TWS: Mar. 22, 2021

Graph of the Week | Economics

The PBOC Clears the Field of Weedy Debt Practices

Tightening liquidity and high yields and credit defaults, oh my! Ever since China’s central bank went on a monetary tightening spree earlier this year, firms with financial difficulties have been popping up like weeds. At the forefront of this Spring blossom, companies like real estate developers, local government financing vehicles, and energy companies, have been among the most apparent.

Real estate developers have accounted for a fifth of the US$10 billion in delinquencies this year after being particularly squeezed by Beijing’s new mandate to cap annual debt growth for developers to no more than 15%. For LFVGs and the coal sector, concern has brewed alike after a handful of firms missed payments on their commercial bills.

Financial struggles across these sectors have triggered investors’ concerns on state-linked industries, which have long been regarded as safe havens. Developers are also struggling to sell new bonds as bond buyers demand increasingly higher yields in return for increased risk.

Bottom line: With clear signs of further tightening of money supply on the horizon, many investors are beginning to turn away from traditional industries and are instead searching for investment opportunities with less risk.

Economics | Industry

Making It Rain for the Economy

Controlling the weather sounds like the stuff of science fiction…or is it?

Cloud seeding, or pumping clouds with chemicals to induce rain, has taken Chinese scientists by storm – and Beijing’s all in. Over the past decade, China has invested over US$1.3 billion in cloud seeding research in hopes of alleviating droughts and hailstorms destructive to domestic agriculture. It’s seen some success.

China already has the largest cloud seeding practice in the world, with plans to take it into the stratosphere. In late 2020, Beijing announced an ambitious plan to extend the initiative across 5.5 million square kilometers – an area more than double the size of Mexico! If effective, cloud seeding would be a game changer for Chinese agriculture and the country’s water-guzzling industrial sector, both of which suffer from regional water shortages and distribution problems.

Bottom line: Injecting chemicals into China’s clouds could rain magic on the domestic economy, but in the words of Rumpelstiltskin, “all magic comes with a price.” Not only have critics questioned the efficacy of the program – particularly when done at this scale – but neighboring countries are mighty concerned about how unnatural changes in China’s weather may impact them.

Economics | Policy

In With the Old and Out With the New

‘In with the new and out with the old’ seems to be the motto for China’s population. With dropping fertility rates and no shortage of greying geezers, COVID-19 is sounding the alarms for China’s long-term economy.

In 2019, China added 14.65 million to its population. To be sure, that’s quite the gaggle of babies. But, to put it in perspective, that’s the lowest birth rate since Mao was still considered the hunkiest man in all the country in 1961.

Fast forward to 2020, and it was thought that the lockdown would bring forth a population boom. Yet, unofficial data from the Chinese government reported a decrease of roughly 15% in birth registrations. Anxiety over the pandemic and its economic uncertainty hasn’t quite set the mood for newlyweds, nor were existing parents in a rush to harvest a second little peanut, citing the difficulties of wrangling just one child through online distance learning.

Bottom line: Population control has long been cause for headache in Beijing, but it looks to be developing into a full-blown migraine. With a 2016 revision to the one-child policy allowing a second child failing to birth results, Beijing may soon be facing some serious issues common to aging societies, including strained pension funds and welfare programs, and a diminishing workforce.

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Industry | Markets

Investors Bulk Up on Home Fitness

Ready to hit the gym…from home? Powerhouse investors like Tencent and SoftBank have flexed on your home sweat seshes and doubled the valuation of Keep – China’s top fitness app – to US$2 billion.

Just over a year ago, China’s fitness market sprinted to the world’s top spot with nearly US$7.1 billion in annual sales. Meanwhile, Keep, its leanest and meanest exercise app, has been riding the tailwinds to the tune of 300 million users. And, thanks to its quarantine-friendly online fitness videos, the app has managed to keep growing – even as brick-and-mortar gym memberships declined during the pandemic.

Keep toes the line between social networking and e-commerce, allowing members to share their fitspo stories while offering all the protein powder you could ever need through the app’s built-in store. The company rakes in cash from membership dues, ad revenues, and exercise product sales, and has raised over US$500 million in VC funding since launching in 2015.

Bottom line: As the Peloton in the East, Keep has the pandemic to thank for a large part of its ongoing success. However, only the fittest survive, and with over 100 online fitness companies raising funds in 2020 alone, Keep’s now looking to IPO to get swole.

Economics | Policy

Revitalize, Rejuvenate, & Reform: The 2021 Guide to Chinese Farming

China’s rural areas are due for a facelift, and Beijing has an appointment in the books. After declaring “complete victory” over poverty – particularly in its rural outskirts – Beijing is upgrading its office for poverty alleviation to a brand-spanking new agency focused on “rural revitalization.”

The Office of Poverty Alleviation and Development was established in 1993 to do exactly what you’d think – eradicate extreme poverty nationwide. After China more than doubled its GDP and GDP per capita from 2010-20, the Office sang its last hoorah as the country gained the status of a “moderately prosperous” nation at the turn of the decade.

Now, Beijing has set forth a new goal for 2049 – “national rejuvenation.” Though its exact definition remains fuzzy, Beijing is looking to its agrarian roots to help solve some of the country’s pressing issues like national food security and a growing urban-rural income gap.

Bottom line: Supporting farmers has been near and dear to many Chinese leaders across history. The newly minted National Administration for Rural Revitalization already has a game plan: flood farms with modernization and subsidies. From farming tools to livestock breeding, rural industries are set to receive a major makeover over the coming years.

Industry | Policy

China’s Emerging Sporting Frontier: eSports & Online Gaming

As the second largest eSports markets in the world, China is cashing in on opportunities within the growing industry. Governmental support has elevated eSports to an officially mandated sport and has fostered career prospects for professional gamers in China. Yet, some of Beijing’s actions may be betraying its true outlook on eSports and undermining its short-term efforts to spur industry growth.

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