TWS: Oct. 12, 2020

Graph of the Week | Industry

Despite donning an ant as its mascot, Ant Financial was likely a mammoth in another life. As the firm sits on the cusp of a gargantuan-sized IPO, Ant, the former digital transactions subsidiary of Alibaba, has lifted its target IPO valuation multiple times to its current level of US$250 billion.

How has Ant achieved a higher valuation than the second largest bank in the US, Bank of America? Well, as the owner of Alipay, Ant Group’s rise has benefitted from the rapid adoption of digital transactions in China. B2B sales are primarily to thank, as digital payments among businesses has grown fourfold from CN¥5.4 trillion in 2011 to CN¥21.2 trillion in 2019.

If that’s not enough growth potential, look no further than Ant’s now most profitable division: digital consumer loans. The company made a strategic swift to financing after it broke from Alibaba, and in 2020, this division drove 63.4% of the company’s total revenues.

Bottom Line: Despite rumors that Ant may be next on the firing block within the US-China spat, the firm’s potential mid-October dual-listing IPO still looks pretty rosy, as it only draws 5% of its income from global markets and is set to debut on Hong Kong’s and Shanghai’s exchanges.

Economics | Policy

Give Some Fin to the Haiguis, Dude!

Following COVID and uncertain global relations, 800,000 haigui, or Chinese foreign graduates affectionately known as ‘sea turtles,’ have followed the current home. With roughly 70% of the Chinese student population abroad returning in 2019, China now faces an influx of highly skilled graduates into the already overpopulated domestic job market.

Their next adventure? Compete with roughly 8.75 million domestic Chinese graduates for a limited pool of jobs. Though foreign graduates were once highly sought after by companies for their unique resources and knowledge, the tide has turned as domestic students graduate with skills more tailored to domestic market needs. Over recent years, Beijing has also increased its support for domestic graduates but has not extended the same opportunities to students returning from abroad. All in all, roughly 80% of haigui settle for jobs with lower salaries and in different areas than their field of study.

Bottom line: China’s haigui are outspending domestic peers on education, only to return home to an unwelcoming job market and few opportunities awaiting them. Few domestic opportunities and an increasingly politically-charged global job market against Chinese graduates are likely to leave this bale of sea turtles feeling stranded on the beach.

Economics | Policy

A Page Straight Out of Mao’s ‘Political Economy’ Playbook

It looks like someone’s been hitting the history books again, as President Xi revives some of the central beliefs set forth by the communist father of modern China, Mao Zedong. As a part of his dual-circulation strategy, Xi is looking to modernize rural communities through rural-urban cooperatives to drive Beijing’s bid for economic self-sufficiency.

Re-establishing co-ops has been central to Xi’s vision since he took office in 2013. During his term, the number of co-ops in rural China has nearly doubled to bring more economic activity to rural communities as part of China’s national goal to eradicate extreme rural poverty by 2020.

A stronger reliance on state-backed co-ops not only strengthens the government’s presence among the rural masses, but also supports the central push towards a stronger domestic production and consumption cycle. Among one of the action items is to give farmers e-commerce platforms and logistics centers to reach a broader consumer base.

Bottom line: Because these co-ops are run like state-owned enterprises, it allows Beijing to place its fingers on the pulse of the rural community. If leveraged correctly, co-ops could turn out to be a key part in China’s plan to strengthen its independence from other countries.

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Finance | Markets

Kicking the Debt Can Down the Road

US$504.5 billion – the amount of cash that the US government has paid out to US financial institutions in bailout since the Great Recession. China, it seems, is choosing a different path.

To cast an illusion of stability without clearing out Ft. Knox (or China’s equivalent) in post-pandemic China, Beijing is using a sleight-of-hand to merge banks before our very eyes. Since May, there have been 6 mergers in 5 provinces, with more to come.

China’s lenders are notorious for corruption, poor risk controls, and shadow banking, with the PBOC recently revealing 586 high-risk institutions. While pre-pandemic China may have let them fall by the wayside, post-pandemic China is more cautious. Earlier this year, the public takeover of Baoshang Bank spooked markets and almost led to bank runs as funding costs spiked – leaving a bitter taste as Beijing cleared its coffers to restore market confidence.

Bottom line: Consolidating at-risk banks with stable institutions dilutes the risk of these lenders going belly-up – at least temporarily. This band-aid approach to post-pandemic recovery fails to address these banks’ underlying problems, nor does it eliminate the red on their balance sheets. If Beijing could make those disappear, that would truly be magic.

Finance | Industry

World’s Largest Workforce Invests in Robots

Goodbye year of the rat – as far as China’s venture capital market is concerned, 2020 should be called the year of the robot. Despite a tough ‘capital winter’ that stretched through early 2020, Chinese markets are flush with rising investment in robotics as industries from hospitality to healthcare see widespread demand for the technologies.

Though the pandemic has turned even the most bullish venture capitalists into bears, the robotics industry has still managed to swell, capturing nearly 25% of all new VC investment. Given the need for decreased human interaction amid a viral pandemic, disinfectant-, food delivery-, and medical robotic-related projects have attracted major central and investor interest as China sets its sights on cornering the industry estimated to reach US$20.7 billion in 2022.

Bottom line: In China’s political economy, wherever Beijing’s gaze settles, investment is sure to follow. While the pandemic may have kicked demand for robotics into overdrive, Beijing and investors are betting on robotics and automations technologies to capture current market opportunities over the short- to mid-term while improving cost efficiency at production facilities amid rising labor costs and increased geopolitical instabilities over the long-term.


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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