TWS: May 17, 2021

Graph of the Week | Economics

Wa Sai, What Do I Spy with My Little Eyes?

“You get a digital yuan! And you get a digital yuan!” In 2020, China rolled out digital yuan testing, overseeing the distribution of several million dollars’ worth of DCEP throughout the year.

Significant debate has arisen around the motives behind the DCEP, with many positing that it may signal China’s departure from a USD based global financial system. The trade war exposed many central concerns, particularly regarding the threat of spiraling relations to China’s high balance of US debt holdings and its exposure to sanctions and potential asset seizures.

In response, China has slowly been shedding its US Treasuries holdings. While the country’s current account – the total of trade surpluses and direct payments – has surged, its holdings of US government debt has tapered down from their high of nearly US$1.3 trillion to about US$1.1 trillion. The Global Times was quoted saying that China will gradually decrease its holdings to US$800 billion.

Bottom line: China has clear motivations for combating dollar dominance and shedding some US debt may be step one. The digital yuan may be a key second step in the process, particularly as a fully realized DCEP could potentially unlock the ability to sneak around US sanctions.

Finance | Industry

Crashing Parties and Supporting the Party: A Day in the Life of China’s Regulators

The crackdown continues: at the end of April, Chinese regulators left 13 of the country’s biggest fintech stars scrambling after being told it’s time to license up and unbundle their financial services.

Regulators added that loans, insurance, and other non-payments services should be removed from apps:

  • Tencent, JD, Xiaomi, Didi, and other giants were in attendance.
  • Ant was the obvious elephant missing from the room.

But breaking up is never easy, and the fallout will be particularly hard to stomach for these giants whose business models are built on one-stop shop super apps:

  • Non-payments services are exceptionally lucrative.
  • Microloans accounted for some 40% of Ant’s total sales. Ouch.

While Ant and others explore new ways to sustain these businesses – i.e. migrating them to separate apps – with regulators on the fritz, no one’s sure if this will be enough to appease Beijing.

Bottom line: Unbundling may just be the price tag for the valuable lesson to stay out of the loans business. From P2P loans and shadow banking to microloans, regulators have struck hard and true at the hearts of these markets. Market stability is the new name of the game, and regulators are on the hunt for any and all that stand in their way.

Industry | Policy

What’s in a Name? Just Ask Huawei…

German regulators are ready to take flight. The Bundestag passed new legislation that could inch the country closer to excluding Huawei from playing a central role in its future 5G networks.

Is Huawei mentioned by name? Well…not exactly. China remains a crucial trading partner as Germany looks to jumpstart a post-COVID recovery. So, it’s no surprise that the new law paints a fuzzy image and avoids targeting any particular country’s “national champions.”

  • Instead, the bill gives regulators the ultimate say in approving applications for 5G partnerships in line with NATO security goals.

We get the picture.

This differs from Germany’s earlier tone, when officials were confident that existing tech policies could mitigate security concerns and that a blanket Huawei ban wasn’t necessary.

  • In 2020, China cheered while the US groaned when Germany greenlit Huawei for its domestic 5G network.

It now seems that bird has flown the coop.

Bottom line: Beijing has been largely successful in its efforts to grow economic ties with Germany over recent years. Yet, losing access to the German 5G market isn’t anything to squawk at, particularly as Germany’s reversal could be an ominous sign for Huawei’s future in Europe at large.

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Industry | Technology

Them Temporary Tech Solutions Are Here To Stay

While the rest of the world hit an “error 404” during the pandemic, China’s digital economy hummed along unaffected by any viruses – either physical or virtual.

During 2020, the China’s digital sector, which includes electronics manufacturing, telecommunications, and internet and software services, took an enormous “byte” of total growth:

  • Digital businesses raked in CN¥39.2 trillion (US$6 trillion), almost 40% of gross GDP.
  • The digital sector grew at faster than triple the speed of national GDP.
  • By contrast, the US’ digital economy only accounted for 9% of GDP in 2018.

The numbers check out. The challenges posed by the pandemic were often met with digital solutions in China, giving an extra boost to an already prioritized sector. School from home required online learning solutions, work from home required telecoms solutions, buying from home required e-commerce solutions, and so on.

Bottom line: While China has put COVID behind it, many instances of digital solutions for IRL issues are here to stay. Now, tied in with a 14th Five-Year Plan that is caps-locked in on innovation in the digital space, new heights are set to be reached for the digital economy.

Business | Industry

The Opportunity of a Century

The Men in Blue (AKA India’s national cricket team) are back, baby! In April, India’s Premier League cricket tournament kicked off – and with it, so too did Chinese phone maker Vivo, one of the league’s top sponsors.

Cricket may be out for a duck (that’s cricket chirp for scoring a 0) in Vivo’s home market, but that hasn’t tempered the phone maker’s enthusiasm for the game. As India’s most popular sport with over 85% share of the Indian sports market, cricket presents a huge marketing opportunity for the smartphone giant.

Since 2019, India not only boasts the world’s 2nd largest smartphone industry behind China but is also one of the world’s fastest growing markets. In 2020, phone shipments batted a record 45 million devices and hit eye-popping 21% y/y growth. To say that the Indian market represents a key target market for Chinese phone makers like Vivo would be a ‘wicket’ understatement.

Bottom line: As more Chinese businesses look abroad, localized marketing is the key to scoring runs. Yet, Chinese brands must be cautious when navigating the geopolitical woes amid rising anti-Chinese sentiment – and few markets have seen stronger backlash than India, where border clashes in 2020 inspired widespread boycotts for Chinese apps and products.

Economics | Industry

Chinese Unease Over Myanmar’s Vulnerable Rare Earths Supply Chain

While China may be the world’s largest rare earths producer, it is also the world’s largest importer. As the world’s third largest rare earths producing country, Myanmar holds unintended sway over the health of China’s economy. Yet, Myanmar’s political instability has disrupted vital rare earths supply chains and introduced doubts over both the trade relationship between the two nations, and the role of rare earths in the global economy at large.

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