Graph of the Week | Markets
Yields Show Tremors Across China’s Financial Fault Lines
Alongside the prudent moves of China’s central bank, China’s money supply has more than halved month-over-month in October – though this seasonal pullback is well documented, with lending usually slowing following the Golden Week holiday in October. Meanwhile, the shrinking amount of cash circulating in the economy has begun to squeeze bond markets, causing investors to ask for higher yields in order to part with their hard-earned cash.
Yongcheng Coal & Electricity Co., a state-owned coal miner, filed for default on its US$151 million corporate bond early this week, sending tremors throughout the markets. Bond prices of various industrial firms have hit all-time lows while other industries have been impacted as well. Corporate bonds for Unigroup Guoxin Microelectronics Co, a prime example as one of China’s largest semiconductor companies, are trading well below their CN￥100 face value at CN￥14.
Bottom line: The PBOC has lubricated the financial system throughout 2020 and allowed private debt to expand beyond normal circumstances; but, while China’s money supply is temporarily reigned in, financial cracks continue to surface. While it is too early to point to major fault lines, investors are growing weary of distressed debt issuers and defaults.
Policy | Technology
Beijing’s latest blueprints are in, and the schematics have “SHENZHEN” written in all caps across the top. China’s newest five-year plan from 2021-25 is going all in on Shenzhen’s Special Economic Zone (SEZ), dangling the prospect of autonomy to propel the megalopolis into a globally-recognized economic and tech hub.
The Shenzhen SEZ pilot program began in 1980, and for its 40th anniversary Beijing is gifting the city relaxed regulations and heightened expectations. Shenzhen’s role in the 14th five-year plan will be that of a poster child for ‘socialism with Chinese characteristics,’ with plans for free market policies in certain industries like land, foreign talent, and tech development, while also bumping up regulations around capital controls and the flow of money.
Bottom line: The new five-year plan is a strong response to issues like an unruly Hong Kong as well as the threat of containment by a US-controlled global financial system. While some have criticized the plan for not doing enough to address key local issues in the young city, it remains clear that Beijing is looking to Shenzhen as the foundation supporting the country’s global competitiveness over the next half-decade and beyond.
Economics | Trade
US Farmers Cash In on Cash Crops
US farmers are harvesting the benefits of the trade deal that Washington sowed with China in January, as latest figures show that China has met 71% of its import targets of farm goods for the year.
The US-China farm trade glass can be viewed as 71% full or 29% empty. As the trade deal bears fruit, the US has been able to hit highs of agricultural exports to China, pumping billions into the industry amid a challenging year for the economy. However, agricultural imports have still fallen far short of China’s US$36.5 billion 2020 purchase commitment.
For Beijing, the exchange has killed two birds with one stone. After a year of extraordinarily severe floods and droughts put a dent in Chinese produce and livestock supply, demand for corn, pork, and soy skyrocketed. Despite the pandemic’s harsh economic impact, this demand planted the seed for more fruitful trading with the US in areas specified within the trade deal.
Bottom line: Regardless of whether China’s increased agricultural purchases from the US are indicative of Beijing’s commitment to the Phase 1 deal or simply filling a dire market need at home, the situation can aptly be summed up by the Chinese idiom – 水涨船高, or all ships rise with the tide.
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Finance | Markets
From Moët to Maotai, Chinese Exchanges Keep It Popping
The bottles have been popping in China this year, with the Shanghai Stock Exchange (SSE) coming in as the world’s largest IPO market for the second year in a row. The SSE tripled its 2019 record performance, playing home to 180 listings and raising upwards of US$61 billion (pending Ant’s listing) over the course of the year.
Primed for success
The SSE’s stellar performance has been a long time in the making. In 2014, the SSE teamed up with the Hong Kong Stock Exchange to connect domestic markets with global capital and, in 2016, it linked with the Shenzhen Stock Exchange to expand listings. In 2019, the SSE released the STAR Board to attract emerging tech SMEs to the exchange with less cumbersome listing criteria and a more defined review process.
It’s been paying off. The SSE has carved its space in international markets by providing global investors access to Chinese companies – opportunities that have particularly paid off in 2020 as the SSE has outperformed the NYSE by 11% through mid-November.
China’s political economy strikes again
The strong performance is greater than just the Shanghai Stock Exchange though as exchanges throughout China have raised a total of US$123 billion this year.
Partly due to a more challenging geopolitical environment and partly because export markets have lagged in their recovery, self-sufficiency has been the name of the game for China in 2020. To aid in its efforts, Beijing lit a beacon in the sky for Chinese companies listed abroad to return home – a call to arms that would offer companies a lucrative opportunity to raise funds on friendlier shores while bringing liquidity to domestic markets via foreign investment in IPOs.
Bottom line: Though Chinese exchanges have been raking in the green (in this case, red) by dangling homegrown champions in front of global investors, their growth potential remains bottlenecked by strict capital controls and few incentives for foreign IPOs in China. Until the RMB becomes more freely convertible and exchanges offer more appeal for non-Chinese company listings, Mainland markets will struggle to eclipse the status of other global financial centers.
Industry | Policy
Reducing Coal Consumption in China Requires Sweeping Reform
To achieve its goal of carbon neutrality by 2060, China needs to ditch coal-fired electric power plants for renewable alternatives. However, doing so will require dismantling an antiquated system of incentives that are in place for local officials and power producers. Whether Beijing can summon the political will to overcome powerful vested interests opposed to these changes will be an important indicator of China’s capacity for meaningful reform.