TWS: Nov. 23, 2020

Graph of the Week | Markets

Onshore RMB Drifts Towards Open Waters

The renminbi is gearing up for a bull market. Daily trading volume of the onshore RMB broke through US$45 billion on November 16th, clocking in at 12-month highs. Meanwhile, demand for the currency has lit a match under the value of the RMB, with the USD/RMB exchange rate hitting its highest level since 2018 at 6.57.

Market skepticism towards RMB valuation has traditionally run deep, and just over a year ago, the US Department of Treasury officially labeled China a ‘currency manipulator.’ Recent movements, however, indicate that fluctuations in the RMB are increasingly market driven.

The People’s Bank of China uses two main tools to manage the currency. First, it sets a daily ‘reference rate’ for its currency, with maximum and minimum value ‘bands’ between which the currency can float. Second, the central bank – or state banks acting on its behalf – buys or sells dollars, driving up or down the relative value of the RMB. Now, as the PBOC’s grip on daily trading bands loosens, the RMB continues to break through recent highs.

Bottom line: Between China’s shocking return to growth in 2020 and an increasingly market driven RMB, investors have their sights set on the currency. The RMB now ranks eighth in trading volume and is poised to soar higher.

Finance | Markets

Beijing Hits It Out of the Park With the RCEP

On the global trading field, one-third of the world’s GDP just teamed up under Coach China. The Regional Comprehensive Economic Partnership (RCEP), now the largest trading bloc in the world, brings together China with 10 other Southeast Asian nations, as well as South Korea, Japan, Australia, and New Zealand under a common economic framework.

China has left historically key Western partners on the bench as it opens spots on its A-list trade team to new players. China has seen its exports as a percentage of GDP steadily decline over the last two decades, down to 17% in 2019 from 26% in 2010; by contrast, the developing economies of ASEAN have taken the top spot as China’s largest trading partner, accounting for 14.7% of its overall trade as of June 2020. The RCEP is Beijing’s pivot away from countries with which it has strained ties and slowing trade and towards those more willing to play ball – all within a deal notorious for its dearth of regulation.

Bottom line: After the US took an extended off-season from regional trade discussions, China has stepped up to the plate to fill the void of economic leadership. The RCEP is a big win for Beijing, who now has homefield advantage in shaping regional regulatory policy and calling the shots in the region.

Economics | Trade

Best Friends Make the Worst Enemies

While US-China trade bans could be best described as a measured back-and-forth, China has launched a more ferocious volley of attacks on Australian products. Chinese ports are now blocking a list of Aussie imports worth over US$4 billion that seems to grow daily.

Australia and China had been downright chummy back in 2015 after the two nations signed a free trade agreement, but tensions have since fallen following Canberra’s stance against Huawei and more resolute anti-foreign interference laws intended to target Beijing’s activity in the Land Down Under. Relations then flatlined when Australia called for a probe into the origins of the coronavirus in April.

Shortly thereafter, Beijing imposed a major beef ban and tariffs on barley, coal, and wine. Add in a more recent ban on timber, sugar, lobster and copper – 8 industries altogether – and with reports of wheat slated to join the mix, we may soon run out of fingers to tally all of the barred Australian products.

Bottom line: Australia is the world’s most China-dependent developed economy, and in the face of a more hawkish international community, Beijing has chosen Canberra as an example to show the potential trade impact that can follow political disagreements with China.

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Industry | Policy

Energy Investors Find Greener Pastures

Investment in China’s renewable energy sector has jolted into action after President Xi announced that China will reach carbon neutrality by 2060. The country is estimated to pump US$2.6 trillion in renewable energies to reach its ambitious goal.

Following Xi’s announcement, investors quickly opened their pocketbooks for green investment, with the S&P Clean Energy Index climbing by 22% and major companies like Xinjiang Goldwind, one of China’s largest wind turbines makers, shocking the market with its 46% gains.

China has a long road ahead to reach its lofty pledge. Not only will it face logistical challenges like connecting renewable energy efficiently to the state grid or transferring energy from the rural areas in which it’s harvested to cities, but central support for state-backed energy intensive projects and reliance on fossil fuels as fuel for economic growth will need to be completely overhauled.

Bottom line: Green energy has always played a leading role in Xi’s campaign. With green development front and center in the 14th five-year plan, Beijing will seek to continue consolidating global influence over sustainable development while allocating sizeable resources to shore up energy-related national security concerns at home.

Industry | Markets

China’s EV Sales Hit the Nitro

As China’s stalled economic engine begins to turn over post-COVID, its automotive industry is seeing a turbo-charged comeback. Electric vehicles (EV) in particular are racing towards a successful recovery after passing the 137% monthly sales increase mile marker in October.

The EV sales boost follows Beijing’s efforts to curb emissions and spur EV adoption through policy support and subsidies. Throughout the pandemic, China continued to support EV development through a US$1.4 billion subsidy while also releasing favorable regulatory updates for production factories.

As a result, Chinese EV companies have begun pulling ahead of the pack. In October, BYD and Xpeng announced impressive earnings at 85% and 229% year-over-year sales jumps, respectively. As manufacturers ride the circuit of EV popularity, central support continues driving the industry towards its finish line of globally competitive domestic EV producers.

Bottom line: At the beginning of 2020, it seemed as though Beijing would begin scaling back support for the industry as its EV subsidy program was phased out. But, given the unexpected turn of events with the pandemic, policymakers have instead gone full throttle to shield the EV industry from the brunt of the impact.


Ready Player China: China’s Growing Gaming Market

Despite its history of strict regulation against the industry, China’s gaming market is flourishing. Chinese MMOs and RPGs are topping lists around the globe while high-quality cross-platform releases, along with creative marketing through films, eSport competitions, and livestreaming, have set the tone for China’s growing gaming market for years to come.

Full Article

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