Latest Briefing – 3rd Week, August 2021

Our Key Messages

  • China is hardening the regulation with uncertainties keeping executives up at night.
  • Unrest in Afghanistan is still hunting the stability of the middle east.
  • Inflation. We are well passed the question but the action.

01
China’s Regulation

The past few weeks was daunting.  Most companies in China are not getting the hang of where the regulation is going.  From the finance, tutoring, food delivering, gaming, alcohol, and even the tech sector, the regulation is cutting deep into seemingly every sector in its economy.

Tech companies are the most impacted with Ant Group, an Alibaba affiliate whose $37 billion initial public offering was suspended with days to go; Didi Global, whose ride-hailing app was expelled from Chinese app stores days after its own $4.4 billion IPO in New York; Tencent, fined by regulators for sexually explicit content and unfair practices, and told to end exclusive music-licensing deals; the online-tutoring industry, largely barred last month from making a profit.(Consolidated by the Economist and Bloomberg)

However, with the Beidaihe meeting coming to an end, we are now seeing, ever more clearly, how technology and other regulations will look like going forward. The document, jointly issued by the State Council and the Communist Party’s Central Committee, said authorities would “actively” work on legislation in areas including national security, technology and monopolies. Law enforcement will be strengthened in sectors ranging from food and drugs to big data and artificial intelligence, the document said. 

“The people’s growing need for a better life has put forward new and higher requirements for the construction of a government under the rule of law,” it said. “It must be based on the overall situation, take a long-term view, make up for shortcomings, forge ahead, and promote the construction of a government under the rule of law to a new level in the new era.”

Generally speaking, there are three goals the growing regulation aiming to achieve. It is also a good predictor of how future’s regulation will go.

1. A Productivity-driven and Sustainable Economy

The goal of regulation is not to annoy foreign investors but to solve an actual problem.  And right now, productivity is perhaps one of the top concerns China faces. What’s happening with the tutoring industry is also stemming from the same reason. It works as a booster to the three-child policy that is currently rolling up by reducing the child expenses that often discourages parent from having more children.

Policy Agendas like Health Nation is also considered to be part of the program where nutrition companies, sneaker companies are benefitted, yet regulations are expected for non-health-driven foods and exercises. Think of gaming as one of those sectors that damages its health and productivity with it being labeled as spiritual opium.

It would also be expected that China’s government will become more of a guiding force in how businesses operate in China. Some of the Chinese firms have already feeling it with Chinese government directly investing in it and actively participate in their decision making.

2. Empowering The Internal-flow of Economy

Another regulation we are seeing is to empower their internal-flow of the economy. Now we have already seen new policy from government that demand state-controlled businesses to source “Made in China” products; It is also wide

3. National Security & Power Centralization

This is not new to people who work with Chinese businesses or have businesses in China. However, it is getting increasingly visible as the stability and sustainability of its economy is under threat.

02
Unrest in Afghanistan

The Taliban are consolidating control of Afghanistan, 20 years after U.S.-led forces ousted them from power. The return of the Islamist fundamentalist group has been brewing for years, but its advance accelerated rapidly after the U.S. set a deadline of Aug. 31 to pull out troops and began withdrawing air support for the now-fallen Afghan government’s forces. President Biden has now said U.S. troops will stay as long as needed to evacuate Americans. Afghans, including many who worked with the U.S. and other Western nations, meanwhile are still struggling to gain access to the airport in Kabul and board flights out of the country. Military personnel on Friday fired tear gas to control the crowds.

There are three potential developments in the future that will change Afghanistan and have the potential that will negatively/positively impact the region.

1. Region Stability in Question

With the Taliban taking power, a lot of analysts are waging in on whether or not Afghanistan will go back to the time of 2000 where:

  • No girls are receiving education(2020). Comparing with 82% as of 2018
  • Low secondary school enrollment. Comparing with 55% as of 2020 and 13% as of 2000
  • Low access to modern technologies like phone and wifi.
  • Low growth Economy

But whether or not this is the case, regional stability will definitely take a hit as the immigrants are rushing out of the country and the existing trade between Afghanistan and other states will go through disruptions. 

2. New battleground for US, China, and Russia

Returning to power in Afghanistan after a 20-year absence, the Taliban have regained control of natural resources that a former mines minister of the country once said could be worth up to $3 trillion. That estimate was made toward the end of the last commodities supercycle in 2010 and could be worth even more now, after a global economic recovery from the coronavirus shock sent prices for everything from copper to lithium soaring this year.

Afghanistan is rich in resources like copper, gold, oil, natural gas, uranium, bauxite, coal, iron ore, rare earths, lithium, chromium, lead, zinc, gemstones, talc, sulphur, travertine, gypsum and marble. It would be expected that neighboring countries like China and Russia will start pouring in resources to compete for influences in the Afghan.

3. Increased commitment to allies

The shambolic withdrawal does not reduce the obligation of America and its allies to ordinary Afghans, but increases it. They should use what leverage they still have to urge moderation on the Taliban, especially in their treatment of women. The displaced will need humanitarian aid. Western countries should also admit more Afghan refugees, the ranks of whom are likely to swell, and provide generous assistance to Afghanistan’s neighbors to look after those who remain in the region. The haste of European leaders to declare that they cannot take in many persecuted Afghans even as violent zealots seize control is almost as lamentable as America’s botched exit. It is too late to save Afghanistan, but there is still time to help its people.

03
Hard/Soft Landing in China 

A perfect storm of rising infections, new restrictions on mobility, supply chain bottlenecks, natural disasters (mainly flooding around Henan Province), and decelerating global demand for Chinese-made goods led to a deceleration in Chinese economic activity in July. New data on retail sales, industrial production, and fixed asset investment indicates healthy growth, but at a significantly slower pace than previously and slower than investors had anticipated. In response, Asian equity markets performed poorly. Moreover, China’s central bank last week unleashed the equivalent of US$92 billion in medium-term loans to financial institutions to offset an evident slowdown. The central bank expressed the hope that banks will use these funds to boost lending now that the required reserve ratio for commercial banks has been reduced. Let’s look at the data.

Retail sales in China were up 8.5% in July versus a year earlier, slower than the 12.1% growth clocked in June. This was the slowest growth in retail sales since December 2020. Retail sales fell on a month to month basis. The government acknowledged that restrictions imposed to fight the spread of the virus had undermined consumer mobility and spending. China’s zero-tolerance policy toward the virus has meant severe restrictions in many locations in response to even modest outbreaks. In addition, a shortage of semiconductors, which has slowed production of automobiles, likely contributed to the 1.8% decline in consumer purchases of automobiles.3

Meanwhile, Chinese industrial production increased 6.4% in July versus a year earlier, slower than the 8.3% growth clocked in June and the slowest pace of growth since August 2020. A combination of higher commodity prices, supply chain bottlenecks, the shutdown of some factories and port facilities due to the virus, and weakening overseas demand contributed to this deceleration. Some categories of production saw a decline in output. These included motor vehicles (down 15.8%), cement (down 6.6%), ferrous metals (down 2.6%), and textiles (down 1.0%). Even then, production of machinery and chemicals was up 6.6%, while production of general equipment was up 7.6%.

Fixed asset investment in China was up 10.3% in the first seven months of the year versus a year earlier, a slowdown from earlier months. This included a 12.7% increase in property investment, a deceleration from recent months. Public sector investment was up 7.1% while private sector investment was up 13.4%. Both numbers were lower than previously clocked. It has been suggested that the slowdown in investment is related to the recent tightening of credit market conditions as well as a regulatory crackdown on some Chinese industries.

Going forward, the most important factor driving China’s recovery is likely to be the virus. Indeed, a government spokesman said, “Given the combined impact of sporadic local outbreaks of COVID-19 and natural disasters on the economy of some regions, the economic recovery is still unstable and uneven.” The Delta variant is wreaking havoc around the world, including in China. While there is not reliable data as to the size of the outbreak in China, we do know that the government has taken significant steps to quell the outbreak in numerous locations around the country. These measures are affecting economic activity.

Although there has been a sharp increase in the number of people vaccinated in China, it is reported that the Chinese vaccines are less effective than those offered in North America or Europe. Thus, the ability to quell the outbreak through vaccination is in question. It seems likely that severe measures to suppress transmission of the virus will continue, especially given the government’s hope to host a successful Winter Olympics in early 2022. Meanwhile, it appears that the government is responding by easing monetary policy, but with an eye toward avoiding a further build-up of debt.4

04
The Fed’s Move

Since the pandemic began, the Federal Reserve has engaged in massive monthly asset purchases meant to suppress bond yields and, therefore, keep credit markets functioning during the crisis. The Fed has previously signaled that this policy will be sustained until the Fed’s goal of stable inflation and maximum employment is met. Lately, given the sudden surge in inflation, the decline in unemployment, and the existence of a labor shortage, many Fed leaders have started to discuss the possibility of reducing or ending the asset purchase program. Last week, the Fed released the minutes of the last meeting of the Federal Open Market Committee (FOMC), the principal policymaking body of the Fed. The minutes indicate that most FOMC members now favor tapering asset purchases later this year, while some want to wait until next year. Here is the relevant text of the minutes.

“Most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee’s ‘substantial further progress’ criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum employment goal. Various participants commented that economic and financial conditions would likely warrant a reduction in coming months. Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year because they saw prevailing conditions in the labor market as not being close to meeting the Committee’s ‘substantial further progress’ standard or because of uncertainty about the degree of progress toward the price-stability goal.”

The FOMC members debated about the potential pace of tapering, about which assets should be the focus of an initial tapering (Treasury bonds or mortgage-backed securities), and about how to coordinate tapering with interest rate policy. In addition, the members discussed how investors would likely interpret its actions, especially in light of the Fed’s relatively new policy of targeting an average inflation rate of 2.0% rather than a maximum rate. Some members were concerned that initiating a tapering of asset purchases would send the wrong signal about the Fed’s inflation targeting. Meanwhile, there appears to be consensus that the current surge in inflation is transitory. Thus, any decision to taper asset purchases will be meant to suppress future inflationary impulses, not to address the current situation.

Finally, FOMC members discussed the potential impact of the Delta outbreak on the economic outlook and the Fed’s decision-making. Members noted that the outbreak could lead to economic weakness and the need to delay tapering. They also discussed the impact of supply chain disruption and labor market shortages. Here is the relevant text from the minutes.

“Rising COVID-19 cases associated with the spread of the Delta variant could cause delays in returning to work and school and so damp the economic recovery. Several participants also remained concerned about the medium-term outlook for inflation and the possibility of the reemergence of significant downward pressure on inflation, especially in light of the recent decline in longer-term inflation compensation. In addition, several participants emphasized that there was considerable uncertainty about the likely resolution of the labor market shortages and supply bottlenecks and about the influence of pandemic-related developments on longer-run labor market and inflation dynamics. Those participants stressed that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans on asset purchases.”

In response to the release of the Fed’s minutes, equity prices and bond yields fell. This suggests that the minutes were a surprise, which they should not have been. After all, Fed leaders have been signaling a shift in this direction for a while. In any event, I believe that investors interpreted the Fed’s statement as auguring a rise in bond yields in the coming year. A higher rate at which expected future profits are discounted implies lower equity values. Thus, the decline in equities makes sense. The decline in bond yields, however, suggests a downward revision of inflation expectations on the view that the Fed’s future tapering will reduce the likelihood of much higher inflation. In any event, growing concern about the Delta variant is also affecting markets, making it difficult to identify the impact of the Fed announcement.

05
Covid Rises in Vietnam

As reported by Nikkei, Covid-19 is still rising even though government is deploying one of the strictest action on Covid.  Hundreds of thousands of workers across the country are sleeping over at the factories in order to keep the production line going.  However, this approach does not seem to provide much value after all.  Not only is the infection still rising, there are even dozens of factories that deployed such approach still find themselves inflected with Covid.

And Vietnam’s plan to prohibit residents of Ho Chi Minh City from leaving their homes from Monday (Aug 23rd) is not helping. It has triggered panic buying in the epicentre of its worst coronavirus outbreak. The scramble for purchases is hurting efforts in the nation’s largest city to contain the spiralling COVID-19 outbreak, said the official Vietnam News Agency. Long queues of people were seen outside markets and shelves at supermarkets in Ho Chi Minh City were emptying on Saturday, witnesses and state media said.

The latest data reported by the health minister on August 23rd shows Vietnam is still long way from Covid-free.  With a 10,266 new COVID-19 infections and 389 deaths on Monday combined with a slow vaccination program, local governments other than Ho Chi Minh City are also expected to deploy stricter lockdown.

The Author

Our Weekly Asia Economics & Insights Update is dedicated to help subscribers and insiders get insights behind our latest news.  We hope to inform, delight, and enrich you with our thought-provoking executive briefs.

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