Graph of the Week | Economics | Policy
Taking a move straight from the ‘Walmart on Black Friday’ playbook, Chinese consumers filled their online shopping carts during the 6.18 shopping holiday with a shop-till-you-drop vengeance. Call it a pleasant surprise for the PBOC, who just last month told us that the majority of consumers were holding onto their savings tighter than ever before.
So, what’s happening? Over the course of the pandemic, consumption grinded to a halt, throwing China into its first economic contraction in decades. But after bottoming out in March, consumer sentiment has since rallied, setting records as CN￥206 billion was spent on JD.com during 6.18.
Don’t be fooled: China’s economy is still hurting in a major way. While online shopping may help release some liquidity into the markets, it’s far from the saving grace of general consumer spending. Just last month, Beijing had hoped that shoppers would empty their wallets while traveling over the Labor Day holiday but was quickly disappointed as travel spending fell 60% YoY.
Bottom line: China still relies on exports for about 20% of annual GDP, and with foreign demand in the dumps, it’s too soon to be optimistic.
Economics | Policy
Hong Kong, I’mma let you finish, but…
In the biggest show of beef since Kanye stole the mic from T. Swift, Beijing passed Hong Kong’s national security law on Tuesday – adding another nail in the coffin to Chinese-Western relations.
Protests have rocked the streets of HK since early 2019 over claims that Beijing is violating the ‘Basic Law,’ a de facto constitution put in place after HK’s handover from Britain to China. Inspired by Tolkien, Beijing’s retribution was swift as it bypassed HK’s legislature to criminalize acts of secession, subversion, terrorism, and collusion with foreign parties – AKA shutting down protests against the mainland. The murky law has sent tremors throughout the human rights community and drawn condemnation from Western governments.
The law’s passing falls a day before July 1st – an annual day of protests coinciding with the anniversary of HK’s re-adoption into China in 1997. Citing coronavirus concerns, local officials have barred demonstrations for the first time since the end of British rule. Coincidence? You tell us.
Bottom Line: Trump announced earlier that the US would revoke Hong Kong’s special economic status, and as a first step, has halted US defense equipment to the region as of Monday evening.
Markets | Policy
Last of the Luckin Charms
The Luckin Coffee saga may finally be drawing to a close. The Nasdaq halted all LK trading on Tuesday – making Monday the last day to offload LK stock for all you unlucky Luckin traders.
Luckin has learned over recent weeks that not all news is good news. After the company’s board uncovered US$300 million of inflated sales in its books, LK share price plummeted, the Nasdaq delisted company shares, and the US Senate passed legislation requiring foreign companies listed on US exchanges to open up their books to US regulators.
Bottom Line: The US-China rivalry is extending to a new arena – US and Chinese equity markets. With increasingly hostile US market regulations for Chinese companies, many of those already listed are preparing to migrate exchanges – taking liquidity and diversification opportunities with them – while those yet-to-list may decide that the lemon just ain’t worth the squeeze.
Finance | Markets
Not All That Glitters Is Gold
Sometimes it turns out to be gilded copper instead. One of China’s largest gold manufacturers, Kingold Jewelry, has pulled the wool over Nasdaq and its creditors’ eyes by passing off at least 83 tonnes of copper bars as gold to secure CN￥20 billion (US$2.83b) in loans.
On Monday, Kingold’s shares dropped by as much as 40%, but its Chairman Jia Zhihong has stood firm and denied any allegations that the gold is anything but…well, gold. Regardless, the loans are majority covered by property insurance policies issued by a leading state-owned insurer, PICC Property and Casualty Co. Ltd., which originally helped ease concerns from lenders.
Bottom line: this scandal comes hot on the trails of Luckin’ Coffee’s investor fraud. With the U.S. increasing its scrutiny of US-listed Chinese companies, Kingold’s heist is likely to elicit some “I told you so’s” and add more heat onto Chinese companies on US exchanges.
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Economics | Policy
China Turns to the West to Solve Its ‘West’ Problem
In 1999, China released the “Go West” initiative, aiming to close inequalities between its rich Eastern coastal cities and poorer western provinces by throwing land, money, and talent (oh my!) at the region.
The result? Over the policy’s key formative years – 2003-2016, western regions amassed crippling amounts of bad debt through inefficient infrastructure projects, contribution to national GDP only grew by a paltry 4% – and here’s the kicker – economic disparity between China’s China’s eastern and western populations actually increased.
With pressures mounting from Western nations over topics ranging from Hong Kong to the coronavirus and the economies of major trade partners lagging with no end in sight, China has decided to ditch the global game and shift its reliance towards domestic demand à la its long-forsaken wild west.
As part of its renewed efforts to “Go West,” China announced a slew of new transport infrastructure initiatives and new energy projects for the western region. Beijing hopes that it will help spur growth while strengthening OBOR trade routes.
Bottom line: The post-‘Rona Western world isn’t looking too hot for China, so keep an eye on the horizon for large domestic infrastructure projects and sloppier loan packages to OBOR member countries.
Finance | Industry
Chinese Banks Say ‘Super Size Me, Please’
Think back to the days of setting up a lemonade stand on your street (cue flashback). Things were looking great – business was thriving and you were shoo-in for retirement before even hitting the real world. Suddenly, these kids straight out of MBA came along and set up shop down the street. What would you have done?
Chinese institutions face a similar dilemma. As avid readers of our humble newsletter know, China has been putting on quite the spectacle lately to woo global investment into its domestic markets. After the recent reform that opened the doors to full foreign ownership within its financial industry, the Middle Kingdom now faces the full entry of the world’s most elite IB competitors like JPMorgan Chase and Goldman Sachs.
The answer? China’s securities regulator plans to grant investment banking licenses to commercial lenders.
Bottom Line: By blurring the lines between commercial and investment banking, China hopes that they can consolidate the domestic industry to create a couple of heavy-hitters to go up against the influx of foreign competitors. Sound sketchy? Senator Carter Glass and Representative Henry Steagall would agree. But then again, as financial crises become more and more common, what does TBTF really mean, anyway?
Business | Industry
‘Big Brother Is Watching You’: Goodbye Ingsoc, Hello CAC
Live streaming is a big topic for TCG this week, and the latest news from the stoop is that Beijing has begun clamping down on some big-name streaming apps. This should surprise no one as China’s ever-vigilant watchdog, the Cyberspace Administration of China (CAC), regularly scrubs the internet for unsavory content.
In this case, 10 apps came under fire, including Bytedance’s Xigua and Tencent’s Bilibili, Huya and DouYu. The reasoning? It’s the usual suspects — vulgar language, indecent dancing, and inappropriate clothing. The companies will pay the price through suspended updates, restricted new user registrations, and extra rules to ensure their apps are up to snuff going forward.
Bottom line: these hiccups are pretty much routine at this point. While the message is effective and the punishments can be costly, the speed at which livestreaming is growing means that this won’t be the last time we hear from good ol’ CAC.
Finance | Markets
Right Place, Right Time: Hong Kong Markets Benefit from US-China Tensions
Recent weeks have highlighted an increased scrutiny from Washington towards US-listed Chinese companies. In May 2020, the US Senate passed legislation requiring foreign companies listed on the NYSE and Nasdaq to open up their books to American regulators. Faced with the reality of increasingly hostile US oversight, many US-listed Chinese companies are actively weighing the costs and benefits of migrating exchanges – and many are settling on Hong Kong.