Graph of the Week | Economics
Causation, Correlation, and China
China’s producer prices (PPI) kicked into high gear as they grew at 1.7% y/y in February, the fastest pace seen in more than two years. Negative Chinese consumer prices (CPI), however, continue to point to a lopsided economy, with producers producing faster than consumers can consume.
More interesting is the growing correlation between China’s PPI and US CPI. In the same month that Chinese PPI grew by 1.7%, US consumer prices also clocked in at a 1.7% y/y increase. Coincidence? Maybe – but we think not.
After breaking a historical record for exports in 2020, China has clung onto its role as the world’s producer. Yet, hidden behind the data is a subtle chain effect. A rise in Chinese production costs has directly exported inflation to the US, particularly as US imports from China have been steadily increasing in recent months.
Bottom line: Let’s go back to Econ 101 and remember that correlation does not equal causation. There are plenty of reasons why US inflation is on the rise – expectations for a quickened global recovery and trillions of dollars in economic stimulus from Washington, for example. Nonetheless, while the US-China chain effect cannot be defined as a direct cause and effect relationship, the trend is suspicious to say the least.
Economics | Technology
Giving the World a Run for Its Money
While much of Asia enjoyed the Chinese New Year, China was swaggering towards the finish line of a digital yuan-filled future.
While the central bank digital currency (CBDC) has been in testing for upwards of a year, it’s still a laundry list away from formal release. Over the holiday, officials crossed a few more items off the list, by:
- Conducting new tests;
- Joining a consortium to explore the use of CBDCs in cross-border payments, and;
- Partnering with SWIFT – the world’s largest electronic payment messaging system
The latest trial run hits closer to home
Testing has largely centered around pilot zones in cities like Shenzhen and Suzhou. This CNY, though, Uncle Xi brought cash-filled cheer to some 50,000 Beijingers via digital red packets filled with CN¥200 (~US$31) worth of CBDC to be spent online or at designated physical locations.
For now, this is just a drop in the bucket for the global leader in digital payments. Yet, with each test, officials expand the scalability of the CBDC by incorporating new banks and payment channels into the network, giving a glimpse into a not-so-distant future when the digital yuan could be quickly airdropped into circulation.
Going global is the goal
Testing is only one piece of the puzzle. China takes the gold as the largest trading nation in the world; yet, while it exported nearly US$2.6 trillion worth of goods in 2020, the RMB was only used in 1.88% of global transactions at the end of December.
So, ‘internationalization’ is the name of the game. Beijing is looking to the digital yuan to boost its global payments profile and has joined the m-CBDC Bridge, a multilateral project exploring the use of CBDCs in cross-border, multi-currency, real-time payments. The initiative is focused on CBDCs in the pan-Asia region – a lucky break for the country that saw the ASEAN trading bloc grow to become its largest trading partner in 2020.
Meanwhile, the PBOC has also partnered with SWIFT, the leader in cross-border payments that handles nearly US$5 trillion per day, to set up a joint venture that will help give the digital yuan some much needed lovin’.
Bottom line: As the saying goes, ‘if you can’t beat ‘em, join ‘em.’ China’s strategy, it seems, is to do both. While not the only competitor on the CBDC track, it’s certainly the front runner – and first place could mean chipping away at the USD’s hegemony abroad while tightening strict capital controls at home.
Join the Guys and Gals at TCG
Want to Join The Crew?
We’re always on the lookout for fellow China Watchers and budding business leaders passionate about their area of expertise. We have positions that span research, operations, marketing – and everything in between. If you’re eager to take that next step in bridging the East and the West, you might just be the person we’ve been looking for. Continue on to learn about our current openings.
Economics | Policy
Besting the Bezoses: An Expensive US-China Divorce
Breakups are never easy, especially when they’re between the world’s two largest economies. At least, that’s the conclusion of a recent report on US-China decoupling from the US Chamber of Commerce and Rhodium Group.
Divorce gets messy. But, like a fortune teller with a crystal ball, the report has foreseen a price tag of mystic proportions should the world’s two largest economies fully separate. In particular, four industries across the US – aviation, semiconductors, chemicals, and medical devices – would stand to hurt the most from blocked access to China’s supply chains and Chinese customers. According to the report, the cost of lost jobs, lower R&D, and an all-around decrease in competitiveness could total hundreds of billions in US GDP over the long-term. That’s enough to even make Bezos think twice!
Bottom line: Relationships are hard work, but it’s clear that the potential losses of a US-China split are worth going to couples therapy over. Most policymakers were already aware that a full decoupling was never in the stars, but jury’s out on whether the two nations will try to reconcile in certain areas or remain spellbound by the chilling mystique that is current US-China relations.
Industry | Policy
Winds of Change Are A-Blowin’ for China’s Energy
Industry wind-watchers were blown away by the record-breaking renewable energy figures coming from the East. In 2020, China reportedly added nearly 72 gigawatts of wind power – enough to power NYC for a breeze under a week – to its grid in 2020.
Wind power is China’s third-largest source of electricity and accounts for nearly 13% of the country’s total power generation. As the country pivots towards greentech, Beijing has flooded the industry with subsidies to spur R&D and adoption.
It’s been working. Chinese firms currently make up over 1/3 of the world’s wind turbine manufacturers, while more than 400 domestic wind farms have committed to 50 gigawatts or more of annual wind installations over the next 4 years – roughly the power equivalent of 20,600 utility-scale wind turbines, 156 million solar panels, or 5.5 billion LEDs.
Bottom line: It’ll take a whirlwind of change to get China sailing towards its carbon-neutral by 2060 promise. Though Beijing’s subsidy program expired at the end of 2020, expect a steady windfall of activity in the renewable energy industry to slowly replace coal – the country’s dirty no-so-little secret that powers just under 57% of its total energy – with clean energy.
TCG’s Best of the Best
Stay Smart With TCG’s Shuǎng Stories
To bring you the freshest China news on the block, we read. A lot. Here are some of our crew’s favorite reads of the week:
Huawei’s Performance Under U.S. Sanctions: Unexpected Results?
Nearly a year after the United States pulled the plug on Huawei’s access to American-touched semiconductors, the sanctions’ results are muddled at best. Go deep with this dive into Huawei’s domestic and overseas growth from China Focus, in which authors Zhijing Kuang, Siwen Xiao, and Yaosheng Xu explain the embattled firm’s better-than-expected domestic performance, here.
China’s ‘Two Sessions’: First Mention of Blockchain in Five-Year Plan Boosts Still-Nascent Industry
As China’s annual “two sessions” draws to a close, onlookers were met with few surprises. Among the tantalizing twists, though, was a curious emphasis on blockchain technologies. The emerging tech was mentioned for the first time in a draft of China’s 14th Five-Year Plan and bodes well for growth potential in the digital economy. Learn more in this delicious read from SCMP, here.
Industry | Policy
China’s Housing Market: A Tale of Economic Progress and Continued Strife
A bubble-prone housing market has been one of the most challenging sectors within the vast array of economic issues that China has faced on its road to economic modernization. One of the key approaches harnessed by policymakers in Beijing has been to limit property loans as a curb for speculative activity; however, questions remain as to the long-term feasibility of this solution to China’s property value crisis.