TWS: Nov. 1, 2021

Graph of the Week | Economics

Producers Pay It Forward to Consumers

Producers have largely borne the brunt of higher inflation brought on by booming commodity prices throughout the year. The recent energy crunch has only added to the weight on their shoulders.

According to September figures, PPI surged once again while consumer prices for both food and non-food goods stood relatively stable:

  • China’s PPI rose 10.7% year-over-year, hitting 26-year highs and marking the ninth straight month of price growth.
  • Non-food CPI growth remained neutral, while September food prices continued their decline with a 5.2% drop.

A year-long slowdown in consumer spending has caused businesses to keep prices low and shoulder the cost of rising input costs. Nonetheless, slimming margins are now pressuring producers to pass the buck onto consumers – higher price tags are likely to hit the aisles in coming months.

Bottom line: Diverging producer and consumer inflation is sounding the alarm among many who believe that stagflation lies ahead. While consumer demand remains at lower levels than the highs in earlier 2021, the alarm is likely premature. As long as headline risks like the Evergrande crisis and energy crunch be contained, this sleepy consumerism spell should prove transitory.

Economics | Trade

OBOR? Never Heard of Her.

One Belt, One Road…What the heck is that? That’s the question on everyone’s mind after overseas investment from China has gone quiet. Following the onset of the pandemic, infrastructure project construction stalled while opposition to the initiative among targeted nations has risen alongside concerns over debt diplomacy. Nonetheless, a Laos-China OBOR collaboration recently made its debut and gave pause to the naysayers.

The brand-spanking new Lane Xang EMU train pulled up safely to the Vientiane Station in Laos for the first time this month after just being completed by the China State Railway Group. With a speed of 160 km per hour and named after the Laotian kingdom that existed from 1353 to 1707, this high-speed train will be the first of its kind in the Southeast Asian country.

Many have seen China’s growing involvement in Southeast Asia as a move to compete with the US for soft power in the region. China has outspent the US in ASEAN this year; in the last year alone, China has invested $10 billion in Malaysia’s solar panel industry, been the chief donator of vaccines, and approved the construction of a new $5.1 billion highway in Laos, among countless others.

Bottom line: The Lane Xang marks a continuation of the country’s Belt and Road Initiative. Many Laotians have welcomed the project as a gate to more foreign investment. On the other side of the border, the investment was a no-brainer for China given its strong trade ties with ASEAN. Still, with pressure mounting against OBOR in most other regions of the world, this Laos-China collaboration does little more than suggest that the initiative is not yet dead.

Industry | Policy

Medusa, Meet China’s Housing Market

Is the Evergrande crisis growing a new head?

A recent study by Bloomberg discovered that nearly two-thirds of China’s top 30 property companies have violated at least one metric from China’s new “three red lines” policy that aims to reign in the industry.

But first, China’s Housing Market 101:

Chinese real estate has been a source of enormous wealth creation for the Chinese population. A nearly three-decade long rally in housing prices has brought huge fortunes to tens of millions of rags-to-riches homeowners. It’s also introduced huge risk into China’s economy.

Beijing’s strict capital controls regime and strong-handed intervention in capital markets has left few attractive alternatives for Chinese investors outside of the domestic property market, while prevailing cultural expectations encourage young Chinese couples to buy homes and apartments before tying the knot. These two factors have led to the market’s exponential growth over the past twenty years:

  • Over 75% of China’s wealth is tied up in real estate.
  • Real estate production and property-related services generate ~29% of China’s GDP.

Yet, the industry was teetering. Property developers were overleveraged while prospective homeowners borrowed at premiums for houses at multiples that put the 2008 housing crisis to shame.

Beijing’s Curt Response

In true 2020 fashion, regulators had finally had enough. Beijing implemented deleveraging measures on a sector-by-sector basis, primarily focusing on the overheated property market in China’s largest cities. Cue the “three red lines” policy:

  • The property firms’ liabilities shouldn’t be more than 70% of assets.
  • Net debt shouldn’t exceed equity.
  • Cash should be at least equal to short-term borrowings.

The three red lines seek to slow credit growth among property developers and ensure sustainable growth within the industry, though the strict rules have led to most of China’s largest real estate developers suddenly finding themselves on the wrong side of the new policy.

Bottom line: The Evergrande crisis opened the world’s eyes to the global implications of sudden Chinese policy changes. Still, it’s important to remain clear-eyed that the three red lines policy is over-corrective and, by nature, intended to add conservatism to an industry that has long embraced unsustainable financial practices. Developers were certainly heading towards dire straits, but many of the financial quandaries that we’re seeing are self-imposed as firms reallocate balance sheets to fall in line with the law. Equally important will be to keep an eye on the market reaction to lower consumption levels brought on by citizens hit by sinking housing values amid slowing GDP growth.

Business | Policy

How Didi Crashed Into China’s New Data Security Laws

Didi’s future is dim – but not yet extinguished.

After years of a relatively hands-off free market approach, Beijing is now turning to state-backed companies to assert control over private industry. It comes as little surprise that one of China’s largest tech companies would be the first casualty of regulators’ shifting priorities; after all, as the Chinese idiom goes: “kill one to warn a hundred.”

Learn more about how China’s new data compliance laws and strong penalties against internet giants mark a shift away from private industry in our latest China Insights article:

Full Article

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