TWS: May 31, 2021

Graph of the Week | Economics

Step Up or Fall Down: Retail Takes the Plate

It’s always important to read between the lines. Big numbers can look impressive, but, occasionally, they don’t ring quite as loudly with context.

Look no further than China’s current growth figures. While the nation’s economy came strongly out of the gate in the first quarter, signs of uneven recovery still show. According to recent figures from the National Bureau of Statistics, consumer activity sputtered in April:

  • Following February and March’s respective 33.8% and 34.2% y/y retail sales growth, April’s slowed to 17.7%.

These figures look all the weaker when considering:

  • Growth slowed considerably from a booming Q1.They fell short of the expected 25% growth.
  • April 2021 only saw lukewarm growth from April 2020, or the peak of China’s pandemic.

A similarly glass-half-empty view can be taken from a longer horizon:

  • Two-year average retail sales growth from Apr. 2019 thru Apr. 2021 landed at just 4.3%, down from 6.3% in March.

Bottom line: While industrial production and fixed asset investment have also settled from their Q1 leaps, theses unsung heroes of China’s miracle recovery are still squarely in line with forecasts. As they take a breather, China’s recovery will fall on consumer spending to begin stepping up.

Industry | Policy

The Nuclear Option Never Looked So Good

It’s no secret that public opinion of nuclear energy can get radioactive, yet Beijing is still chugging forward with its plans to go nuclear. Estimates show China becoming the world’s leading nuclear energy powerhouse on its journey to peak carbon emissions by 2030.

The US currently leads in production and sale of nuclear power, but China is quickly gaining steam. Since the turn of the century, nearly half of all nuclear reactors connected to the grid were constructed in China, and just last month, the State Council approved the construction of five new plants.

While reactions have boiled over amid Japan’s latest decision to dump nuclear wastewater in the Pacific, it’s nevertheless long been the preferred method to generate energy and is touted as the world’s cleanest and safest source of electricity.

Bottom line: China shouldn’t be the only country fission for compliments on its nuclear energy program. While its motives aren’t entirely clean – the country profits off its nuclear technology exports through the BRI initiative – more countries will need to get onboard with nuclear power to meet goals for curbing global emissions. Let’s just chalk this up to one of those rare cases where a healthy dose of US-China competition can only do the world good.

Industry | Policy

Regs Assign Low Marks to China’s Private Education

Private education is a big business in China, but it’s getting schooled by regulators. This month, Chinese regulators published new rules for private schools, while weighing restrictions on private tutoring for those gosh darn impressionable K-12 kiddos.

This is just the latest round of detention for private education:

  • In March, the industry was slapped with US$389,000 in fines for insufficient licensing and false advertising.
  • Late night online classes have been banned, with late night and weekend in-person tutoring sessions anticipated to follow suit.
  • Strict caps will be placed on tutoring fees.

Private schools also made the State Council’s shortlist:

  • Foreign control of private schools is now prohibited.
  • Local officials can cap tuition fees for private schools that receive government subsidies.

Bottom line: Tutoring and private education is a big deal in China. Like, US$155 billion by 2025 big. Yet, the industry’s boom has challenged regulators, who have become overwhelmed by scams, unaccredited providers, and most worryingly, non-approved curriculum. Don’t forget – while China’s political economy gets a lot of press, education is at the core of the Party’s doctrine, so expect a full-on assault on the industry until it gets its grades back up.

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Economics | Industry

Steeling Away With China’s Green Dream

Steel yourself. May has been a roller coaster ride for producers of China’s most popular metal.

Following production limits imposed on steelmakers in Tangshan – China’s top steel-making city, as well as supply concerns regarding Australian iron ore, speculative buying drove metals prices to all-time highs in mid-May.

Then, a wave of government-led meetings with producers over market manipulation came crashing down to taper the rapid inflation, which sunk steel prices faster than you can say “non-ferrous metals.”

Amid the action:

  • Prices for steel products rose by more than CN¥1,600 per ton before dropping back down to pre-May levels.
  • Many steel mills reported filling orders at a loss due to volatile prices; in response, many have stated that they will slow production and hold larger stockpiles for the time being.

Bottom line: Steel is a cornerstone of the Chinese economy, and, at the moment, it’s placing policymakers in a pickle. While Beijing hopes to curb production to support long-term carbon neutrality goals, volatile metals prices will keep these visions at bay. Demand for steel is red hot, and broken iron ore supply chains from Australia and Brazil are putting stress on production – a reality only made worse by production curbs.

Finance | Industry

The Race Heats Up for China’s Riches

As the world’s largest asset manager, BlackRock is an undisputed leader in the financial industry. Where BlackRock goes, others follow. Curious where BlackRock is heading now? You guessed it: China.

Asset managers in China have had a momentous year. Not only have joint venture ownership requirements been lifted, but market returns also outpaced those from other major global economies in 2020.

  • According to some estimates, China’s wealth market is worth well over US$18.9 trillion.

Financial giants have noticed. Global banks are increasing their investment in China and have begun relocating regional HQs to China. BlackRock, in particular, has been busy:

  • This month, BlackRock got the green light for a new 50.1% majority-owned wealth management JV.
  • This is in addition to the wholly owned mutual fund company that it opened in China last year.

Bottom line: China’s domestic wealth management capabilities have always trailed behind its massive market opportunity. JV ownership limits have long protected the industry from more mature foreign competition, yet as the industry opens up, it appears domestic giants have now been deemed strong enough to hold their own. Expect China’s wealth management scene to become the backdrop for the next financial gold rush.

Economics | Policy

The Fickle War Against China’s Credit Boom

Easy access to credit, a key pillar of China’s recovery, has helped lift the economy from the pits of the pandemic; however, cracks are beginning to show. Policymakers are now shifting their gaze towards systemic issues that could hinder the economy’s long-term recovery – and an unprecedented domestic credit boom is at the top of the list. Yet, as new monetary policy takes hold, many wonder if Beijing has introduced the very economic instability that it sought to avoid.

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