the new CCP slogan. Since 2007, China has increasingly reduced its exposure to foreign markets through trade, investment, and capital, and instead prioritized economic self-dependency – all while nurturing global reliance on Chinese supply chains.
Avid TCG followers by now know that imports were down…way down…in the first five months of the year. But consumer spending is also on the rise, with May retail consumption only lagging 3% year-on-year. To split the gap, Chinese factories have proportionately ramped up production to meet domestic demand, as shown by year-on-year output growth in consumer products like automobiles (+2.7%), computers (+27.5%), and TVs (+5.3%).
The end effect is that Chinese companies are replacing their ailing foreign competitors – helping advance Beijing’s goals of further reducing foreign exposure while potentially defining a new staging point for a permanent focus on self-dependency.
Bottom line: China is all-in on its “Made in China 2025” plan, which will prioritize a transition towards high valued-added products. If successful, China may shed its tech import reliance on the US and Europe; if unsuccessful, its WTO-unfriendly subsidies and IP acquisitions may drive its trade partners further away.
Economics | Policy
Hong Kong Trumps China No Longer
Ladies and gents, the time has come. After a long buildup, President Trump has issued the anticipated executive order to terminate Hong Kong’s special status. If this is news to you, check out our explainer series from last week on how we got here.
“No special privileges, no special economic treatment and no export of sensitive technologies” will become the new normal for HK, as revoking the city’s preferential status will affect a variety of areas from travel to investment, and everything in between.
Complementing the EO, Washington also slipped in a hard-hitting bill that will penalize Chinese officials and banks involved in ‘undermining HK’s autonomy’ with sanctions.
Bottom line: Because the timing and specifics of the bill remain murky, the long-term effects of the response is unknown. That said, with the current and future trade deals up in the air amid a host of looming geopolitical tensions, US-China relations are likely to remain volatile with no end in sight. Keep checking in to see how the global business environment is affected – but spoiler alert – it won’t be pretty.
Economics | Trade
It’s All Just Dust in the Wind
January 2020 kicked off one of the most unique years in recent history – and what was once a key achievement is crumbling to the ground. The USDA claimed that the US-China phase one trade deal purchase commitments are unrealistic while Trump confirmed that any possibility for a phase two deal is slipping away.
The landmark goal in the phase one deal committed China to increase its purchase of select US goods to the tune of US$200 billion between 2019-21. What was already an ambitious target saw the scale flipped as the outbreak spread. The annual change of monthly import values in China remained deep in negative territory over the first five months of 2020, with May monthly imports down 16.7% year-over-year as factory doors remained shut across the globe.
Bottom line: As the global economy began its plunge before the ink from the deal had dried, China’s ability to meet its commitments was always a long shot. Alas, among the COVID outbreak, murder hornets, and giant Saharan dust plumes all within the first months of 2020, bleak prospects for the trade deal may just be a drop of water in an endless sea.
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Economics | Industry
Belay That, China!
Flooded by an ocean of central support, China has taken control of the seas. China’s shipping industry is thought to have received a staggering US$132 billion of assistance between 2010 and 2018, displacing global competitors through direct financing and behind-the-scenes support for domestic players.
And it’s working. China controls the world’s 2nd largest shipping fleet by gross tons and constructed over 1/3 of the world’s shipping vessels in 2019. It also produces 96% of the world’s shipping containers, which are likely to return to the country via one of its 7 of the 10 busiest ports in the world.
Despite its success (and precisely because of it), there may be choppy waters yet for China’s commercial maritime industry. With the dominant industry still using forced tech transfer, state-sponsored hacking, and anti-competition consolidation practices, global competitors are beginning to create waves over unfair Chinese trade laws.
Bottom line: Beijing understands that state-backed intervention may just be the secret sauce to its competitive political economy both at home and abroad. We’ve seen a renewed focus by China to dominate global industry through domestic giants recently…the question remains, ‘How will foreign governments respond?’
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Finance | Markets
It’s Gettin’ Hot In Here…
In true high school fashion, President Xi appears to be copying notes from his bff, Mr. Trump. As Beijing tries to portray economic strength, state media is advocating for a “healthy” bull market to drive domestic recovery efforts…and it’s working. The Shanghai Composite has soared over 14% with trading volumes reaching five-year highs over the past two weeks.
But in an unexpected twist, Chinese investors are turning to margin loans to invest – borrowing from institutions to double down on positions – exposing themselves to extreme risk in the current volatile environment. Over 85,000 new margin trading accounts have been opened since June, supporting an estimated ~12% of daily trading volumes transacted on margin.
The current run is reminiscent of China’s 2015 market crash. State media had then also encouraged investors to use margin loans to pile into stocks that swelled over the course of a year, only to crash and wipe US$5 trillion in market cap.
Bottom line: China’s financial regulators sense the looming danger. They’ve begun cracking down on unqualified brokerages and recently published a list of platforms that are illegally offering margin finance. Expect state media to take a chill pill while regulators look to further reduce market heat to a simmer.
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Economics | Finance
Cash Still King in the Middle Kingdom
Chinese consumers have found a loophole to gain cheaper access to the Benjamins (‘Maos?’) – with the banks left footing the bill.
Consumers are conspiring with merchants to skirt the high rates on cash advances from credit cards through phony transactions. With a swipe of a card, the cardholder walks away with cash in hand and a charge by the merchant. Many then pay off the balance on one card with cash borrowed from another. With multiple cards, consumers can borrow even more, rolling over debt from one card to another in a Ponzi-esque fashion – stockpiling cash in the meantime!
But just as Ponzi’s scheme caught up with him, consumer credit default rates are skyrocketing in China. March 2020 credit balances at least 6 months overdue reached ~CN￥91.9 billion (US$13.2 billion), up 23.7% from the end of 2019 and its second highest figure since 2008. The PBOC has taken note, releasing draft regulations in June 2020 that urged banks and third-party payment companies to tighten supervision over debit and credit transactions.
Bottom line: “Cash-out services” are adding turbulence into an already volatile economy. China’s financial institutions could face serious threats if just 10% of cardholders who use “cash-out services” fail to repay their debts.
Economics | Policy
A Dirty Recovery
Beijing is throwing caution to the wind in its efforts to recover from the outbreak. Pollution levels are higher than the same period last year as industries like steel and cement are firing on all cylinders to spur GDP growth through infrastructure projects. In a classic ‘China move,’ this has become Beijing’s go-to trick after having turned to similar recovery approaches following SARS in ‘03 and the financial crisis in ‘08.
China has made significant progress in flattening its CO2 emissions over the past few years – and while the country is the world’s largest consumer of coal, it’s also the largest developer of renewable energy. Unfortunately, Beijing has pressed pause on environmental standards for the time being, with local governments turning a blind eye to factory emissions while the central government approved more coal-fired power plant projects in the first three months of 2020 than all of 2019 combined.
Bottom line: While China still pushes out a message of curbed pollution and stricter environmental standards, all emissions commitments appear to have been shelved until clearer skies emerge. The only hope to clean up this ‘dirty recovery’ is a total return to pre-COVID economic strength.
Economics | Policy
China and the Curse of the Skyscraper
The Curse of the Skyscraper is a theory that claims that skyscrapers are usually a sign of poor investment and an economy careening towards recession. China has over half the world’s skyscrapers, and the central government is beginning to limit the height of buildings in an attempt to avoid the Curse.