TWS: Sept. 14, 2020

Graph of the Week | Economics

As we often cap off our communications, 好好学习,天天向上. The idiom, meaning “study hard and every day you will improve,” first appeared on a notebook that Chairman Mao handed to a group of officials from Anhui province in 1951. Nearly 70 years later, the phrase couldn’t be more apt as record numbers of Chinese students graduate with advanced degrees and return from overseas schools while Chinese universities break into top global rankings.

Despite its daunting three-day-long gaokao college entrance exam, China has seen a surge in tertiary education over recent years. Over the past five years, the number of Chinese universities ranked among the world’s top 1500 best colleges nearly quadrupled; in the same period, the number of Chinese students with advanced degrees jumped more than 15%, with 640,000 handed out in 2019. Specifically, Chinese students flock to STEM majors, with STEM graduates in China outpacing their American counterparts 8:1 in 2016.

Bottom line: China’s educated labor pool is expanding rapidly. While the US may lead in AI, IoT, and cloud computing for the time being, Chinese students’ studies are complementing China’s trillions of investment into R&D and improving the nation’s standings at blazing speeds in its race with the West.


My Way or the Cyber Highway

Old school PE class has gone global as the US and China pick teams for new digital standards on tech and telecoms infrastructure. About a month ago, the US went on the offensive with its Clean Network program, inspiring China’s defensive maneuver to launch its own rival initiative.

While the US’ program encourages others to establish “cleaner” systems by filtering out Chinese firms for national security purposes, China is calling on the world to embrace the Chinese approach to data security by respecting ‘cyber sovereignty.’ The scoreboard is beginning to show the standings – as of early August, 30 countries stood with the US as Beijing continues its campaign for support. Once China’s initiative takes shape, a clear line will be drawn in the sand, revealing each sides’ players.

Bottom line: Chinese firms are beginning to feel the heat over their ties to Beijing, with recent actions taken by the US and India causing concern. China’s defensive play of choice? Safety in numbers. By developing a coalition of supportive nations, China can avoid being singled out as a ‘bad actor’ in the digital space and distribute the heat to maintain data security guidelines that support its national interests.


Marching to the Beat of China’s Digital Gong

In the battlefield of global finance, China is marching ahead with the release of its PBOC-backed digital currency and electronic payment (DCEP) plan.

The plan is Beijing’s latest push to internationalize its currency. In 2016, the RMB made the ranks of the world’s top 5 influential currencies when it was included into the IMF’s basket of top global currencies, but has since flatlined. The RMB currently accounts for less than 2% of international payments and hovers around 2% of global foreign-exchange reserves.

To join the big leagues, China is rolling out its DCEP domestically to reduce transaction costs and curtail financial fraud while using OBOR to go global. In an international trade environment, a digital RMB could alleviate a host of cross-border trade issues like long settlement times, high processing costs, and exchange risk – presenting a viable alternative to the long-reigning US dollar.

Bottom line: The DCEP is arguably China’s most potent gambit to internationalize the RMB yet. China will need to rethink how it manages its exchange rate – but by using a digital RMB to threaten the US dollar’s supremacy, Beijing is shifting the board to counter the US’ financial arsenal while advancing the RMB’s global influence.

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Indebted to Chinese Lenders

Chinese lenders have taken trillions for the team in 2020 to provide SMEs the support they need to outlive the economic fallout. The country’s new bank loans are projected to have risen significantly over the past month, with August estimates up 23% to CN¥1.22 trillion from July’s CN¥992.7 billion.

To keep pumping cheap cash into the market, lenders have been asked by authorities to provide loans with capped interest rates and low fees. Last month, total social financing (TSF), a measure of credit and liquidity specifically targeted towards the private sector through traditional and non-traditional channels, was estimated to have risen by 62% to CN¥2.73 trillion from CN¥1.69 trillion.

Bottom line: Chinese banks will feel the pain of bearing the brunt of China’s pandemic pains for years to come. Bank profits are already sliding, a new wave of non-performing loans is beginning to crest over a sea of bad debt, and net losses for the second half of 2020 are imminent in order to hit the positive growth targets laid out by Beijing.

Economics | Finance

In Pursuit of Profitable Profiteering

Citigroup has been awarded the first fund custody license in China, making it the primary American bank allowed to hold securities on behalf of mutual and private funds domestically.

Beijing has been pushing full steam ahead in its campaign for foreign capital. Just in the last year, US$200 billion of funds have flowed into Chinese markets, with foreign holdings in Chinese stocks and bonds increasing by 50% and 28%, respectively.

Apart from Citigroup, other big names such as BlackRock, Vanguard, and JPMorgan have also made moves to shift focus towards Mainland markets – most recently with Vanguard announcing its plans to shift its Asian HQ from Hong Kong to Shanghai. Despite the current volatile political environment, China is the only major economy posting growth and interest rates above zero, so it’s unsurprising that the big banks are crossing the Pacific in pursuit of the big bucks.

Bottom line: While many in the industrial sector are considering potential China exits, widespread reform is roping major global financial players deeper into domestic markets – offering short-term refuge for global institutions seeking gains while subsidizing Beijing’s central stimulus with much needed longer-term liquidity and stability.


Redressing Western Brands’ Successes and Failures in China

Since Deng Xiaoping’s 1979 Reform and Opening Up Policy began, Western brands have faced headwinds entering the Chinese market. Some have succeeded, but there have been many more failures. We’ll take a longer, historically informed view to think about what separates the winners and losers of Western brands trying to make it in the Middle Kingdom.

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