China’s Sept services activity returns to growth: Caixin PMI
Activity in China’s services sector returned to growth in September as a major Covid-19 outbreak in the eastern province of Jiangsu receded, a private-sector survey showed on Friday, offering some support to a slowing economy. The Caixin/Markit services Purchasing Managers’ Index (PMI) rose to 53.4 from 46.7 in August, pulling away from the lowest level seen since the height of the pandemic last year. The 50-point mark separates growth from contraction on a monthly basis. The better readings in the survey, which focuses more on smaller firms in coastal regions, are in line with findings in an official survey last week which also showed the services industry returned to activity growth.
China’s economic miracle is in transition, not in danger of stagnation
There are concerns China could undergo economic stagnation, like Japan has since the 1990s, because of an asset bubble bursting and its ageing population But the country’s policy measures, and its vibrant entrepreneurial ecosystem and dynamic capital markets, tell a different story
The economic ripples from China just keep on coming, and the latest one might prove to be the most significant yet for the global economy. An almost year-long campaign to rein in the power of internet platforms has shaken global investors views on how private capital is treated — with no signs it’s going to abate any time soon. But that’s a market and company issue, not something that’s quantifiably damaging the economy. Global markets have also been rattled by the cash crunch at struggling developer China Evergrande Group. While its $300 billion plus in liabilities makes it a big deal for note holders, the real economic fallout for the world was always going to be contained so long as China’s central bank kept liquidity ample and regulators prevent any “Lehman moment.” But a power crunch curbing production in the factory to the world — that’s clearly going to send some shock waves through the global economy, as Tom Hancock and Jeff Sutherland write.
What’s Next for U.S. Trade With China?
Instead of laying out a wholly new vision for addressing the challenge posed by China, Tai indicated that the Biden administration largely intends to continue the trade policies developed by President Donald Trump’s administration. The tariffs covering more than two-thirds of Chinese exports to the United States will remain in place, though there will be a revised process for excluding certain goods from the tariffs. (Hundreds of product exclusions granted during the previous administration have expired.) The Biden administration will also use the “Phase One” U.S.-China trade deal, which was negotiated by the Trump administration, as a launch point for future conversations the administration says it plans to have with Beijing soon. Despite Tai’s emphasis on multilateral coordination, there was little indication that the Biden administration will proactively seek to develop closer economic ties with allies and partners in the Indo-Pacific or elsewhere. There was no sign that the administration will look, for instance, to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), prioritize a new trade deal with Taiwan, or broaden the U.S.-Japan Digital Trade Agreement into a regional pact.
Work on some of these issues is likely going on behind the scenes, but the administration’s hesitance to showcase it will likely be dispiriting to U.S. partners in the Indo-Pacific who have watched China guide the development of the Regional Comprehensive Economic Partnership—a trade pact joining the Association of Southeast Asian Nations with Australia, China, Japan, New Zealand, and South Korea—and file a petition to join the CPTPP. There is also the risk that the administration’s hesitance to embrace a role for the WTO in addressing some of its concerns with China could fatally compromise the organization. This would rob the United States of a potentially valuable forum for building a coalition of countries with shared concerns that could collectively challenge China’s many practices that are inconsistent with WTO rules.
The world economy’s shortage problem
Scarcity has replaced gluts as the biggest impediment to global growth et the shortage economy is also the product of two deeper forces. First, decarbonisation. The switch from coal to renewable energy has left Europe, and especially Britain, vulnerable to a natural-gas supply panic that at one point this week had sent spot prices up by over 60%. A rising carbon price in the European Union’s emissions-trading scheme has made it hard to switch to other dirty forms of energy. Swathes of China have faced power cuts as some of its provinces scramble to meet strict environmental targets. High prices for shipping and tech components are now triggering increased capital expenditure to expand capacity. But when the world is trying to wean itself off dirty forms of energy, the incentive to make long-lived investments in the fossil-fuel industry is weak. The second force is protectionism. As our special report explains, trade policy is no longer written with economic efficiency in mind, but in the pursuit of an array of goals, from imposing labour and environmental standards abroad to punishing geopolitical opponents. This week Joe Biden’s administration confirmed that it would keep Donald Trump’s tariffs on China, which average 19%, promising only that firms could apply for exemptions (good luck battling the federal bureaucracy). Around the world, economic nationalism is contributing to the shortage economy. Britain’s lack of lorry drivers has been exacerbated by Brexit. India has a coal shortage in part because of a misguided attempt to cut imports of fuel. After years of trade tensions, the flow of cross-border investment by companies has fallen by more than half relative to world GDP since 2015
Evergrande’s deepening crisis weighs heavily on major Chinese developers’ sales in September
The country’s top 100 real estate companies saw overall sales sink 36 per cent year on year to US$118 billion in September: China Real Estate Information Corp Chinese property shares fell on Friday, while investor concerns about developers’ liquidity mounted after Fantasia bonds were suspended from trading Major Chinese developers saw their sales plunge last month as China Evergrande Group sank deeper into crisis, putting more pressure on the government to limit the fallout. Combined contracted sales by the country’s top 100 real estate companies plummeted 36 per cent to 759.6 billion yuan (US$118 billion) in September from a year earlier, deepening a downward spiral emerging in July, China Real Estate Information Corp (CRIC) said in a report. More than 90 developers saw a decline in their sales from a year ago, with 60 per cent of them recording a drop of more than 30 per cent, according to the report. Under the current market conditions, real estate enterprises need to speed up development, ensure supply, strengthen marketing and accelerate sales to recoup cash in the fourth quarter, the official Shanghai Securities News cited Lin Bo, general manager of the property consulting firm, as saying in a report. “In the medium to long term, reducing leverage is still the focus of real estate enterprises,” Lin added. Domestic home sales by value already slumped 20 per cent in August from a year earlier, according to official data, the biggest drop since the onset of the coronavirus shut swathes of the economy at the start of last year. The Chinese government has taken measures to limit the fallout from its property crackdown. Late last month, the central bank told financial institutions to cooperate with governments to “maintain the steady and healthy development of the real estate market” while safeguarding homeowners. The regulators have asked banks to refrain from cutting off funding to developers all at once, Bloomberg reported. “Looking forward to the fourth quarter, we think enterprises will maintain a proactive marketing and sales strategy and may offer deeper discounts to drive sales,” the CRIC said in the report.
HNA, Evergrande Woes Underscore How China Paradigm For Business Success Is Being Swept Away
That’s according to Drew Bernstein, co-chairman of MBP, a New York-based audit and advisory firm that specializes in Asian companies “The old paradigm for building a corporate juggernaut in China has been swept away,” Bernstein said in an email exchange. “Previously, the interests of the private and public sector were strongly intertwined,” he said. “Now, there is a level of distinction between private and public interests.” China’s crackdown on technology companies such as DiDi Global and Alibaba Group over data-sharing and other practices in recent months has triggered big declines in their share prices this year. That “regulatory blitz” has further hit new fundraising on international stock exchanges, while at the same time occurred alongside moves that aim to attract more capital at home in line with tech industry development goals spelled out in the country’s “Made in China 2025” plan, By 2018, “it was clear that (HNA’s) purchases were at a premium and the debt was unmanageable,” and HNA began to sell off assets and refocus on the core business, Bernstein said. Then, the Covid-19 pandemic hit. The Hainan government seized control of the company in early 2020 and then put it into bankruptcy proceedings at the beginning of this year. HNA Group had over 60,000 creditors, 410,000 employees, and debts of $171 billion – “so it is a massive undertaking,” he said. “The bankruptcy may provide insights into how future reorganizations are handled. Protecting employment and the interests of small creditors will be paramount.” Though excessive borrowing was a big reason of HNA and Evergrande’s problems, another important lesson for foreign businesses and investors is the need to view current developments through the prism of China’s current promotion of “common prosperity,” Bernstein said. “We are learning that this phrase ‘common prosperity’ is resetting the bounds for corporate governance. Recent restructurings may create opportunities for investors to drive the business segments that are still healthy,” he believes. And yet, he added, “success depends not only on dissecting cash flows and balance sheets, but on understanding how a transaction aligns with the goals of ‘common prosperity.’ Can a transaction be positioned as preserving employment and preventing financial contagion? Does it correct any prior transgressions? Will it promote stable, quality growth?”
China crackdown: How much pain can the economy take?
Beijing has taken aim at its high-tech, energy and property sectors in recent months, spooking investors who were used to decades of unprecedented growth. How much self-inflicted pain can China’s economy endure?
Evergrande and other Chinese property giants have sizeable off-balance sheet debt – JPMorgan
They estimated Evergrande’s “net gearing,” as debt as a ratio of a firm’s equity is known, was at least 177% at the end of the first half of the year, instead of the 100% its accounts reported.
Evergrande, other Chinese developers shifted debts off balance sheet to comply with deleveraging push: JPMorgan
Evergrande ‘most aggressive’ in shifting interest-bearing debt to off-balance-sheet vehicles, JPMorgan analysts say Evergrande units sued by Centaline over US$12.8 million in unpaid commissions Other developers who likely have higher net gearing ratios once you adjust for off-balance-sheet debt include Guangzhou R&F Properties, China Sunac Holdings and Country Garden, according to JPMorgan.
In August last year, the People’s Bank of China adopted new “three red lines” requirements to measure the debt levels of property developers and limit their ability to borrow if they were overleveraged. It was part of Beijing’s efforts to tamp down speculative property price bubbles. In an effort to repay its suppliers and stave off its cash crunch, Evergrande has been turning over properties to suppliers and selling some of its assets. Its shares have been suspended since Monday in anticipation of a potential sale of a controlling stake in its Evergrande Property Services Group. Evergrande said its shares were halted ahead of an announcement about a “major transaction”, but no announcement has materialised. China-based developer Hopson Development is said to be buying a 51 per cent stake that values Evergrande’s property management unit at HK$40 billion, according to a report by Chinese financial news portal Cailian, which cited people familiar with the matter. Hopson’s shares also have been suspended from trading in Hong Kong this week for a potential takeover announcement.
‘China’s financial system could collapse’: What the Reserve Bank’s Evergrande bombshell means for Australia
The Reserve Bank of Australia has made some startling observations about the possible consequences of the collapse of China’s second largest property developer, Evergrande. The RBA warns: “Vulnerabilities in China’s financial system remain elevated and authorities face a difficult balancing act.” The slow-motion train wreck that is Evergrande remains a crucial aspect of those “vulnerabilities”.”If they act too quickly in addressing these vulnerabilities, confidence in the implicit guarantees that underpin much of China’s financial system
What’s Behind China’s Luxury Shopping Slowdown?
Insight group LookLook has conducted research in September among 100 Chinese affluent women under 40 who spend at least $10,000 a year on luxury purchases and revealed that the recent slowdown in spending is just a temporary short-term pause. “After healthy levels of spending on luxury skincare, handbags, and jewelry in early 2021, the Chinese luxury buyer is recalibrating to global caution around the Delta variant,” stated LookLook, adding: “Feeling less urgency to purchase due to travel restrictions, she’s waiting until she can resume her luxury spending abroad. When borders reopen, expect luxury ready-to-wear sales in particular to jump dramatically.”
Climate change: Tracking China’s steel addiction in one city
Wuzhou, in southern China, is a living example of the country’s dependence on its “build, build, build” mantra to boost development. It was one of many contributors to China’s record output of a staggering one billion tonnes of steel last year.
China power cuts: Coal miners ordered to boost output, say reports
Beijing has reportedly ordered China’s coal mines to boost output as an energy shortage across the country has seen millions of homes and businesses hit by power cuts in recent weeks.
New China-Korea semiconductor industrial complex starts construction amid Beijing’s push for tech self-reliance
The municipal government of Wuxi and memory chip giant SK Hynix have teamed up to develop the China-Korea Integrated Circuit Industrial Park The city is expected to become home to 19 new semiconductor-related projects with a combined investment of US$4.7 billion Over the past several years, Wuxi has become a major location for IC development. The city ranked third behind Shanghai and Beijing in this field, according to a report published in March by local industry tracker ChipInsights. Shenzhen in southern Guangdong province was ranked fourth, followed by Wuhan, capital of central Hubei province. China’s direct-administered municipalities and provinces have been sharpening their focus on semiconductor development. Shanghai, for example, has drawn up an ambitious plan to lead the country in strategic emerging industries such as semiconductors, artificial intelligence, electric vehicles and advanced manufacturing. Still, some of these IC initiatives have not succeeded. Wuhan government-backed Hongxin Semiconductor Manufacturing Co once boasted that it could challenge Shanghai-based Semiconductor Manufacturing International Corp, mainland China’s largest contract chip maker, but the project collapsed without even producing a single chip three years after it was launched.
EV maker WM Motor to raise $500 million in Series D
Chinese electric vehicle maker WM Motor is about to close a $500 million Series D. The funding involves two rounds. The company is expected to receive a $300 million Series D1, led by PCCW, Hong Kong’s biggest telecommunication firm headed by billionaire Richard Li. A Series D2 is expected to follow, bringing the raised fund to $500 million, according to a Tuesday statement. The six-year-old automaker, also backed by search engine giant Baidu, said it had cumulatively delivered over 70,000 vehicles as of the third quarter in 2021. [Company statement, in Chinese]
Are China’s BRI Glory Days Over?
ASEAN wrestles with Chinese debt and post-pandemic recovery plans. assets. According to the American Enterprise Institute, signed BRI contracts were worth $46.54 billion by 2020, with ASEAN grabbing the lion’s share of 36 percent. However, the latest independent numbers provide perhaps a clearer picture. A report by AidData, a research lab at the College of William and Mary, found China had loaned $843 billion to finance more than 13,000 projects to 165 countries over 18 years. Of the recipients, 42 countries carry debt to China exceeding 10 percent of GDP, including Cambodia and Laos. Most loans were tied to the BRI, and the reality is setting in with many an analyst, including the cheerleaders, saying the initiative’s glory days are over. ASEAN ministers held an online BRI summit to discuss new initiatives needed to promote post-pandemic growth in early September and Chinese Foreign Minister Wang Yi toured Indochina in mid-September. That was followed by a rare meeting of leaders from Cambodia, Laos, and Vietnam in Hanoi, a mini-summit that was widely seen as an attempt by the Vietnamese to shore up old alliances that have been fractured by China’s regional political and economic power-plays. Free trade agreements with Beijing are being discussed and ratified and this could help to a point, but at the end of the day it’s the Chinese economy and the red ink that’s being splashed about which matters, and it is far from encouraging.
China’s geostrategic engagement in a new Afghanistan
China is determined to establish a geostrategic foothold in the new Taliban-led Afghanistan. A decade ago, China forayed into Afghanistan’s strategic space by inking deals with the Afghan government in the mining, power and oilfields sectors — although Afghanistan’s chaotic political environment prevented any real progress. China then played a key role in facilitating peace talks with the Taliban from 2014. With the Taliban back in power, China can once again advance its interests.
China vows to protect nature and work with other nations ahead of UN biodiversity summit
Country will ‘uphold the idea of a shared future for humanity and nature’, Beijing says in white paper released days before COP15 conference It also pledges to collaborate with the international community on a new global biodiversity governance model ‘that is fairer and more reasonable’ China had a “better overall performance than the global average” in meeting 20 biodiversity targets set in Aichi, Japan in 2010 under the UN Convention on Biological Diversity. Last year, a UN report concluded that the international community had failed to meet any of the Aichi goals on stopping the destruction of nature and wildlife. According to Beijing’s white paper, “China has overfulfilled three of the Aichi targets” – namely establishing terrestrial nature reserves, restoring and ensuring important ecosystem services, and increasing ecosystem resilience and carbon storage. It said the country had “made progress” on 13 goals, including mainstreaming biodiversity, sustainable management of agriculture, forestry and fishery, and sustainable production and consumption. Also at Friday’s briefing, Li Chunliang, deputy director of the National Forestry and Grassland Administration, said the country attached importance to wildlife protection, pointing to an increase in the number of some animals on the endangered list. He said conservation areas had been set up for 71 per cent of the country’s key state-protected species, and that had seen expansion of their habitats and population growth. The number of wild giant pandas, for example, had increased from 1,114 to 1,864 since the 1980s, while the wild Asian elephant population had gone from 180 in 1985 to around 300 now, he said.
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