Graph of the Week | Economics
Time To Buckle Up for Turbulence
Crude steel can be a “crude” indicator of Chinese economic performance, and with declining infrastructure investments and property development placing downward pressure on steel production, we have another sign that economic turbulence lies ahead for Beijing.
Major causes of the dent in production and investment can be attributed to tepid demand from the real estate sector and local governments, both of which have scaled back lines of credit and hampered construction in the wake of China’s ongoing liquidity crisis.
Mixed asset investment has suffered as a result, consistently falling to a monthly compounded growth rate of just 0.11% in October 2021. Though steel is used in a variety of manufacturing industries, it is pivotal for infrastructure development; as a result, China’s monthly crude steel output shrunk to 71,580 tons in October 2021, a year-on-year decrease of 21,702 tons.
Moreover, steel output cuts are also driven by environmental factors. Beijing has implemented strict output controls in a bid to keep 2021 steel production within the previous year’s levels.
Bottom Line: China produces about half of the world’s steel. So, with steel production down by such a significant amount, this marks a clear warning sign of forthcoming economic turbulence. While the current drop in production can be attributed to headwinds in infrastructure and real estate investment tied to the Evergrande fiasco, it may also be telling of slowed demand amongst manufacturers in segments like automobile and consumer goods production, which is equally worrisome.
Economics | Industry
Shifting Signals Over Singles’ Day Sales
It’s lonely to be single, right? Well, for China’s bachelors and bachelorettes, at least they have Singles’ Day. Not only does the unofficial shopping holiday allow singles to fill the void of a significant other with e-commerce purchases, but it also acts as a barometer for consumer sentiment. Just like a bad blind date, this year’s holiday gave us mixed signals.
At the surface level, Singles’ Day results showed strong sales:
- Alibaba’s total gross merchandise volume reached a record-high $84.5 billion.
- JD.com also fared well with volume reaching $54.6 billion.
Though, in terms of actual growth, Alibaba’s 8.5% increase appears meager in comparison to the 26% from last year. JD saw 28.6% growth, which was still lower than the 33% growth from last year. Moreover, the once one-day shopping holiday became an 11-day event in 2020; with 10 additional days to rake in cash from the world’s largest consumer market, growth figures look even weaker.
Bottom Line: While Alibaba flaunts record sales, the reality is that the results were modest, and there are clearly headwinds pushing on consumerism. Inflation likely played a significant role, with high producer inflation making it tougher for merchants to give discounts amid lower margins. In a different vein, competition also played a role. Singles Day was founded by Alibaba, and JD.com had historically been its sole competitor. Nowadays, internet companies like Pinduoduo – along with livestreaming platforms like Kuaishou and Douyin – have begun to eat away at Alibaba’s dominance.
Industry | Policy
LinkedIn ‘LinksOut’ of China
Over the past month, two of the last big Western names have called it quits on China. LinkedIn and Yahoo have both announced that they will pull out of the Chinese market, citing growing complexity in censorship and data compliance requirements.
It’s been a tough year for tech companies in China. Amid industry-wide crackdowns that saw many of China’s largest tech giants bend the knee to Beijing, policymakers turned up the heat and hatched two new laws to govern the domestic use of data over recent months:
- Personal Information Protection Law: PIPL focuses on defining the scope and processing of personal information. It strengthens user data protection requirements for companies with heavy user data-driven services.
- Data Security Law: DSL focuses on data and the companies and individuals that process it. It constructs a system that standardizes and regulates nationally sensitive data.
These new policies are just now coming into effect – and companies are worried. While the objectives seem clear, the business implications are anything but.
- Intensifying censorship requirements are increasing the risk of operations for user data-heavy firms in the China market.
- Language in the DSL is vague, and companies have no choice but to hike compliance costs amid little understanding of the data security requirements that apply to them.
LinkedIn and its 54 million Chinese users held the trophy for the “last man standing” for major American social networking platforms in the Chinese market. Still, with the new data-related laws coming into effect, the cost-benefit analysis to maintain operations in China fell flat and the professional networking giant decided to cut its losses. Yahoo followed suit shortly after, announcing that it would also be leaving China for good.
Bottom Line: In many cases, Western tech companies in China – LinkedIn included – were not held to the same strict censorship and operational standards as their Chinese counterparts. As Beijing tightens its grasp on the domestic tech industry, policymakers have deprioritized the ancillary benefits that foreign companies bring to the domestic market (read: IP, FDI, and more) and are instead ringing the bells that recess is over for any and all companies that want to share in wealth of the Chinese market.
Economics | Finance
The Unholy Matrimony of China’s Real Estate and LGFVs
Local government financing vehicles (“LGFVs”) reclaimed the spotlight during the pandemic as officials sought quick gains to reinvigorate a slowing economy. However, mounting off-balance sheet debt has become a key concern for policymakers who seek to confront a credit boom.
As China’s property market woes begin to create ripple effects for LGFVs, policymakers are now tasked with balancing the need to front-run debt issues while preventing rampant defaults.
Policymakers have a wide variety of policy solutions available to them; though, running course with recent party policy of improving capital market allocation efficiency, it may be possible that we soon see the first LGFV official bond default.