TWS: May 24, 2021

Graph of the Week | Finance

Regs Ravage the Rally & Call In the Bears

Two weeks ago, we mentioned that the war that Chinese regulators are waging will have a positive long-term impact on the economy. As restrictions target anti-competitive activity in the digital space, new opportunities will arise for the little guys. Nonetheless, the market’s recent dip has been eye-catching.

For Alibaba, Pinduoduo, Baidu, and Tencent, these giants have lost anywhere between 25%-40% of their value since their previous highs between the end of 2020 and early 2021.

Baidu (BIDU), China’s leader in search engine and AI, has led the plummet:

  • Led by famous buyers like Cathie Wood’s ARK and Bill Hwang’s Archegos Capital, BIDU tripled its price between May 2020 and Feb. 2021.
  • Yet, after China formally released its new anti-monopoly laws in February, BIDU quickly halved from its 52-week high to US$180.

Bottom line: While a more competitive economy creates widespread benefit for Chinese consumers, the impact on tech companies is hitting home, and investors are more than wary. While some giants only need minor adjusting, others – like Ant Financial with its high levels of leverage – will need to drastically rethink their business models. So, with turbulence on the radar, buckle up for the bumpy ride to come.

Business | Policy

Serving Up a Fresh Round of Fines

It’s open season for anti-competitive behaviors in China, and Meituan is on the menu (as well as available for delivery!). Similar to Alibaba, the company is under investigation for cajoling merchants to sell exclusively on its platform.

China’s antitrust hunt is heating up:

  • Regulators recently released a draft overhaul of China’s anti-monopoly law regime.
  • In early April, Alibaba was fined a record US$2.8 billion for monopolizing the market.
  • Meituan and 33 other companies have been ordered to the chopping block by regulators.

While China’s antitrust laws have been around since the late 2000s, they have only recently been more heavily applied towards tech companies. National darlings like Tencent and Baidu are perfect examples of favorites that have previously enjoyed a nurturing environment largely free of foreign competition.

Bottom line: From IP to antitrust, regulatory protections and innovation go hand-in-hand. It’s no surprise then that China, who’s gone all in on becoming the global leader in emerging technologies, is whipping its markets into shape. And Meituan? Well, it’s probably a good thing that it just raised US$10 billion last week to buffer against a governmental wrist slap.

Industry | Technology

Open Skies Ahead for Chinese Cloud Giants

Chinese tech giants are taking their competition to the clouds in Indonesia. Last month, Tencent Cloud threw down the gauntlet with Alibaba Cloud by opening its first cloudcomputing center in Jakarta.

With plans to launch more centers over the next year, Tencent is looking to paint its influence over the country. While Alibaba has a head start on Baidu after it entered Indonesia in 2018, it’s still too early for either firm to claim a thunderous “W” over the market.

Why Indonesia, you might ask?

  • It’s the world’s 4th largest country by population and the fastest growing digital economy.
  • Unlike the US and India, the market is not saturated with competition (cough cough…Amazon).
  • Indonesia’s cloud market is in its early stages, offering plenty of open sky to scale market share at a low cost.

Bottom line: When gazing up at the clouds, it’s easy to miss the trends on the ground. China’s tech giants have established a comfortable if not fierce market share at home and are now investigating new battlegrounds abroad. While foreign competition looms – Amazon just opened its own first Jakarta location in March – China’s giants tout an impressive advantage of rapid spending growth for cloud infrastructure, which jumped by 66% in 2020.

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Industry | Trade

Chinese Ports Stay Steady on Course

Ever notice that you can’t spell “exports” without “ports?” It’s no coincidence, then, that China’s ports have made the nation into the captain of global trade that it is today. China is at the helm of the world’s maritime shipping industry, commanding 12 – 3 more than the US – of the world’s top 100 most connected ports.

Yet, with many going back hundreds of years, Chinese ports are as efficient as they are connected. All hands are on deck in cities like Ningbo and Zhoushan, Shenzhen, Guangzhou, Qingdao, and Tianjin, as China’s busy ports handle nearly 30% of the world’s throughput – or the amount of goods in containers processed by a port. This number continues to rise with the tides, as freight volume processed by the top five ports in China has increased 6-fold over the last ten years.

The sheer connectivity and efficiency of China’s ports have led to the nation’s maritime trade dominance, but none of this happened by accident. Over recent decades, Beijing has played a strong hand to secure all of the resources, funding, and attention necessary for China’s ports to have the infrastructure to grow with China’s economic output.

China’s Modern Maritime Silk Road

If China’s ports are the mainsail driving the nation’s maritime strength, then the “Maritime Silk Road” is the jib. With a strong base at home, Beijing has turned its navigator towards seaports abroad.

The Maritime Silk Road, part of the broader BRI, aims to shore up China’s global maritime network by investing in foreign shores. Between 2010 and 2019, China’s crew of SOEs reeled in over 80 agreements totaling nearly US$70 billion for port projects overseas. As the skippers behind the operation, the SOEs then provide construction contracts, FDI, and more to countries keen to revamp their ports.

Still, deals have slowed to a crawl. Many now worry that port deals with China don’t come cheaply after several countries have fallen prey to debt trap diplomacy, in which crippling debt and an inability to repay loans see foreign ports changing flags.

Bottom line: 
Shipping remains the most popular method to transport goods across the globe. As the world’s second largest economy, largest exporter of goods, and the largest trading nation in the world, maintaining a connected network of ports and secure shipping lanes will continue to be a top priority for a China increasingly worried about maritime security.

Industry | Technology

Crafting a Coffee Culture in China

Perhaps most well-known for its love of tea, China’s tea culture has been meticulously cultivated for thousands of years. Millions of Chinese drink tea daily; yet, in recent decades, coffee has surged in popularity.

As the two most prominent players in China’s coffee industry, both Starbucks and Luckin have taken China by storm. While Starbucks preferred to key into cultural values, Luckin has instead capitalized on societal trends. Regardless, both chains have defined their niche within the Chinese consumer lifestyle and are evidence that, so long as Chinese market strategies are culturally aware and data-driven, there is more than one road to success in the Chinese market.

Read more about the takeaways from the tales of Luckin and Starbucks in our most recent China insights article: Crafting a Culture of Coffee in China

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