TWS: Nov. 9, 2020

Stay in the know on China business insights

Graph of the Week | Markets

Keeping a Short Leash on a Big Ant

Ant Group’s stakeholders were more than eager for their share of the company’s US$34.5 billion IPO this month. Jack Ma, the founder of Alibaba and Ant Group, was personally expected to pocket at least a cool US$27 billion from the IPO, but for now these winnings will have to wait.

Ma’s harsh criticism of Chinese regulators at a banking summit in late October prompted officials to initiate an investigation into Ant Group’s financials, leading to the Shanghai Stock Exchange halting Ant’s listing plans.

Behind the decision was the high degree of leverage propping up the financial empire. Currently, Ant has CN¥2.1 trillion consumer loans outstanding, but only about 2% of Ant’s loans appear on its balance sheet. By issuing asset-backed securities (“ABS”), Ant can typically obtain liquidity of nearly 100% of its current assets and use the cash collected to re-issue new loans. From there, rinse and repeat.

Bottom line: Ant’s cancelled IPO can be reduced to two factors. On the surface, Beijing wants to make it clear: no company or individual, no matter how influential, is above the law. Under the surface, regulators don’t view players within the micro-lending industry favorably and are quickly working to close the legal grey areas that allow the industry to exist.


Finance | Policy

Squeezing Out Micro-Lenders

When it comes to money and the internet, a little can go a long way. To keep a tight leash on micro-lenders, the PBOC recently issued a new basket of rules intended to color in the glaring grey zones within the rogue micro-lending industry.

Regulators view micro-lending as a major threat to market stability and have been slowly strangling the life out of the industry. In a recent draft of regulations, new limits on maximum lending amounts, higher capital thresholds, and increased data sharing with the PBOC will be levied on online lenders. Lenders will also need to find a partner bank to jointly invest in any loan they want to fund.

The new regulations are meant to raise the bar to heights that only the most established players will be able to continue operating under, while also filtering out riskier investments by requiring lenders to jointly invest with banks that have more conservative lending practices.

Bottom line: The PBOC has been filling in the cracks in Chinese markets to create some breathing room as it doles out stimulus and adds mountains of bad debt at traditional institutions. It’s also no surprise that the new draft regulations come as one of the industry’s most well-known players, Ant Group, comes under intense regulatory scrutiny.


Economics | Trade

China Hums Along With Humdrum PMI

The Chinese economy train keeps on chuggin’ along as Caixin’s manufacturing PMI soars to new heights unseen since 2011 at 53.6.

A quick reminder: manufacturing PMI is a pre-indicator that predicts business activity levels before final numbers for production and consumption are released. The figure is based off surveys of manufacturers and runs on a scale of 0 to 100, with anything over 50 considered “growth.”

October marked the 6th consecutive month of PMI growth, with the near decade high coming amid a humming economy and recovering consumer activity. While October’s figures were fairly vanilla, there were two nuggets of nougat to drool over:

  1. While the numbers show that total orders are increasing, new foreign orders are rising, albeit at a much slower pace;
  2. The main raw materials inventory index dropped by 0.5% to 48.0, which points to decreasing production inventories and indicates that production may continue to gain steam as inventory stockpiles built during and after the quarantine wear thin.

Bottom line: As the height of the pandemic moves further away, China’s manufacturing will continue shooting forward as it makes up for lost time. With supply and demand recovering, China’s economy can expect to pull into the station with 2% growth in 2020, surpassing all other major economies in a year of global economic stagnation.


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Industry | Technology

LBX & YXT Go TBTF Over O2O

Whispers are coming out of the woodworks that Laobaixing and Yixintang, two of the three largest pharmacy chains in China, are in talks to merge and form a mega pharmacy.

The alleged merger would lay the groundwork for heavier integration between the pharmacies’ online presence and physical storefronts. The “O2O,” or online to offline initiative would be supported by the perfect partner – tech giant Tencent, which controls a 1% stake in Laobaixing (LBX).

O2O gives customers the option to order products online and receive them in person via delivery, often on the same day. In China’s e-commerce driven retail market, many industries have been transformed by O2O, and drugstores are beginning to see the writing on the wall. Tencent’s stake in LBX would give the post-merger mega pharmacy a leg-up on competitors via special inroads into its popular social media platform, WeChat.

Bottom line: While Tencent, Laobaixing, and Yixintang may be the movers and shakers to embrace O2O within the industry, they’re far from alone. Meituan and other e-commerce giants are toying with the idea of buying into pharmacies, particularly as an early pivot to O2O would allow for quick winners among a wave of consolidation in one of China’s most fragmented markets.


Industry | Policy

Blasting Through Paper Tigers

In a fit of fury over Washington’s latest deviation from its traditional stance on the One-China policy, US defense firms are getting a taste of Beijing’s fresh sanctions after policymakers penned a US$1.8 billion arms deal with Taiwan.

US support for the One-China policy (not sure what this means? Check below) predates formal diplomatic relations with China, though much to President Xi’s dismay, the Trump administration has broken from precedent on several occasions. In response, Beijing has heavily militarized the Taiwanese Strait, prompting Taiwan to call upon Washington for some new gadgets.

Boeing, Lockheed Martin, and Raytheon, three major defense firms now facing Chinese sanctions, have strictly government-approved foreign contracts and make deals based off US policy – placing them directly in Beijing’s crosshairs. While the details on the sanctions haven’t been disclosed, they are unlikely to affect divisions outside of military technologies.

Bottom line: Because US defense companies aren’t allowed to conduct military sales with China, the sanctions may just be a paper tiger symbolizing Beijing’s opposition against US-Taiwan military cooperation – particularly as talks of another sale worth a whopping US$2.37 billion are happening now.


Economics | Policy

Clear Waters and Blue Skies for China’s Economy in 4Q and Beyond

Following its first economic contraction since Mao Zedong held office, China has set precedent as the first major economy to return to growth. While the road to recovery has been riddled with bumps indicative of lopsided development, Q3 results, paired with well-targeted policy support, are painting a promising outlook for China’s development into Q4 and beyond.

Full Article

Further Reading

The Weekly Steep

TWS: Nov. 23, 2020

The Weekly Steep

TWS: Nov. 16, 2020

The Weekly Steep

TWS: Nov. 2, 2020

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