Graph of the Week | Economics
As the king of copper, China burns through more than 50% of the metal’s global supply every year. Though not a precious metal, copper is more valuable than you may think. In recent years, its price has been widely used to forecast Chinese economic indicators.
China watchers often look to the industrial value-added (VAI) indicator to check the pulse of the Chinese economy, which recently beat economists’ median estimate after clocking in at a cool 5.6% year-on-year growth in August. Behind the figure, an upswing in the copper market was telling. The three-month rolling copper forward, an indicator of copper’s price 90 days into the future, rallied higher alongside a humming industrial sector. Copper price swings often spike or dip before a change in the VAI, acting as a crystal ball that provides a glimpse into the future of the Chinese economy.
Bottom line: As the world’s largest copper buyer, China sets the stage for copper prices. Consequently, the upswing in copper prices indicated a rebound in China’s industrial sector. While correlation between copper prices and economic growth does not equal causation, there were many other positive figures released in August like exports and consumer spending that suggest China’s economy could well be heating up.
Riding Out the Storm
Despite 2020’s choppy seas, China has weathered the storm better than most. Not all boats are rising with the tides, as other Asia-Pacific countries struggle to keep their heads above water. “Developing Asia,” a group of 45 countries in Asia Pacific, is projected to see net negative economic growth for the first time in 6 decades.
Among Asia’s expected negative growth of -0.7%, China – the proverbial engine room – has (just barely) stayed afloat. It is predicted that the country will register positive growth of 1.8% for the year, with the country’s successful public health measures having put the economy on a fast track to recovery.
As the world’s pharmacy, Chinese manufacturing was bolstered by strong demand for medical supplies while market reform and early recovery saw foreign capital flow into domestic markets. To tie everything together, Beijing also encouraged banks to ease lending requirements and keep interest rates low.
Bottom line: Despite lower than normal growth figures, China has had more time to focus on market-friendly policies and stimulus measures that have provided relief to consumers and businesses alike. The first step to fix any sinking ship is plugging up the holes – which China has done – though dark clouds still paint the horizon as banks prepare for waves of bad debt following relaxed lending practices.
Business | Industry
Take a Seat for the New Normal
The new normal is one big game of musical chairs as companies shift from one country to the next. China’s fintech companies, from large digital banks to small asset managers are flocking to the Lion City.
As the chairs are whisked from under China—Hong Kong most of all—Singapore offers an increasingly attractive space for international growth. Foreign funds in Singapore can take advantage of a newly launched legal structure that offers reduced capital requirements and tax-exemption, banks were offered a limited number of digital banking licenses that allow foreign entrants to tap the underserved SME market, and companies can enjoy a stable operating environment. With Southeast Asia’s digital economy expected to triple to US$300 billion in the next couple of years and investment to grow from 3% to 11%, having a foothold in the Singaporean market is music to Chinese companies’ ears.
Bottom line: As geopolitical uncertainties persist and companies face stiff competition at home, Singapore acts as a hub of opportunity for firms to establish a stronger presence in Southeast Asia. Companies like Ant Financial, Huawei, and Alibaba have already claimed a seat, and don’t seem to be eager to give up their spot anytime soon.
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Finance | Industry
Hold Up, Holding Companies
China is yanking the leash on financial holding companies through new regulations intended to curb the risks that they pose to the financial industry. Beijing’s financial watchdogs aim to collar the long-overlooked institutions through a new set of operating licenses and limitations.
Financial holding companies are non-banking financial service providers like insurance agencies and investment services firms. The lack of oversight has begun weighing on regulators, primarily due to the widespread reach of the holding companies’ subsidiaries. This mounting issue has been reaffirmed by high-profile scandals involving companies such as Anbang and the HNA group over the last few years.
Regulators are currently fighting against a history of mixed signals towards financial holding companies. Many of these firms were or had deep ties to China’s state-owned enterprises, which translated to near-invincibility from regulators. Because these SOE roots continue to persist in China’s political economy, regulatory authorities have found it difficult to weed out the deep-rooted “unique Chinese characteristics” that now challenge China’s sprawling financial system – these new regulations are Beijing’s solution.
Ant under the microscope
Regulators are busy observing these financial beasts both big and small, with the Ant Group currently under the microscope. Ant Group, the owner of the revered online payment platform, Alipay, represents a new breed of internet finance conglomerates whose rapid expansion has left regulators scratching their heads.
At first glance, Ant Group may not stand out as a financial holding group. But, as with most obscurities within the Chinese market, not all is what it seems. Ant ticks all the boxes by holding multiple subsidiaries in several financial sectors which, according to the new rules, will subject the company to license requirements across a multitude of areas. Ant will potentially be required to simplify their ownership structure to promote transparency as well – a requirement that has been met with broad private sector pushback.
Bottom line: China is long overdue for addressing its lax supervision over financial holdings groups. By calling out titans such as Ant Group, the government is setting the tone that no company will receive special treatment while broadcasting its widespread commitment towards lessening risk in China’s financial system.
Rotting Apples and Spoiling Trade
While an apple a day may keep the doctor away, China doesn’t seem too willing to trade from its lunchbox with the US. As relations between Beijing and Washington remain feverish, China has threatened to withhold vital medicine exports to the US.
From medical chemicals to antibiotics, the US heavily relies on Chinese producers after large-scale reshoring efforts in the ‘90s saw a global shift of medical production out of the US. In 2019 alone, the US imported US$1.2 billion worth of pharmaceuticals from China. Many are calling Beijing’s weaponization of medicine the “nuclear option” as Washington contemplates potential retaliation over being cut off from Chinese pharmaceuticals with few, if any, short-term alternatives.
Bottom line: The cure to the ill will between the two rivals will require more than a simple check up to prescribe. While China’s pharma industry still lags behind many global competitors, the pandemic has once again highlighted US reliance on Chinese producers. With China’s threat of tit-for-tat escalation spreading to medicine, Washington and US companies may prompt for diversification, stat.
Industry | Trade
The Beijing Bash: US Sanctions Drive Investment to Chinese Semiconductors
US sanctions designed to limit China’s access to cutting edge semiconductor technology have challenged Beijing’s ambition for technological hegemony. Even with significant state-backed investment over the past 30 years, China’s semiconductor industry still lacks the capabilities necessary to compete in the global marketplace. The current economic and political environment poses an ultimatum for the country: innovate or fall behind.