TWS: Mar. 1, 2021

Graph of the Week | Markets

HK Investors Give Their Two Cents on Three Cent Tax

The Hong Kong government dropped a fun surprise on investors on February 23rd when it decided to raise taxes on stock trades for the first time since 1993, bringing the effective rate from 0.10% to 0.13%. Now you may be wondering, ‘who gives a darn about an extra 3 cents per 100 dollars?’ Apparently, investors do.

Despite posting record profits for its third consecutive year, the Hong Kong Exchanges and Clearing Market (HKEX) – the operator behind the Hong Kong Stock Exchange – saw its stock drop by nearly 14% upon announcement of the new tax. The Hang Seng Index, a benchmark index that tracks Hong Kong’s largest public companies, similarly declined 3%.

Analysts from Goldman Sachs pointed out that the tax may have simply spurred an overdue market correction, and that it would likely have little long-term effect on investment choices. Nonetheless, brokers forecasted a 7% drop in profits for HKEX and lower trading volumes ahead.

Bottom line: The tax is unlikely to impact HK’s market competitiveness. Considering the city’s 0% capital gains tax and heavy investment from the Mainland, expect money to stay put. Moreover, new revenues from the tax will be repurposed to support stimulus handouts, which should prompt a stronger economy and bode well for markets ahead.

Business | Industry

Nothing’s Giggity About China’s Gig Economy

As the gig economy grows in China, more workers are speaking out against unfair treatment and lagging protections in the booming industry.

Even before the pandemic, gig workers in China were a fast-growing part of the labor market. It’s estimated that anywhere between 20-35% of the working-age population has already turned to the nearly CN¥1 trillion industry for flexible employment, with an Ali Research Institute report predicting that as many as 400 million people in China may join rank by 2036.

Industry Growing Pains

As the industry grows, worker complaints have swelled. But, given arbitration is both expensive and time consuming, nor does it guarantee compensation, most complaints go unrecorded. In most cases, workers accept the abuse and simply find new a contract instead.

Due to the minimal blowback, many companies take advantage of the informality of gig economy contract-work, a growing trend that is driving workers in droves to labor unions. From 2015-16, 30 million migrant workers had joined the ACFTU, Beijing’s umbrella organization for unions and union members. By January 2021, the organization had ballooned to over 390 million members.

The burdens of responsibility

Yet, as membership swells, the headaches for labor unions are intensifying. Labor unions are nestled under the watchful gaze of the central government and cannot do anything that goes against central policy.

Occasionally, the central mission to maintain social stability and ensure economic development runs at odds with employee protections – a conundrum that has paralyzed some unions from acting. According to Hong Kong-based NGO China Labour Bulletin, the number of protests by gig economy workers has risen both in absolute terms and as a share of overall labor unrest. Yet, a study by Jenny Chan of Hong Kong Polytechnic University revealed that of 350 unionized delivery workers from the Mainland interviewed, not one knew what the ACFTU does to support member interests.

Bottom line: Unions are useful stepping stones for Beijing to not only boost its grassroots presence—particularly among China’s vast migrant population—but also gain additional visibility into rogue operations within the private industry. As Beijing infiltrates the C-Suites to gain influence at larger listed companies, officials have also identified unions as an additional channel through which to apply pressure to smaller private firms.

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Industry | Trade

Beijing Finds a New Mettle for Scrap Metal

As they say, one man’s scrap is another man’s treasure. China has taken this to heart, trashing trade restrictions as it begins importing tonnes of scrap metal from foreign markets.

For the world’s largest steelmaker, importing scrap metal is an old solution to a new problem. Australia was China’s largest iron ore supplier, filling over 60% of the country’s enormous demand. But, after Sino-Australian relations turned to rubbish, the price of iron ore—a key input in steel production—went through the sky. Ever since, Beijing has found a new mettle for scrap metal, lifting import quotas as it encourages steel mills to substitute scrap for iron ore.

Littered among the decision was an additional benefit: scrap metal imports reduce emissions caused by mining. As China’s new emissions trading scheme comes online, scrapping iron ore will progress industry goals of lowering carbon emissions.

Bottom line: China’s latest theme has been ‘self-sufficiency.’ Historically, as countries develop, they naturally begin generating larger amounts of scrap metal; this early transition to scrap will be a bridge for domestic steelmakers as China begins replacing foreign suppliers in a more carbon-friendly way – all while taking a shot at Beijing’s rival Down Under along the way.

Industry | Markets

Wall Street’s Closing Avenue Into China

Once the biggest, baddest kids on the block, Wall Street hedge funds are getting kicked to the curb by China’s growing gang of 15,000 competitors.

In step with China’s economic recovery in 2020, its hedge fund industry saw an average 30% return on investment and grew by US$268 billion over the course of the year. Meanwhile, Wall Street funds saw an average of 12% gains over 2020.

While local funds keep on wheelin’ and dealin’, foreign institutions are getting squeezed out of the block. In its hunt for global capital, Beijing released market reform that opened access to Chinese financial markets for foreign players.

Yet, with high entry capital requirements, many funds are still tentative to dive into an unfamiliar market without first getting their feet wet – an absence that has opened the door for industry consolidation. According to Liu Ke, Head of Research for Hengtian Wealth Management, “Money is increasingly gravitating toward the biggest players, with the top 10% soaking up most of the inflows.”

Bottom line: Given their late entrance to the game, foreign funds were always destined to play catch up. Larger local institutions have a strong head start and continue to race forward; the longer that Wall Street waits, the further behind it’ll fall.

Economics | Policy

A Glimpse Into the Past, Present, and Future of Xi’s Bellwether City, Shenzhen

A historic speech given by China’s paramount leader Xi Jinping in late 2020 highlighted the past and future importance of Shenzhen, a city pivotal to the nation’s continued economic rise. Within his speech, Xi laid out a strategic vision for the future growth of the city, placing particular importance on economic reform, consumption-driven growth, and integration with the broader Guangdong-Hong Kong-Macau Greater Bay Area.

Full Article

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