TWS: Sept. 28, 2020

Graph of the Week | Economics

Last month, we discussed how China’s Q2 growth broke from the norm. Growth had been led by industrial, manufacturing, and construction growth – as compared to the typical fixed asset investment (FAI) and consumer spending that are China’s bread and butter – which pointed to economic reliance on Beijing’s financial stimulus. While 3Q results may paint a similar picture to 2Q, FAI and consumption are quickly making a comeback, giving hope for a more “hands-off” economic recovery in Q4.

China’s August fixed asset investment growth figures clocked in at -0.3% year-over-year while unemployment dropped to 5.6%, down from March’s peak of 6.0%. Positive job readings and recovering industry investment have together lent confidence to weary consumers, boosting August retail consumption growth to 0.5% – the indicator’s first show of growth in 2020.

Bottom line: All three indices signal that China’s economy is on the road to a strong recovery, especially as movements in FAI, which is approaching 2019 levels, are considered as a pre-signal of retail sales. More importantly, China’s retail and services sector is showing signs of life, which will relieve pressure on Beijing to support infrastructure, manufacturing, and industry via monetary and fiscal stimulus.

Economics | Finance

All in a Day’s Work

Cha-Ching! Chinese foreign exchange reserves rose US$10.2 billion in August, bringing the country’s totals to US$3.165 trillion – the highest of any country in the world.

The uptick in reserves can be attributed to foreign investment in Chinese markets and Beijing’s strict capital controls. Notably, China’s stash of cash barely reached the half-way mark for August’s projections of a US$21.61 billion increase for a couple reasons, namely:

  1. USD value has been sliding, and while China is diversifying away from the currency to decrease Washington’s financial arsenal against Beijing, USD still commands a majority or China’s total reserves;
  2. In August, we estimated China’s stimulus to clock in around US$500 billion. Unless science teachers everywhere are fibbing and something really CAN come out of nothing, that mountain of stimulus has to come from somewhere, and forex reserves are a good place to start.

Bottom line: Though China’s forex gain was underwhelming, the ‘why’ behind the low figures in addition to strong economic data over past months all point to a good ol’ 3Q economic bounce back. With retail sales, industrial production and trade all on the up-and-up, China may be able to continue cashing in on its lucky streak.


China’s Real Estate Problem Hits Home

As the world transitions to the new normal, the old embers of China’s real estate market draw hotter once more. Home prices in roughly 70 cities across China ticked up by 0.6% in August, marking an increase over July amid a surge in consumer demand, easier access to credit, and a recovering economy.

In a period still defined by the lingering impact of the pandemic, the demand-driven housing boom is a good sign. Regardless, with China’s tier-1 cities boasting some of the most extreme housing price-to-income multiples on Earth, the market’s recovering growth has sparked concerns and led to authorities putting restrictions into place to prevent the market from overheating. Additionally, while the PBOC is advising domestic institutions to dole out credit for individuals, regulators are closely monitoring real estate developers’ debt and liquidity levels.

Bottom line: Beijing has been cautiously releasing air out of the housing bubble for the last decade. Real estate has long been the go-to investment choice for the Chinese populace, and though regulators have recently been easing policy due to COVID-19, they are still hyper-aware of the influence that any sway in the property market could have on both a national- and individual-level.

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Finance | Markets

A Profitable Engagement: HK’s Dual Listing IPOs

Hong Kong’s Hang Seng Index (HSI) has seen a recent influx of money returning home through IPOs. Major tech giants like Alibaba, Xiaomi, and Wuxi Biologics have added nearly US$20 billion to the Hong Kong Exchange, bringing much-needed diversification to its historically finance-dominated index.

From e-commerce to biotech, an increasingly tense regulatory environment in Washington is driving many US-listed Chinese tech firms across the Pacific to safer harbors – particularly Hong Kong – where they are received with a warm welcome. With many of China’s MNCs balancing one foot on each side of the pond, Hong Kong has recognized an opportunity to diversify the index by allowing companies to dual-list on the HKEX and China’s Shanghai Stock Exchange, giving firms access to a strong international market that offers a stabler listing environment.

Bottom line: With China’s major tech giants setting precedent in dual listings across Hong Kong and Shanghai, many smaller companies are likely to follow suit. Though the HKEX certainly does not boast the same deep liquidity and global reputation on par with US exchanges, it still offers a safe spot to lay anchor in friendlier waters.


The US-China Spat Goes Interstellar

The great space race has kicked off once more – this time with a new challenger. While the US and China battle for influence here on Earth, both nations have also been increasingly looking to the skies and beyond as the next frontier of military weaponry. Recently, China officially blasted off as a major space power with its latest anti-satellite weaponry.

According to a new US Air Force think tank report, America should be wary of what China is “up” to thousands of miles above. The Department of Defense recently reported on China’s space militarization via an increasingly robust anti-satellite missile program, likening space to another opportunity to subtly consolidate power – China’s endeavors into other space technology could be used as a means to gain allies and reshape the international system here on Earth. Regardles, despite China’s great leaps into space over recent years, some see room for improvement, chiefly in the Chinese policy environment and bias towards state-owned space companies.

Bottom line: China’s rapid expansion of its space military technologies has caught the eye of the US, who recently passed a bill to assess China’s space capabilities in early 2020. With COVID preventing critical upcoming US launches and elections on the horizon, will China gain a lead that the US can’t match? Only the stars can tell.

Economics | Trade

Peeking Behind China’s “Debt Trap Diplomacy” in Kenya and Sri Lanka

As a global initiative unprecedented in scope, the “One Belt, One Road” initiative often gets a negative reputation. News pundits accuse Beijing of using OBOR as a means of forcing unsustainable levels of debt onto weaker partner countries to seize the precious loan collateral. In this piece, we examine OBOR projects in Kenya and Sri Lanka to determine whether Beijing is engaging in debt trap diplomacy.

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