China

China continues to dominate discussions about the health of the world economy. Many are concerned about the country’s slowing growth and its ability to manage the difficult transition from a controlled economy dominated by manufacturing to a more open economy with greater reliance on domestic consumption. Some policy decisions last year also scared the market.

While the risks are many and real, they are manageable and well-understood by China’s policy makers. This is not the time to sell China short. Read more

Speculation is rife that Amazon is soon to establish itself as a global shipping and logistics expert, in a move coined internally as project ‘Dragon Boat’.

While this bold strategy has the potential to significantly increase margins and position Amazon as Chinese businesses’ gateway to the West, a considered and phased implementation is essential if the firm is to gain share of the cross-border e-commerce market from industry leader Alibaba. Read more

By Ken Wong, Eastspring Investments

There is an even chance that, this summer, China’s A-shares will be included for the first time in a key emerging market investment index operated by MSCI, the index provider. If it happens, it will be a welcome development, for the simple reason that it will make the benchmark a more accurate reflection of the emerging market corporate universe.

While the immediate impact of inclusion would be quite small, the longer-run potential for A-shares – which are the stocks of companies listed inside mainland China – to grow in importance within the index is enormous.

Two obstacles to inclusion have been largely removed – reforms to a quota system on investment inflows from abroad and a shortening of the delay in repatriating capital out of China. Read more

You don’t hear much these days about capital outflows from China. The renminbi seems well behaved, and China’s foreign exchange reserves have stayed stable in the past couple of months. Sure, the economy itself faces a bunch of challenges, as the government hasn’t quite found a way to maintain rapid growth rates without a dangerous degree of reliance on credit. But you don’t get the sense that the Chinese are falling over themselves in a rush to buy dollars.

The Fed might take heart from this. On two occasions in the past year, the US Federal Reserve’s intentions to raise interest rates have been confounded by financial turbulence caused by large outflows from China. The first was last summer, when the Fed was forced to postpone rate hikes following a surge in flows from China after the People’s Bank of China (PBoC) introduced a new regime for fixing the renminbi on August 11th. The second was this winter, when another surge in outflows that coincided with the Fed’s December rate hike made it impossible for the Fed to keep doing so. Read more

By Michelle Chan, VP of Programs, Friends of the Earth US

As chair of this year’s G20, China is mounting an ambitious campaign to promote ways that the banking sector can not only green the Chinese economy, but the global economy too.

Over the past decade, China has prioritised sustainable finance policies as a means of preventing and controlling pollution via its banking sector, leading many to hope that China can lead the world on a greener path towards sustainable finance. The members of the G20 Green Finance Study Group, meeting next month in Xiamen, are certainly betting that China does have something to offer when it comes to green finance.

But have such Chinese finance policies actually led to concrete improvements for the environment? Read more

For some, China represents a positive scenario of structural reforms returning the country to its position as the engine of world growth. Not only do we think this is unlikely, we actually believe China poses a systemic risk of historic proportions.

It is now clear that China is not smoothly passing its growth baton from exports and investment to the service sector. Official GDP data still show growth, but this has decelerated significantly despite numerous interest rate cuts and massive fiscal support. Read more

By Sarah Lain, Royal United Services Institute for Defence and Security Studies

The Silk Road Economic Belt (SREB) builds on China’s long-standing economic investment in Central Asia, and it has the potential to further develop Central Asian economies. However, China’s historical track record of investment engagement in the region raises concerns that the SREB could instead exacerbate economic inequalities and poor governance.

China has long been a key driver of infrastructure investment and construction in Central Asia, covering a wide range of sectors. It has invested heavily in the region’s natural resource extraction, with gas, oil, uranium, gold and copper making up key exports from the region. Read more

By Philippe Le Corre and Joel Backaler

This year has all signs of becoming another bumper year for Chinese overseas mergers and acquisition activity. In the first three months alone, the total value of cross-border deals nearly reached 2015 annual totals ($101bn and $109bn, respectively).

High-profile deals from the last three months include: Dalian Wanda’s $3.5bn acquisition of Legendary Pictures, a US media company, Haier’s $5.4bn takeover of GE’s appliances unit and most notably ChemChina’s record-setting $43bn bid for Syngenta, a Swiss-based agri-business group.

However, all of this overseas business activity is occurring against a backdrop of a Chinese domestic economy that is facing myriad challenges with a slower GDP growth forecast of 6.5 per cent, reduced domestic demand and decreasing industrial profits not to mention industrial overcapacity. Read more

Every day an estimated 150,000 new Chinese shoppers join the ranks of the hundreds of millions in the country who have discovered ecommerce. Penetration will double by 2020, according to our estimates, with the total value skyrocketing to Rmb 10tn ($1.5tn).

But this dramatic adoption of online shopping is not the biggest news to emerge from Bain & Company’s latest study of China’s ecommerce market, conducted in partnership with AliResearch, Alibaba Group’s research arm. The unexpected finding is how ecommerce is shaping consumer behaviours and the profound influence those shoppers are having on online sellers. Despite its massive growth, China ecommerce is rapidly evolving to become more than a numbers game for both consumers and sellers. Read more

Markets used to cheer when China’s exports rose, believing this showed the global economy was in good shape. They are still hopeful today, despite the 25 per cent fall in February’s exports. But closer analysis of China’s important refining and petrochemical sector shows that a paradigm shift is under way.

No more is China’s economy based on importing raw materials and exporting low-cost manufactured goods. Instead, the focus is on using the new capacity built during the 2009–13 stimulus period to maintain employment and boost China’s self-sufficiency. Read more

US penalties handed down on ZTE, the Chinese telecoms giant, are a reminder that despite January’s partial lifting of sanctions on Iran after UN nuclear inspections, they can still bite.

Previously, the Bank of Kunlun, set up to handle oil for loans and infrastructure deals between Beijing and Tehran during the embargo, had been cited for violations. Chinese commercial and policy banks nonetheless were gearing up last year for legal business, supported by a flurry of official initiatives.

 

China’s “One-Belt One-Road” outward investment campaign envisions a tenfold increase in Sino-Iranian economic engagement over the next decade to $500bn; Iran took a tiny 2 per cent founding share in the Asian Infrastructure Investment Bank; and the countries discussed bilateral currency swap lines. Read more

China has reminded investors that there’s more to the country than worrisome economic indicators by announcing a significant step in the opening up of its domestic interbank bond market. The move has positive implications for capital flows and the strength of the currency.

One of the challenges in forming a clear understanding of China’s economy from the perspective of investment risk and reward is the complex interplay taking place between cyclical trends and structural reform. Read more

By Mark Schwartz, Goldman Sachs

In the 1990s, trade was the defining issue of the US-China economic relationship. Today, as much as any other issue, the environment binds the two giants of the global economy together.

This week, leaders from the international financial community are gathering in Shanghai for preparatory meetings in advance of the G20 summit in Hangzhou this September. Among the most prominent items on the agenda is green finance– public and private investment in environmental protection and climate change mitigation. Read more

With about every major leading economic indicator in a tailspin, it’s easy, even obvious, to be bearish about China. But, one sign of economic activity could hardly seem more robust: the crowds and cash at gambling tables during this year’s Chinese New Year.

The two-week long lunar New Year celebration finally drew to a close on Monday with the Lantern Festival. Here in Shenzhen, China’s richest city per capita, no sooner do the shops all shut down for the long break than the gambling tables spill out onto the street, like the cork flying out of a bottle.

Gambling, especially in public places with large sums being wagered, is illegal everywhere in China. All the same, the New Year is ready-made for gamblers and street-corner croupiers to gather. For one thing, most police and urban street patrols are also away from their jobs with family. Read more

By Michel Lowy, SC Lowy

Traditionally, investing in Asian high-yield bonds has not been for the faint-hearted. Yet in recent years a new normal emerged; just about any bond delivered strong returns. Such has been one of the results of the extremely accommodative policies of major central banks that have flooded the markets with liquidity, thereby dulling the perception of risk.

However, all this changed last year when steep falls in oil and commodities prices,
together with US high-yield fund redemptions, led to a liquidity shakeout
in the high-yield bond market. The new reality rewarded a discriminating investment strategy – with the Chinese property sector’s high yield bonds returning gains of 20 per cent, even as other market segments such as Indian issuers and Chinese industrials experienced single-digit losses. Read more

By Weifeng Zhong and Zhimin Li

The falling value of China’s yuan has once again become a trigger for state intervention. Fueled by a whopping $1tn in capital outflows last year, downward pressures on the renminbi have prompted the Chinese government to defend the currency by burning $700bn of its foreign-exchange reserves and rolling out a barrage of administrative measures. The latest reserves plunge shows that the government is losing the fight.

While capital flight is a headache for Chinese officials long fixated on managing the renminbi’s value, it may be good news for the rest of the world. As we explain later, it could well mean that the serious economic reforms outlined in China’s new five-year plan, such as deregulations, tax cuts, and other pro-market policies, might become a reality. Read more

By Gilliam Collinsworth Hamilton, NSBO

A crowd gathered around the entrance to the Beijing Guang’anmen hospital. In the centre stood a young woman with an out-of-town accent, according to a video posted on Tengxun Xinwen, a Chinese news and video site.

Like many in the crowd, the woman had travelled to Beijing to see a doctor. But she found too late that she could not pay the scalper’s fee for admittance. Her voice grew hysterical. “This is the great Beijing,” she shouts. “If I die at home today, it would be because our society is hopeless. This is Beijing. This is our capital.” Read more

By Kevin P. Gallagher, Boston University

As Western-backed development banks and the private sector are on the retreat from Latin America, China’s development banks are coming to the rescue, at least for now.

China’s two development banks, the China Development Bank and the Export-Import Bank of China, provided upwards of $29bn to Latin American governments in 2015, according to new estimates published by Boston University’s Global Economic Governance Initiative and the Washington-based think tank The Inter-American Dialogue.

A three-fold increase from 2014, China’s 2015 finance to Latin America was more than the World Bank, Inter-American Development Bank, and the Development Bank of Latin America combined. Read more

Investors’ attention remains focused on the minutiae of central bank policies in the developed world. But they might spare a thought for developments in China’s lending policies.

The implications of these dwarf anything being considered in Tokyo, Frankfurt, London or Washington, as the chart below highlights. It shows the changes since 2008 in official and shadow lending, which together constitute China’s total social financing (TSF). Read more

By Gordon French, HSBC

China’s “Belt and Road” infrastructure investment drive will help boost the flow of physical goods across large swathes of Eurasia, southern Asia and even parts of Africa and the Middle East. Less obvious is the impact that the vast amount of spending linked to the initiative will have in the financial arena – in the currency and bond markets in Asia and beyond.

First announced in 2013, the “Belt and Road” initiative is an essential part of China’s domestic economic rebalancing, and of its outbound ambitions. The initiative entails ploughing billions of dollars into the hardware – railways, highways and ports – that links mainland China and the dozens of countries to its west and south. The goal is to encourage more cross-border trade while putting excess capacities to work. Read more