Graph of the Week | Economics
Here’s Lookin’ At You, Lukou
After a reportedly botched cleaning job turned Nanjing’s Lukou Airport into the epicenter of the worst COVID-19 outbreak since Wuhan, China’s service industry buckled under a wave of travel restrictions and quarantine requirements. Post-outbreak shivers have brought the weakest non-manufacturing Purchasing Managers’ Index (PMI) numbers since early 2020.
While China’s return to relative normalcy throughout the past year has been a boon to the economy, Beijing’s zero-tolerance policy for COVID cases has flown in the face of the service industry in August:
- The non-manufacturing Price Managers’ Index (PMI) dipped from 53.3 to 47.5, its lowest-low since February of last year.
- The services activity index alone fell to 45.2%, indicating an even steeper contraction.
Of note, the services activity index isolates and removes construction from the equation, making clear that the largest hit was sustained by consumer and business services.
Bottom line: The fall below the 50% threshold indicates that the service industry is officially in a state of contraction; however, it is likely to be no more than a sprained ankle for China during its post-pandemic marathon. Already, Jiangsu Province, the epicenter of the Delta variant outbreak, has reduced cases to a daily average of one.
Industry | Policy
A Seasoned Captain for All Seasons
Beijing’s waves of crackdowns have left Chinese companies lost at sea, and some are reaching deep into their treasure chests to radio in help from Beijing’s fleet of policymakers-turned-businesspeople to navigate the treacherous waters.
Finance companies have long been coughing up some serious dough to persuade former officials from the Ministry of Commerce (MofCom) to join the crew. Between 2008-2016, business leaders in the world’s second largest economy fought over the 152 MofCom regulators that retired during this period, with these admirals of trade commanding hefty packages in excess of US$77,500 – far above the average salary for Beijing’s officials.
Now, tech companies are hoisting their sails. Given the increasingly competitive and unpredictable market environment, former regulators from MofCom, the State Administration for Market Regulation (SAMR), and other regulatory bodies are commandeering pay packages upwards of US$465,000 to come aboard these ships in the private sector.
Bottom line: Finding a seasoned captain to navigate China’s shifting regulatory winds is becoming instrumental for high-stakes businesses that want to stay ahead of the curve. Still, big pay packages may not be enough; high-level officials are required to wait for at least three years after leaving the government before becoming involved in the industries they used to oversee, and that’s pending an extensive formal review process.
Economics | Finance
Picking Up Scraps at Evergrande
There’s nothing like a good ol’ fashion yard sale to free up some cash. China’s second largest property developer, Evergrande Group, is selling off some of its assets to survive its current debt squeeze.
Evergrande’s debt crisis (a reported US$88 billion in debt in June) is a result of the PBOC’s “three red lines” policy implemented last year, which limits the amount of money that property developers can borrow from banks.
Three red lines was a tightening maneuver to prevent speculative building and investing in real estate, which has been behind high housing prices across China’s metropolitan areas. However, for China’s heavily indebted property developers that rely on high levels of borrowing to sustain operations, these restrictions have put many at risk for delinquency or default.
Bottom line: According to Evergrande’s 2020 annual report, the firm has more than US$52 billion worth of debt set to be due within a year amid declining net income. Looking at such bleak figures, all that’s left is to sell off some assets and hope for the best. All eyes are on Beijing for its response – while policymakers want to ensure that tenants don’t lose their apartments, regulators have taken a strong stance recently against central bailouts.
Business | Policy
The Economic Consequences of China’s Regulatory Crackdown
From clamping down on anti-competitive marketing practices to stifling illicit uses of personal data, Beijing’s regulatory crackdown is driven by a desire to curb the “disorderly expansion of capital.” However, these efforts risk going too far and threaten to deal an outsized blow to China’s rapid innovation and growth. Read more to learn about the economic impact of China’s regulatory crackdown.