TWS: June 11, 2020

Graph of the Week | Markets

Historically known for marked volatility, Chinese markets appeared relatively calm at the height of the coronavirus panic, at least compared to its American counterparts. As shown by the CBOE’s American (VIX) and Chinese (VXFXI) volatility indexes, peak volatility in the US markets surpassed China’s by more than 20% in April.

Behind the figures were a few masked drivers. First, Chinese markets predominately consist of retail investors, who typically focus on momentum over fundamentals. Second, Chinese markets are more inward-looking. Due to the staggered impact of the outbreak, MNCs were disproportionately exposed as global supply chains crumbled while Chinese investors remained cool as domestic markets benefited from lower global exposure.

Third, investors trade on confidence in central intervention, which has been consistent during economic turbulence. In February, the PBOC injected CN¥1.2tr (US$171b) into the market, with further action taken to cut taxes for small businesses and order banks to extend forbearance on outstanding debt.

These factors led to a comparatively subdued market response, which could in turn lead to global investors parking money in less volatile Chinese markets – and further capping volatility going forward.

Economics | Trade

SMEs Say ‘Baibai China, Hola México’

In a recent survey of 635 North American small business owners, 56% indicated that they were considering or are in process of moving supply chains out of China. More than half stated that their supply chains had been impacted by the outbreak, while 61% were exploring domestic partners.

While some companies consider other areas in Asia such as Indonesia, Taiwan, and Vietnam, Mexico has stood out as a favorable candidate. Offering cheap labor and additional benefits from NAFTA, Mexico has attracted both US and Chinese companies alike, with some experts estimating potential redirected FDI to the country ranging from US$12b to US$19b annually.

The study diverges from AmCham’s April report on MNC’s China strategies, which had shown that over 70% of surveyed US MNCs had seen demand for their products impacted by the pandemic, though over 70% still planned to retain their current production and operations in China.

This difference likely stems from small business’ comparative susceptibility to changes in the global environment, and although many would prefer to stay in China, it is a risk that few are willing to take.

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Economics | Industry

What’s Stoking the Fires of Industry?

China’s manufacturing sector enjoyed rebounding growth in May – albeit at a slower pace than in April, with official May PMI clocking in 0.2 points lower at 50.6.

The subindexes that compose the PMI paint a different picture. While still in contraction territory, the index for new export orders increased by 1.8 points to 35.3, indicating that foreign demand for Chinese goods showed a slight month-on-month uptick. Similarly, total new orders slightly increased by 0.7 points to 50.9.

With continued contracting foreign demand and subdued domestic consumption, industry expansion was largely driven this month by the production index, which settled at 53.2 and composes 25% of the final index.

Although not yet producing at full capacity, most Chinese factories are up-and-running again and are taking advantage of this time to catch up on outstanding orders.

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Economics | Trade

What’s Stoking the Fires of Industry? Pt. 2

Not unexpectedly, China’s trade readings released worrying numbers for May, with both imports and exports sliding compared to April’s results.

Albeit better than the predicted 7% drop, May exports fell by 3.3% year-over-year. Imports also dove by 16.7% from a year earlier to set the sharpest decline since January 2016, far exceeding the 9.7% anticipated fall and further extending April’s 14.2% losses.

Due to contracting exports, China’s industrial profits fell nearly 30%. Unsurprisingly, medical supplies exports remained the shining star as China continues to meet global demand for masks and other prevention equipment.

Economists paint a more uncertain picture for imports, which heavily depend on trade with the US, as well as domestic market demand. With tensions between the US and China rising as well as the ongoing impact from the outbreak, getting a good read on trade performance in the coming months will remain a challenge.

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Business | Industry | Policy

PRD Embraces Capitalism with Chinese Characteristics

China’s southern city of Guangzhou plans to invest around CN¥500b (US$70.7b) in 2020 on new infrastructure. The projects span a wide range of fields such as 5G, artificial intelligence and big data centers. In May alone, 73 major projects totaling CN¥180b (US$25.5b) were penned into action.

Guangzhou is part of the Pearl River Delta (PRD), one of the most prosperous regions in China. The PRD has a joint economy larger than that of Indonesia and is home to the equivalent of over one-third of the US population.

With roots in manufacturing, the PRD has since focused on transitioning to a more tech-based economy – and has been successful in doing so. Neighboring megalopolises, Hong Kong and Shenzhen, boast some of the countries’ top destinations for tech companies; by contrast, Guangzhou is a top area for sourcing engineering talent, which the city aims to convert into a burgeoning tech industry to rival that of its neighbors.

Amid the current instabilities surrounding Hong Kong, significant central funding and political support is driving a push to integrate the economies in the region. It can be expected that a large portion of Guangzhou’s infrastructure spending projects will be regional in scope and spill over to neighboring locales.

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Economics | Industry

The Great Chip Race Is Afoot

China is firing on all cylinders to bolster its semiconductor industry as tensions mount between the US and China. China has made strides to establish itself as self-reliant, pumping capital into the industry to spur R&D. In 2019, Chinese firms accounted for roughly 25% of global semiconductor demand, yet China’s capabilities still trail those of the US.

The latest move by the US was demonstrated through the Commerce Department’s new stipulation that requires foreign semiconductor firms using US tools to apply for an export license for chips shipped specifically to Huawei. However, US chipmakers cannot afford to cut off all trade with Huawei, with the industry giant accounting for approximately 5% of total global semiconductor consumption.

Notably, the US and China’s fierce battle for chip domination may provide a unique opportunity for alternative chip producers that can stay out of the crossfire to position themselves as R&D capital flees the two largest economies amid increased trade restrictions.

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Economics | Finance

China’s Big Four March On & Out

At its lows in the first half of 2020, the Dow Jones index had crashed by 36%, slowing American lenders and providing Chinese banks the opportunity to accelerate their expansion into emerging markets.

In the past, Chinese banks had been largely focused on their home market, but in recent years have slowly expanded internationally. Now, China’s largest four banks have a total of 618 branches outside mainland China, with foreign assets accounting for 9% of their books. The economic fallout from the pandemic may push these banks to further diversify, especially in Asia where they have a natural advantage.

While some remain skeptical that Chinese banks can outcompete their American counterparts or quickly scale the sprawling networks required for investment banking, they are still making significant leaps in debt raising and equity issuances for both domestic and foreign players, alike.

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Business | Policy

Changing Tides in China’s Electric Vehicle Policy

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.

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