TWS: Sept. 13, 2021

Graph of the Week | Trade

Hot Trade Brings China Out of the Ringer

Chinese trade saw nothing short of a graceful recovery in August. The General Customs Administration of China published trade data earlier this week, and export growth in particular has stolen eyes.

Exports from the “world’s factory” increased by 25.6% year-over-year, up from 19.3% in July. Fresh out of the ringer with an outbreak of COVID-19, China’s rise in exports surprised analysts that expected lower figures to carry over from July, with an average growth forecast of 17.3% y/y.

Imports also clocked impressive gains at 33.1% y/y, up from 28.1% in July. While a strong indicator of recovering consumer sentiment, the figure didn’t spark too much excitement. Imports benefited from a valuable base effect, given August 2020’s import change rang in at -2%.

Bottom line: Following unprecedented extreme flooding, soaring commodities prices, and a COVID-19 outbreak that spread across several provinces, these strong export figures have left us waiting for more in Q4. For now, it seems that China’s jammed ports have cleared up, and global demand for Chinese goods is strong. Only time will tell if high commodities prices and the Delta variant will cool China’s hot streak.

Finance | Markets

Beijing Gets a New Exchange for $MEs

“Listing at home has never been easier!” should be the slogan for Beijing’s new stock exchange. President Xi Jinping recently announced that a third stock exchange within the country that will specifically cater to small and medium-sized businesses was in the works.

Sprouted from the NEEQ, a small listing board in Beijing in 2013 of 66 companies, the new exchange will be China’s third, joining its counterparts in Shanghai and Shenzhen. It will be tailor made for small and medium-sized businesses looking to find precious funding at home without the rigamarole of having to comply with increasingly strict overseas listing requirements.

Chinese stocks listed in the US took a beating over the summer following new US audit regulations for non-US companies. With more required disclosures – along with Beijing’s recent policy that all foreign regulatory disclosures must be greenlit by Chinese regulators first – this not-so-fun game of high-stakes tightrope is certain to dam the floodgate of Chinese companies looking to list in US markets. This new exchange may be Beijing’s way of throwing a net out to catch smaller companies that lack sufficient resources to navigate the US and China’s growing geopolitical chasm.

Bottom line: If you had to ask us, we’d have to say that this move is less about keeping companies at home – though that may be an ancillary benefit – and more to do with diversifying the financial obligations of SMEs in China. As we’ve said before, we see rising debt as the top threat to China’s financial system. By creating an exchange specifically geared towards SMEs, Beijing will be able to relieve the pressure from banks of providing risky loans to smaller companies and spread it among the markets. Therefore, should some of these listed firms go belly-up, the fallout is spread amongst a larger number of participants and does not have the same magnitude as it otherwise would on China’s vulnerable lending institutions.

Industry | Policy

EVs Left Holding the Short Stack

When high demand for electric vehicles meets a low supply of semiconductors, you’re bound to get a mixed bag for EV performers in China. Producers saw varied deliveries and sales in August, with winners and losers on both sides of the aisle. All said and done, Li Auto, BYD, and Tesla came out holding the chips, while Nio and Xpeng left the table early.

The global semiconductor chip shortage has raised a giant question mark around the stability of NEV growth. Still, producers are using different strategies to stay in the game. Tesla, for instance, produces in the early months of the quarter and delivers at the end. These “delivery waves” benefited the firm in August as it was able to sell more cars than it had in stock. BYD, by contrast, owns a semiconductor firm, which has insulated the manufacturer from industry infighting over the same pool of chip producers.

Bottom line: Regardless of the sourcing woes gripping the industry, EV producers are still banking on a hot streak ahead. Companies are ramping up production capacities on the back of central support and rising demand. Policymakers are aiming for 25% of all domestic vehicle sales to be NEVs by 2025, which has paved the way for policy support and industry incentives.

Economics | Policy

Revitalizing the Rust Belt

There’s trouble in the heartland, and we’re not talking about Kansas. Thankfully, there’s a man with a plan and the 14th Five-Year Plan for Northeast Rejuvenation was released last month.

The three provinces of northeast China, known as the “eldest sons of the Republic,” flourished in the early days of communist China. They dominated in heavy industry, mining, and agriculture; yet during the opening and reform period of the 80s, state-owned industrial firms in China’s Northeastern “rust belt” began to falter, and local governments have been footing the debt bill since. The northeastern region’s share of GDP has gradually declined, now only contributing 5% to national annual GDP – a blip compared to the coastal regions’ 50%.

Bottom line: For decades, Beijing funneled resources to the blossoming coasts while neglecting inland areas. While the northeast saw a proposal to revitalize “old industrial bases” in 2003, not much has changed. Now, Beijing is implementing a no-province-left-behind development plan to make the region more investable. With the Premier, SOE watchdogs, and other top policymakers at the helm of the effort, expect this region to stay in the headlines and offer some deals too good to pass up.

Economics | Policy

The Impact of China’s ‘Lying Flat’ Movement on Labor Markets

Boy does it smell like teen spirit over in China right now.

The lying flat movement is spreading like wildfire, and with it could come some nasty obstacles to Xi Jinping’s dual circulation model – particularly when coupled with China’s aging population.

Curious what it means to ‘lie flat’ in China? Want to learn more about China’s notorious 996 work culture? Read on in our latest China Insights article:

Full Article

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