Graph of the Week | Economics
Numbers Too Good To Be True
The devil is in the details, particularly when it comes to economic data. Last week, China’s National Bureau of Statistics released some impressive data for the months of January and February. Retail sales grew at a pace of 33.8% y/y, beating the average forecast of 32%.
However, the way the data is presented does not paint the full picture; in reality, China’s 30+% growth in sales is underwhelming when put into context. First, Chinese New Year was effectively derailed in 2020 following the onset of the COVID-19 pandemic. While travel was still discouraged during this year’s holiday, businesses were back in full swing. As such, beating 2020’s results was all but assured.
Second, sales between the two months only grew 0.56% from the prior month, December. Given that CNY is the nation’s biggest commercial holiday and typically churns out a sales boom, such incremental growth indicates that CNY failed to stimulate consumers to spend this year.
Bottom line: Do not take economic data at face value. While recovering nicely, China’s economy is still imbalanced. A gap between production – still rising on the back of exports – and consumption remains; ultimately, production will have to slow down, or consumption will have to catch up.
Economics | Policy
Should I Stay or Should I Go: The Story of a Dimming Pearl of the Orient
China’s Two Sessions, THE political event of the year, has thrown yet another wrench in Hong Kong’s race to preserve its independent business environment. On the last day of the meeting, legislation was passed to reform the city’s electoral process.
What does it mean?
Hong Kong’s semi-democracy has been on rocky roads for a while, so reformation was always within the realm of possibilities. Now, not only will policymakers in Beijing be able to change how the HK electoral committee is structured and functions but will also have the ability to pick their own “patriots” for a seat at the table.
Hong Kong has been a long-time favorite for foreign investors and businesses, particularly due to the autonomy that came with its “one country, two systems” governance. But, paired with other proverbial potholes, such as getting booted from the Index of Economic Freedom (that it once led) in March, mass arrests of pro-democracy figures, and hints at judiciary reform, this latest development has the city’s standing as a free international business hub driving off a cliff.
Has there been an impact?
Yet, there hasn’t been the business exodus from the city’s more than 9,000 foreign companies that many had anticipated.
While the bumpy terrain has some businesses shifting gears – with many now packing the car for Singapore – others still stand by the city and its unique access to the Mainland market.
Largely due to concerns over the national security law, Hong Kong saw its first decline of foreign companies in 2020, many of which were in the financial sector. However, most indicated that they were not bowing out entirely, rather shifting priorities towards other markets. This checks out; after political tensions first began towards the middle of 2019, the city’s 2019 GDP dropped by 1.2% – throwing the city into recession – while FDI into the city plummeted by 47%.
Bottom line: Smart business is all about balancing risk and reward. The past two years have shown that political instability has increased the perceived risk of doing business in Hong Kong, yet the economic benefits are in decline. Now, with new looming electoral reforms and anticipated degradation of the city’s long-touted independent judicial system, the risk-reward ratio of Hong Kong’s business environment is sliding further down a slippery slope – and more fallout is likely to be felt in the dimming Pearl of the Orient.
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Business | Policy
All Good Things Come in Threes
Had a blast making your website GDPR compliant? If so, you’re going to love China’s new set of cybersecurity laws.
China’s governing “Cybersecurity Law” was released in 2016 and is notorious for its ambiguous language that makes it a “compliance nightmare.” Adding more complexity into the mix, Premier Li Keqiang discussed the roll out of a “Digital China” initiative during the Two Sessions, which features 2 new laws to govern the collection of China-based user data.
PIPL focuses on defining the scope and processing of personal information while DSL regulates the logistics of data handling. Despite their eye wateringly vague language, they both contain a range of penalties for violations and apply to companies across the globe – regardless of whether or not they have a presence in China.
Bottom line: Chinese internet protection laws are regarded to focus more on government utility of data rather than actual user protections. While PIPL and DSL are broad in scope, they still fall in line with expectations – notably placing the burden of a new classification system that ranks data by importance to national security on companies. For foreign firms in China, failure to comply ranges from fines to losing business permits, so it’s time to brush up your legalese.
Policy | Trade
Rare Earths To Get a Whole Lot Rarer
…and more news from this year’s Two Sessions:
Bigwig policymakers in Beijing threw some shade at the world with a saucy “Y Eu No LiK” as they committed to double down on mineral export restrictions.
For all you NatSci wizards out there that could pick out the rare earth elements within the Yttrium, Europium, Nobelium, Lithium, and Potassium, Eu Dy BEsT.
For the rest of us, here’s a quick ‘Rare Earths 101’ refresher. Rare earths are key to manufacturing many of the world’s advanced technologies. Over 95% of the world’s production of rare earths are also sourced from – you guessed it – China. Even as countries hustle to find other sources, most products still end up in China for processing.
So, as Beijing lays the foundation to curb exports, world leaders are taking notice. China’s motives could range from environmental concerns to economic interests, but whichever the reason, countries are already discussing how to form less-dependent supply chains.
Bottom line: Even with a modest increase in China’s mining quota this year, global demand for rare earths is still projected to quickly outstrip supply within the next decade. China is holding its resources close, which will begin creating headaches for supply chains across the globe.
Policy | Trade
‘Health Silk Road’ Gives the BRI a Rebranding
As BRI infrastructure projects stalled at the peak of the pandemic, Beijing found an opportunity to rebrand the decaying initiative. To maintain ties with BRI member countries while providing China the maneuverability to deflect Western criticism of its mishandling during the early stages of the pandemic, Beijing is in the midst of re-orientated the BRI to emphasize vaccine diplomacy through the new “Health Silk Road.”