TWS: Nov. 30, 2020

Graph of the Week | Trade

Trade Future Up in the Air in the Land Down Under

What began with Australia’s proposal for inquiry into the origin of COVID-19 has quickly spiraled into a trade war, and the dispute is beginning to weigh on the ‘Land Down Under.’

While many had hoped that the recent Chinese-led RCEP trade deal would remedy the flailing Sino-Australian relationship, the shallow nature of the deal does not prevent Chinese tariffs on Australian goods from remaining in place. Nor does it prohibit new tariffs, as the largest national consumer of Aussie reds and whites slapped duties of up to 210% on wine imports from the Land Down Under last week – a product that saw trade volumes of US$1.2 billion in 2019.

Both sides are playing an expensive game of “chicken,” but Australia’s Prime Minster, Scott Morrison, may have taken the first step in extending an olive branch. At an event last week, Morrison explained that Australia’s former actions had been misinterpreted by China and went on to admire China’s economic growth and achievements in poverty alleviation.

Bottom line: China has made it clear that trade will not normalize until Australia ‘plays ball.’ Rejections at the border and high tariffs have become commonplace for top exports like barley, wine—even lobster—and with the dispute weighing on Australia’s exporters, many will be forced to seek new markets should the relationship stay its current course.

Markets | Policy

Mirror, Mirror on the Wall, Who’s the Most Fraudulent of Them All?

Washington is leaving no stone unturned as it throws down the gauntlet to US-listed Chinese companies yet again.

A recent SEC proposal would use “co-audits” to require US-listed Chinese companies, which can currently go public on US exchanges without US inspection, to undergo audits by both a Chinese accounting firm as well as a second accounting firm in a country compliant with the PCAOB – the US organization that regulates auditors of publicly traded companies.

Chinese officials’ clockwork-like response

Chinese officials, as expected, have called foul on the proposal, outlining concerns over possible breaches of trade secrets, and have already publicly prohibited Chinese companies or individuals from working with overseas securities regulators without its explicit go ahead. Their worry? Under the new proposal, US-listed Chinese firms would answer to a new set of policymakers, which in turn could cap Beijing’s ability to marry politics and economics at its largest and most influential companies.

The CSRC ticks out of beat

Yet, in a split from the official stance, China’s Security Regulator Commission (CRSC) returned the gauntlet to its rightful owner and instead expressed its willingness to discuss how the PCAOB might gain access to Chinese audits. Historically, international calls for more transparent access have been met with little action; but, peering through the looking glass over the past year, Beijing may now be ready to follow through to keep channels open for foreign investment.

Bottom line: Don’t expect China to raise its hand to admit that it’s faced more than its fair share of financial fraud lately (Luckin’, we’re looking at you). However, with its campaign to end fraud in the private sector as well as the looming threat of widespread delistings for its most globally visible companies, Beijing may have taken a hard look in the mirror and concluded that, just this once, the juice may be worth the squeeze to explore its options. In other news, the outcome of this proposal will also tie hand-in-hand with the incoming Biden administration’s China strategy – which means for now, the bottom line will remain blurry on both sides of the Pacific.

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Industry | Policy

‘Beijing Blip’ Overshadows Most Profitable Singles Day Bash

Beijing painted a stormy sky over ecommerce giants on the eve of Singles Day that continued to cast shadows over the world’s largest online retail frenzy. Despite raking in record-setting sales at US$115 billion, Chinese tech stocks flashed red on the news that regulators were releasing new draft regulation intended to reign in domestic tech companies.

The new regulations seek to break the stranglehold that Chinese tech giants have over the market. By prohibiting industry norms like exclusivity clauses, consumer behavior-based marketing, and generally dodgy sales tactics, Beijing has fired the first shot at the digital players it perceives to wield too much influence over the public.

Investor response was swift as top tech stocks shed a combined US$102 billion and tech-heavy exchanges saw their market values wash away as the announcement thundered throughout the market.

Bottom line: The drafted guidelines unveil a significant mental shift for officials that bigger doesn’t always mean better. Though Beijing continues to flood resources into strategic industries, this latest move illuminates regulators’ confidence that China’s tech giants are formidable enough to take on the world yet shows their concern about leaving these ever-growing Frankensteins unleashed at home.


Upgrading the “World’s Factory” Through China’s Fourteenth Five-Year Plan

China’s leaders are meeting in October to finalize proposals for the country’s fourteenth Five-Year Plan (2021-2025). As tensions with the US intensify and economic growth slows, Beijing is under pressure to produce a five-year plan that delivers its “Made in China 2025” ambitions on time and is likely to turn to increased state intervention in strategic sectors of the economy as a central tenet of the upcoming five-year plan.

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