TWS: May 3, 2021

Graph of the Week | Economics

TBTF? We Don’t Do That Here…

It all began in November 2020 when China’s State Administration of Market Regulation (SAMR) put a cork in Ant Financial’s mammoth-sized IPO. Ever since, anti-monopoly has become China’s policy du jour in 2021: from new rules for P2P lenders to Alibaba’s jaw-dropping US$2.8 billion fine, SAMR has been waging nothing short of an all-out war.

While these efforts are welcomed by the small businesses that suffered from anti-competitive practices, investors have hastily pulled back in the markets, making China lag in this year’s global stock rally. The CSI 300 Index, which tracks the performance of the nation’s largest firms, has slumped since SAMR turned up the heat in January.

Nonetheless, economists tend to believe that the anti-monopoly campaign in 2021 will end quickly, even given that several previous tightening campaigns lasted beyond a year. Moreover, major banks consider the anti-trust investigations as a benefit for the economy in the long-term.

Bottom line: In the grand scheme of things, SAMR’s anti-monopoly war is unlikely to dim China’s growing demand and business activity. In this case, a rising tide raises all ships: China’s economic growth bodes well for China’s public companies, and investors will return with more gusto after the squall settles.

P.S. pay no attention to the hushed SOE consolidations taking place behind the curtain.

Economics | Trade

Outta There Faster Than a ’Roo in the Outback on a Hot Summer’s Day

Crikey! There’s thunder rumbling down under as the Aussie government scraps plans for joining China’s Belt and Road initiative.

Victoria was initially slated for two infrastructure deals that would bring investment and jobs to the region. Yet, with Sino-Australian relations more bitter than a barrel full of Vegemite, officials in Canberra now worry that the deals might be a croc (that’s Aussie for “a threat to national security”).

China remains Australia’s largest trading partner, but ever since Aussie authorities caught wind of China’s political influence at home in 2018, relations have hit a great barrier of the non-reef variety. Beijing has largely banned Australia’s largest export sectors, and tariffs, quotas, and trade manipulation have spilled bad blood between the two.

Bottom line: What’s happened between Beijing and Australia has been less of a back-and-forth trade spat and more of a classic one-sided backyard whooping session. Australia was one of the few developed nations that exported more to China than it imported – a balance that has since given Beijing a larger retaliatory toolbox. Now, with its activity in the Quad and public dismissal of Beijing’s beloved BRI, things are unlikely to look up anytime soon in the Land Down Under.

Economics | Trade

Xi to Merkel: “We’ll Always Have Duisburg”

…and more on the Belt and Road Initiative…

When you think of China’s BRI, does Germany come to mind? Ja? Fantastisch! Nein? Read on.

At a dash over 130 countries, the BRI is a monstrous initiative that places China at the center of the developing world. With most member countries based out of SEA, Africa, and the Middle East, the 8-year-old campaign doesn’t typically conjure up thoughts of Western Europe, let alone Germany.

Yet, China has invested heavily in expanding Euro-Sino rail routes, many of which connect through Deutschland via the key city of Duisburg. The city’s freight traffic with China hit record highs last year, as trade between the two grew by 70% and is projected to rise by another 40%. The routes are getting a big “danke” from the Guisburgians as the city rides the rails to tens of thousands of new jobs.

Bottom line: While rail shipping through these lines can be nearly 3 times more expensive than sea freight, ongoing hiccups in global logistics give all the more reason to diversify trade routes, and railways like this provide a much-needed alternative to waterborne deliveries. For German leadership, these new Sino-German economic ties also complicate traditional alliances and up the ante for taking hard stances against China. Alles klar? Gut.

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Beyond Meat Plants Roots in China

Plant-based meat is catching fire, and the ‘steaks’ are getting higher as Beyond Meat officially plants its roots in China. The company just opened its first China-based production facility about an hour-and-a-half drive outside of Shanghai.

The pea’s gristle here for Beyond Meat not only lies in the new factory’s proximity to consumers, but also to key suppliers. 85% of Beyond Meat’s super-special secret pea protein is made by Shandong-based Yantai Shuangta Food Co., which holds between 30-40% of the world’s market share for the ingredient.

Entering China early last year via a Starbucks partnership, Beyond Meat also debuted a meatless burger restaurant and signed a deal with Alibaba to bring its popular meat-alternative to Chinese supermarkets. It’s since launched an imitation minced pork especially for the world’s largest pork market, supported by the nearly 30kg that the average Chinese foodie chows down on per year.

Bottom line: The best and wurst is yet to come for Beyond Meat in China. Cuisine is deeply entrenched in Chinese culture and palates will not be easily changed; still, the realities of widespread pork shortages and ballooning pork futures offer a unique opportunity for the company to hook the world on plant-based protein.

Economics | Policy

It’s All About That Sweet R&D, Baobei

AI, 5G, EVs – these three acronyms have consistently crowded the pages outlining China’s plans to drastically raise research and development spending. They took the stage again as Beijing reaffirmed R&D goals in its work report from the recent National People’s Congress.

Research spending has been eye-catching, but these new objectives are even more so:

  • China broke records in 2020 by spending 2.4% of GDP on R&D
  • R&D spending is set to raise the bar by 10.6% this year
  • Beijing plans to continue increasing investment by >7% every year for the next five years

In the modern Cold War that is US-China relations, homegrown tech innovation has become a core goal for Beijing, particularly as a variety of American efforts throughout the trade war have sought to hamper certain high-tech Chinese industries.

Heavy R&D is essential for China to get its innovation going ASAP, and as shown by the 14th five-year plan, funding will go to the usual suspects like AI, semiconductors, biotech, EVs, 5G, and more.

Bottom line: Self-sufficiency is the name of the game, and China has reaffirmed these ambitions time and time again. From the dual circulation strategy to the newest five-year plan, Beijing has shown that it means business when it comes to its R&D [out]spending.

Economics | Finance

The Rise of the Renminbi: Hong Kong’s Role as an Offshore RMB Hub

A global RMB is a strategic long-term policy goal for China, and a deep offshore market is a crucial prerequisite. As a key offshore RMB hub, Hong Kong will have to embrace supportive policy and build financial market infrastructure to bolster the RMB’s internationalization. This article takes a look at the potential levers available to both Hong Kong and Mainland authorities to advance this agenda.

Full Article

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