Graph of the Week | Trade
China’s transnational train system has become the primary mode of freight transport between China and its trade partners abroad. Recognized for its reliability and low cost, Chinese railways have absorbed much of the air and trucking freight capacity, with the pandemic slashing transport through both channels by 75% and 70% year-on-year, respectively.
As part of the OBOR initiative, Beijing worked with participant countries to construct a wide web of cross-continent railway networks that connect China and the world by train. Recently, new routes from Jinan to Hamburg, Xi’an to Warsaw, and Hefei to Duisburg have been built to adapt to the new demands of the current trade reality. Due to the comparative resiliency of railway freight during the pandemic, Beijing is now claiming the network’s increased usage as proof of OBOR’s success.
It can be expected that in a post-COVID world, shipping distributions will largely return to previous distributions; however, government rail freight subsidies and line expansions may have a positive effect on railway’s total freight trade over the medium- to long-term.
Economics | Markets
Well That Was (Un) Expected
Following President Trump’s announcement that the US would no longer recognize Hong Kong’s special status, China retaliated in-kind by ordering state-owned enterprises to halt all purchases of U.S. soybean and pork.
Private corporations continue to purchase U.S. agricultural exports, but the market is on edge. Chinese importers canceled roughly one week’s worth of pork shipments from the U.S. following Trump’s comments on Hong Kong, totaling between 10,000 and 20,000 tonnes. Additionally, U.S. corn, wheat, and lean hog futures weakened on Monday as tensions between the two superpowers reached a new peak.
China is prepared to suspend additional agricultural imports if further action is taken on Hong Kong, putting the Phase One trade deal at risk. In the deal, China pledged to buy an additional US$32 billion worth (based on 2017 figures) of U.S. agriculture products over two years. As Q1 agricultural imports already lagged behind 2017 by nearly 50%, this retaliatory act points to a high likelihood that the commitment will not be met, which may drive President Trump to scrap the deal.
Full Report Here
Economics | Markets | Policy
‘Hong Kong, It’s Not Me, It’s You’
With the future of Hong Kong’s special trading status up in the air, President Xi may be grooming Hainan to replace the Pearl of the Orient as China’s new financial hub. The latest move to make Hainan a free trade zone would incentivize global trading partners to ramp up business activity with China while diverting influence away from Hong Kong.
Following the annual “Two Sessions,” plans were drawn up for the 21,000 square mile island to be turned into a “free trade port.” The port would come with a 15% flat tax on individuals and companies as well as relaxed visa requirements for tourists and business travelers, making it an ideal place to conduct business.
Beijing’s goals for Hainan are even loftier, as they position the city to become a center of strong international influence by 2035. Its trajectory implies that, along with Shenzhen and Shanghai, Hainan is intended to compete with Hong Kong as a future global financial center.
Economics | Markets | Policy
PBOC: ‘We’re Here to Help’
The People’s Bank of China (PBOC) will allocate CN￥400 billion (~US$56.33b) to buy loans from local banks on a quarterly basis. The move is anticipated to spur bank loans to small businesses to the tune of CN￥1 trillion (~US$140.82b). The measure is intended to help local banks with smaller balance sheets support the real economy, though qualifying banks will need to buy the loans back from the PBOC after one year.
The PBOC is concerned that banks will continue with their trend of overextending loans into the bubble-prone property and stock markets, and has hinted that banks should shift their lending focus from property companies and local governments to small businesses.
Beyond these measures, additional tactics are being employed to support small businesses. The PBOC will provide CN￥40 billion (~US$5.6b) in relending funds and conduct interest rate swaps with local banks. Additionally, Premier Li Keqiang recently announced that small and micro-sized businesses will see their loan obligations extended through the end of March 2021.
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Business | Economics | Policy
China Looks South for the Winter
China’s Belt and Road Initiative (OBOR) is bearing fruit. While Chinese foreign trade in the first quarter fell by 6.4% year-over-year, trade with OBOR nations held firm at 3.2% annual growth and accounted for CN￥2.07 trillion.
Trade with ASEAN has been key. In Q1 2020, composite ASEAN trade growth with China exceeded 6.1%, surpassing the US as the Middle Kingdom’s largest trading partner for the first time. Trade within the region has flourished due to:
- Tariff-free trading under the ACFTA agreement;
- Trade infrastructure development through OBOR. Railway connectivity throughout the region has expanded rapidly over recent years, offering reliable trade amid the pandemic as compared to increased restrictions on air and sea shipping channels;
- Continued commitment to cross-border collaboration throughout the region. In April, China announced a new pilot zone for development in Baise City, Guangxi – a province on the border with Vietnam, to promote cross-border trade infrastructure and collaboration.
ASEAN GDP has proven robust with 10-year composite GDP growth of 82.5% during the period of 2008-18, and China wants a piece of the pie.
Chinese & US Quants Take Off the Gloves
Younger than their Western cousins, China’s quant funds are closing the gap with foreign players in the market. High-Flyer, the top ranked Chinese equity hedge fund of 2019, attracted more assets last year than several dozen foreign funds combined. China’s largest quant fund, Shanghai Minghong Investment Management, tripled its assets under management to nearly CN￥40 billion.
Access to foreign technologies and algorithms combined with a thorough understanding of domestic markets has allowed China’s quants to make up for lost time. In addition, foreign companies face obstacles like daily trading limits and requirements to build a local team, challenging their ability to initiate strategies at full capacity.
While Chinese markets have matured over past years, they are still characterized by inefficiencies and marked volatility – making them an attractive landscape for machine learning and high frequency trading. That said, Chinese quants are struggling to capitalize on these arbitrage opportunities as the industry still struggles to poach engineers from top technology companies despite lucrative packages.
Economics | Markets | Policy
Dissension in the Ranks
Despite a central push to gradually phase out coal-fired power stations, Chinese investors and local governments are still ordering the construction of new plants. China’s coal-powered plants are able to sell less than half of the electricity they produce and cannot be put to full use due to air quality limits imposed on the crowded market.
In a push to remove bureaucratic inefficiencies in 2014, local governments had been granted greater freedom to approve construction projects. The mandate has since backfired, leading to divergent interests between central and local governments – inadvertently expanding the industry.
The government is sensitive to SOE and local economies’ dependence on the coal industry and is driven to prioritize economic growth. Regardless, renewable energy capabilities continue to grow as the industry receives significant investment for R&D.
Without bureaucratic alignment, China’s targets for a greener environment will be severely hampered by the industry. Coal is still by far the largest source of energy in China with coal-fired generating capacity growing more in China than it did globally in 2019.
Economics | Finance
The Rise of the Renminbi: the Role of ‘One Belt, One Road’
Continuing upon the first article in “The Rise of the Renminbi” series, TCG explores China’s strategic approach to the long journey towards RMB internationalization. China has intertwined its global RMB ambitions with the ‘One Belt, One Road’ initiative, a large-scale infrastructure development plan. By providing funding to economically underdeveloped nations, China aims to lead a strong global trade bloc through which new trade and investment can be facilitated in RMB.