Graph of the Week | Economics | Trade
As a lingering indicator of a potential “V-shaped” economic recovery, China’s foreign exchange reserves rose by US$10.23 billion in May, bringing the world’s largest reserves significantly closer to its historical mean. The reflexive rebound from 17-month lows in March 2020 was driven by a quickly recovering trade surplus largely unforeseen by economists.
In May, China’s trade surplus reached 5-year highs at US$62.9 billion as imports contracted far more heavily than exports. Amid the ongoing pandemic, China’s pivot to medical supplies, protective equipment, and other prevention medical goods production has played a significant role in increased global demand for Chinese exports.
During the peak of its outbreak at the turn of the year, China had been importing far more medical equipment than it was exporting – plunging its trade balance to depths unseen since early 2017. However, with China’s daily confirmed case count now largely under control and many countries across the globe still facing the worst of the pandemic, exports have since picked up in pace and could continue to see large gains for the foreseeable future.
Markets | Policy
Flag on the Play, Beijing Tossed from the Game
The US Senate unanimously passed a bill requiring foreign companies to adhere to additional regulatory and auditory standards as defined by Washington, stipulating that foreign companies will need to certify that they are not being controlled or manipulated by their governments.
While not outwardly targeting China, the legislation comes at a time when US-China relations are increasingly strained by concerns of governmental intervention in the private sector. Heightened tensions between the two superpowers has spurred Washington to re-evaluate regulation regarding US investment in the Middle Kingdom in both the private and financial sectors.
Heat from the bill has already impacted Chinese markets, with shares of many Chinese tech behemoths that have known governmental ties falling on news of the legislation. Given the impasse between the two nations over national security, forced technology transfer, IP laws, and other concerns, Washington is now turning to increased corporate transparency and accountability measures to diminish Beijing’s influence in the private sector.
Finance | Policy
AMEX Called Safe at Home; Visa, MC in Scoring Position
American Express received the go-ahead from the PBOC in its joint venture with LianLian DigiTech Co Ltd. to become the first foreign credit card company allowed to process local currency transactions.
This approval not only marks a significant contribution to American Express’ long-term growth, but also highlights China’s initiative to open up to foreign players. The company’s joint venture will process both online and offline payment transactions, joining the arena of well-established mobile wallet service competitors such as Alipay and WeChat Pay. Visa may be soon to follow, having submitted its application in early 2018, while MasterCard is waiting on their network clearing license.
American Express’ success poses a promising outlook for foreign companies looking for direct access to what will soon be the world’s biggest bank card market. While retailers re-evaluate their Chinese supply chains, it is likely that there will be a mad dash amongst US financial institutions to become early market entrants, which will in turn allow for China to reap the reward of increased foreign investment and increased market liquidity.
Economics | Policy
The DOC & Huawei Backslide – ‘It’s Complicated’
The US Department of Commerce will be amending May’s blanketing Huawei ban to allow US companies to work with the Chinese tech giant and develop 5G standards together.
Standards for 5G technologies are still being established to broadly define how communications equipment from different companies talk with each other. The US is a leading innovator for the chips and technology driving 5G, while Huawei is a leader in 5G development and the world’s largest provider of telecommunications equipment.
While industry and government officials claim that this move is to give an equal voice to US companies throughout the standards discussions, it can also be seen as a positive step towards in re-engaging with China on 5G. Restrictions on communication would only hasten China’s push for industry independence from the US and put US companies at a strategic disadvantage.
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Economics | Finance
Need Cash Fast? The PBOC’s Got You Covered
China will begin selling CN￥100 billion special bonds to offset the economic impact wrought by COVID-19, one part of the CN￥1 trillion stimulus package Beijing is slowly implementing to spur economic recovery. Due to the outbreak, China is grappling with sluggish global demand amid its first economic contraction in decades, as the world’s second largest economy shrank 6.8% in Q1 2020, alone.
The Ministry of Finance plans to auction off a basket of 5-year, 7-year, and 10-year special treasuries, with the bond sale likely to complete by the end of July 2020.
The bond sale will ostensibly target both domestic and foreign institutions, with the proceeds introducing much needed liquidity in the market and replenishing the PBOC’s war chest. In a similar pursuit, China has been on a spree to bid for foreign investment over recent months through market reforms and increased foreign institutional inclusion, though it remains to be seen if these new measures are here to stay or simply intended as a band aid approach to be yanked as the pain from the outbreak subsides.
Economics | Finance
‘Naughty’ China Looks to Make ‘Nice’ List
To align China’s green bonds closer to international standards, the PBOC recently excluded ‘clean coal’ from the list of projects eligible for financing with the instruments, a move that may serve to bolster foreign investment. Despite this, investors remain skeptical about China’s ability to make ‘green’ bonds truly green.
In 2019, US$24.2b worth of Chinese green bonds fell short of international standards, which require that at least 95% of investment proceeds go towards green assets. Due to its domestic reliance on coal, China has established its own norms and, in recent years, has considered initiatives such as coal washing and carbon capture as ‘green’ projects.
However, in the same year, China netted more than US$31.3b in bonds that met international standards, second only to the United States in financing. Alongside the exclusion of ‘clean coal’ projects, there may be a large uptick in Chinese bonds that meet the criteria. Coal produced 57.7% of China’s total energy use in 2019, and as most municipalities require coal washing, this now defunct funding may be redirected towards renewables over time.
Business | Economics
A Virtual Canton Spring Fair Receives Wintry Reception
The Canton Fair, China’s largest and oldest tradeshow, has embraced virtual showrooms in the wake of the pandemic. The biannual event attracts buyers from across the globe, with 195,000 traders spanning 213 countries in attendance in Spring 2019, and is widely seen as a barometer of the country’s trade economy.
Despite sporting 24-hour live-stream showrooms for vendor and buyer interaction, few within the trust-driven industry are optimistic about the virtual fair – particularly amid plunging demand for Chinese exports and an increasingly uncertain bilateral relationship between the US and China. Further obscuring foreign interest in the event is the crucial loss of face-to-face opportunities like Chinese supplier factory visits to review product quality.
Chinese suppliers have been hit hard over recent years, with the US-China trade war dealing the first blow, only to have the coronavirus amplify the pain. China’s OBOR initiative has also fallen short of expectations, with many participating countries at the epicenter of the pandemic.
Little Lobsters, Big Economics
Since 2009, the Chinese government has looked to consumer subsidies to bolster its domestic electric vehicle market. In addition, strong domestic brands and supportive policy have helped the industry to develop into the world’s largest EV consumer market. Initially, Beijing sought to reduce its role in the industry to promote market consolidation and leverage global economies of scale; however, changing tides in sales due to policy reversals and the outbreak are driving policymakers to reconsider their exit plan.