TWS: June 7, 2021

Graph of the Week | Finance

Investors Band Against SOE Bonds

State-owned enterprise debt has bond investors spooked. One SOE in particular has investors on edge: China Huarong Asset Management.

Huarong was born as a response to the 1997 Asian Financial Crisis, and, to this day, focuses on distressed debt management. Yet, in light of recent rumblings, it might be time for Huarong to start looking inwards at its own debt instead.

Rumors began to echo throughout the markets after the company announced in March that it would delay its 2020 annual financial report. It was then discovered that the company’s net profit finished at a dismal CN¥0.21 billion, or at a 90% y/y drop due to the pandemic.

While the firm has managed to make its recent bond payments on time, investors are wary of the future. As evidence, look no further than the price of Huarong bonds with expires in 2025, which saw their prices dramatically stutter below CN¥60.

Bottom line: The contagion of bad debt is spreading. China Great Wall Securities, one of the other three state-owned distressed debt managers, saw its AAA-rated debt trade at CN¥87. Between the four asset managers, they have stacked up a staggering amount of debt, and Beijing may intervene by establishing a holding company to oversee all four firms.

Industry | Technology

Tech Neck & the Tale of Tiktok

Thought TikTok was just for videos? Think again! The beleaguered video-streaming app announced it would start testing in-app shopping, facing off head-to-head with competitors like Facebook for a slice of global online retail pie.

TikTok watchers must be getting whiplash, or at least a bad case of tech neck, from trying to keep up with the company lately:

  • ByteDance CEO Zhang Yiming unexpectedly announced he would step down.
  • The company shelved IPO plans and started a program to buy back employee shares.

Yet, despite the setbacks, the company’s e-commerce plans are still going full speed ahead:

  • TikTok will take a note from its Chinese sister app, Douyin, and offer an in-app shopping function.
  • The company estimates it will pull a whopping US$185 billion in annual e-commerce sales by the end of 2022.

Bottom line: The Chinese market has been at the helm of social media and e-commerce integration and turned heads for recent trends like live streaming e-commerce and community group buying. As Chinese giants take their playbooks global, expect Western competitors to follow suit while the social media industry attracts the gaze of regulators for foraying into new consumer-facing areas.

Economics | Policy

Flying High to the Economy of Tomorrow

It’s a bird! It’s a plane! No, it’s the GBA! The Greater Bay Area is China’s 21st-century high flying version of a ‘shining city on a hill,’ lighting a flame for the country’s economy of 2035 and beyond.

Covering regional powerhouses like Hong Kong, Macau, Shenzhen, and Guangzhou, the GBA has always shone brightly as a beacon for foreign investment while playing the role of flagship manufacturing and tech hub. The GBA has always been China’s most prosperous area of the country; if it were a country, it would rank as the world’s 11th largest economy – just behind the Great White North.

And yet, China has never been one to settle for ‘good enough.’ Policymakers continue to funnel an eye-watering number of resources to hone and integrate each individual city’s economy into the sprawling megalopolis. In particular, Hong Kong, Shenzhen, and Guangzhou will play integral roles in driving innovation within the region, specializing in cross-border financing, tech R&D, and smart manufacturing, respectively.

Bottom line: Between new region-focused investment funds, loosened foreign capital requirements, YUGE business incentives, and even a regional university, Beijing’s betting big on the GBA as a major economic driver in the Chinese economy of tomorrow.

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Economics | Industry

To Tax or Not to Tax? That Is the Question.

Tax me. Tax me not. Tax me…after years of back-and-forth pivoting policy, nationwide property taxes in China could finally become a reality.

For years, Chinese officials have waffled over instituting nationwide property taxes, yet previous attempts have all fizzled out – that is, until now. A host of regulatory bureaus recently held a seminar to trade notes on potential real estate tax reform. In short:

  • A pilot program could be in the works for later this year, with Shenzhen and Hainan as the likely trial locales.

Why discuss property taxes now?

  • China’s housing market is scalding hot.
  • New home prices reached new highs in 62 of 70 major cities nationwide.
  • Property taxes could help taper speculative second hand sales.

Bottom line: A nationwide property tax could raise some uncomfortable questions for Chinese leadership. Citizens are prohibited to own property in China; instead, ‘buyers’ enter into a lease of up to 70 years from the government for the right to use the land. Yet, property tax is a tax on the value of owned property, which begs two burning questions: ‘why should the tenants be taxed for land they don’t own’ and ‘what happens when all of China’s failed infrastructure projects go belly up upon valuation?’

Policy | Technology

‘Game On’ for US-CN Tech Race

The Senate is saying “game on” as it laces up to pass the Endless Frontiers Act. The bipartisan bill will earmark over US$100 billion in funding for artificial intelligence and platform 5G infrastructure research, two competitive flashpoints in US-China relations.

While the US dominates as a top destination for AI R&D, China leads in producing industry talent. Almost a third of AI researchers working in US institutions are Chinese nationals, and scores more received their education in the United States – a trend that has formed the mainstay of past US-China tech-related policy:

  • Last year, Republican Senators introduced provisions to bar Chinese nationals from obtaining visas for studying STEM.
  • Unsurprisingly, this only hurt America’s own AI industry, particularly as only 10% of American-educated Chinese AI researchers at the PhD level return to China.

Bottom line: Congress is gearing up to take China head-on in the 21st century “tech race.” The Endless Frontiers Act marks a new approach in Washington and seeks to foster home-field advantages in the US-China competition rather than contain Chinese development. Poignantly, bipartisan support for the bill also shows the ringing alarm uniting policymakers across the aisle.

Industry | Policy

The Rise of China’s Customer Service Robots

Every year, the same question is asked, “When will robots make human employees obsolete?” Yet, the answer may be simpler than you think. The robots are not coming, they are already here.

And, nowhere in the world are they more populous than in China.

Beijing continues to invest heavily in the robotics industry as part of its aim to rely more on homegrown industries, particularly the technology sector, to compensate for labor shortages and supply chain concerns. With unbounded investment and favorable policy, China’s service robot sector is the fastest growing in the world and represents more than 25% of the global service robot market.

Read more about how the pandemic accelerated China’s innovation in the customer service robotics field in our latest China insights article.

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