TWS: Mar. 8, 2021

Graph of the Week | Markets

No Bubbly Allowed for This Bubble

“Bubbles in US and EU markets are going to burst ultimately due to the divergence between market performance and their underlying economies, and [these markets] will have to face corrections sooner or later.” Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, dropped this heavy forecast earlier this week.

China’s regulators are increasingly skeptical of the stability of foreign markets and are particularly worried of what a chain reaction could mean at home. Combined with simmering housing prices, these trends are leaving huge question marks around the potential for economic tightening.

China’s strong economic rebound has stoked the fires of China’s ever-growing property market. Despite slashing shadow banking activities, capping property market lending, and reducing market liquidity by means of open market operations, housing prices continue to rise across both larger tier 1 cities and a basket of 70 smaller cities. Residential real estate accounted for approximately 20% of China’s fixed asset investment and 10% of GDP in 2020.

Bottom line: There is little doubt that regulators will utilize their policy tool belt to place pressure on bubbles forming in various cities. Added concern over foreign markets may just hasten their steps.

Industry | Policy

Splitting the Pair – Beijing Doubles Down on Dicey Gambling Havens

While there may be a “Chinese poker,” Beijing’s not dealing its countrymen in. Instead, officials are going all in on a crackdown over cross-border gambling.

In case you’re not a betting (wo)man, gambling has been illegal in China since the Communist Party was established in 1949. Under current law, even individuals who open casinos to attract Chinese clients are subject to punishment.

Wild cards that favor the house

But just like any good card game, there are a few wild cards to keep things interesting. China’s state-run lottery industry is the second largest in the world, and the special administrative region of Macau cashes in on over three times the gross gambling revenues of Las Vegas annually.

Yet, while many high rollers go abroad to get lucky in foreign casinos, scores of other Chinese are placing their bets at home through underground banking systems and VPN connections to online gambling sites.

A hard habit to kick

Despite Beijing’s best efforts, illegal gambling in China has only grown in recent years. With entire overseas industries propped up by Chinese gamblers and Chinese online gambling transactions topping CN¥1 trillion (US$150 billion) in 2020 alone, Beijing isn’t liking its odds in kicking this dirty habit anytime soon.

Ever since Mao took control over China, the official Party stance has been that gambling is a danger to the stability of Chinese society at large. Unofficially, of course, it’s a treasured pastime.

Flushing out the industry

With illegal gambling gaining traction at a dizzying pace, Beijing isn’t rolling the dice. Officials have doubled down on campaigns to crackdown on domestic gambling and are now turning their gaze to overseas gambling houses.

Last August, Beijing released a list of travel restricted cities and has recently announced that it is extending the blacklist to include other countries that are known to be frequented by Chinese gamblers. While officials slow play showing their hand, it’s likely that the list will target Southeast Asian meccas like the Philippines, Vietnam, Cambodia, and Myanmar.

Bottom line: It’s a noble goal to save its citizens from the evil vice of gambling to be sure, but we’re going to go ahead and call Beijing’s bluff this time around. Gambling is a huge source of capital outflows for China, and by cracking down on it overseas, officials can reroute that money through Macau or other greenlit domestic channels to keep that money circulating within the Chinese economy.

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Economics | Industry

Hasta La Vista, Maybe?

Chinese movie sales pulled a move from the Terminator and came roaring back with a vengeance this Chinese New Year. Local box office revenues hit record highs of US$880 million, annihilating those from last CNY by about 33%.

Strict social distancing restrictions left Chinese box office revenues gone with the wind for most of 2020. Nonetheless, as theaters started reopening, moviegoers flooded back for the curtain call in droves, defying analysts’ predictions. Meanwhile, record sales had investors singin’ in the rain as news of box office sales shot the stocks of IMAX China and Alibaba Pictures Group Ltd. up more than 30%.

Bottom line: The rebound in China’s movie industry may be a good sign for other industries that were worried to have been disrupted by shifting consumer habits during the pandemic. As restrictions continue easing, other industries may begin springing back to life this Spring, terminating concerns about their post-‘rona permanent destruction.

Industry | Technology

Cracking the Global Chip Supply Shortage

We’ve all heard the expression, ‘don’t put all your eggs in one basket.’ Apparently, the saying’s making circles in China’s tech circles, as Chinese search giant Baidu hatches plans to diversify away from its multibillion-dollar digital advertising business with a brand spanking new AI chip company.

Baidu is anything but diversified. 70% of its total revenues are tied up in online advertising, and with Beijing’s renewed push to build China’s capabilities in high precision chip manufacturing, the company has seen a chance to spread its eggs across a whole new basket.

The enlightened China Watcher may be wondering how this new chip business will differ from Baidu’s current semiconductor unit. While the internet giant currently produces chips, they are earmarked for limited AI uses as opposed to the new chips, which will extend to different applications and be nestled under an independent subsidiary with more financial backing.

Bottom line: Baidu is hoping that this new business will help crack the global chip supply shortage that has left Chinese producers scrambling. Not only will a venture into semiconductors lay Baidu further into Beijing’s good graces, but it will also bring the company one step further in its foray into the electric vehicle industry.

Business | Policy

Another Step Forward on China’s Long March Towards Improved IP Protections

Amendments to China’s Patent Law are set to take effect later this year. The changes promise to strengthen patent enforcement in China in a variety of areas and should allow foreign companies operating in China to better protect their intellectual property portfolios. However, changes to the Patent Law alone will not be enough to put an end to the predatory practices of forced technology transfer, and it remains to be seen how Chinese courts and regulators will interpret and enforce the amendments.

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