Shenzhen eyes duty-free zone

Hong Kong has woken up to the fact that the Greater Bay Area isn’t a concept designed exclusively for its benefit, after analysts pointed out Shenzhen’s plans for a duty-free shopping zone in its downtown area. The same is happening in Macau, where massive shopping centers are being built in neighboring Hengqin.

Unlike Macau, which appears ready to annex Hengqin, Hong Kong cannot get ahead of this trend. The easy days as an “offshore” shopping destination that fueled its tourism industry since the recovery from the last pandemic (SARS in 2003) are unlikely to return after Covid-19 is brought to an end. Hainan is already providing a snapshot of what happens when onshore duty-free shopping is embraced: it, er, migrates back across the border.

This is good. Hong Kong’s duty-free status is a drug that has long needed to be kicked. It has brought in mostly low-end jobs, enriched landlords more than workers, and taken Hong Kong’s focus away from being “Asia’s World City.” Forces pushing for innovation and globalisation of Hong Kong’s economy might stand a better chance again.

However, in many other respects, it would seem that Hong Kong is moving in the other direction, becoming more of a mainland-like city. Shenzhen’s duty-free plan is just a reminder that it is a competitive market that awaits Hong Kong, with or without a GBA masterplan.

Conservative snowball gathers speed

Foreign investors could be forgiven bewilderment at the range of explanations being put forward for the current wave of crackdowns on private businesses in China. Fortunately, most analysis appears to be coalescing into two schools of thought. They contend that what is happening is either the manifestation of Machiavellian intrigue at the top of the Party, or a simpler case of well-crafted bureaucratic actions poorly communicated.

Superior analyses combine the two approaches to suggest that the crackdowns might actually be necessary and could indeed be better presented, but they would not be happening unless they also strengthened the hand of President Xi Jinping against opponents of his agenda – and his drive for a third term.

Better yet would be to step back from the fray and consider bigger, longer-term forces shaping the current bureaucratic and political imperatives.

Continue reading Conservative snowball gathers speed

Dreams for GBA chip industry seem unrealistic

Local media in Guangdong have been poring over the province’s latest Five-Year Plan for industrial upgrading, which has unveiled the goal of becoming a “semiconductor manufacturing powerhouse”, according to Trivium, a Beijing-based consultancy.

This covers every aspect of the supply chain, naturally:

  • Key semiconductor materials
  • Design software for high-end chips
  • Advanced fabrication technologies
  • Advanced packaging and testing 
  • High-end chip manufacturing equipment

The challenge for the province, and indeed for the entire Greater Bay Area, is how to do this when its historical strengths have not been deployed in anything remotely like what is now being expected of it.

Continue reading Dreams for GBA chip industry seem unrealistic

PE, VC money should be in less of a hurry

PE and VC fund managers deserve sympathy at this time, having raised so much money recently only to be blindsided by Chinese policy shifts, as this Reuters article points out. But to continue throwing good money after bad is unconscionable. It would be far better to wait, watch and learn from what is going on at the moment in both Washington and Beijing.

Investing at this level in China has become next to impossible, if for no other reason than public exit strategies are likely to be held hostage by either or both of the US and Chinese governments as their trade war morphs into a financial war. Nevertheless, three strategies seem to have emerged as the consensus: 1) Invest in the government’s priorities; 2) Invest in domestic-focused firms; and 3) Brush up on Xi Jinping Thought.

Each begs rebuttal: 1) Investing in the Chinese government’s priorities is akin to investing in future victims of the US-China conflict; 2) Investing in domestic-focused firms is no assurance of avoiding US Entity Lists; and 3) Xi Jinping Thought is mass-market propaganda that is useless to read in isolation from the broader context of Chinese history.

Now is the time to keep the powder dry. There is further carnage ahead, believe it. This is especially for funds investing in the GBA from their offshore base in Hong Kong.

Continue reading PE, VC money should be in less of a hurry

Macau lawmakers say ‘no rush’ on licenses; but this might speed the process

Macau’s health authorities announced over the weekend that mass testing of the entire city, around 700,000 people, had produced not a single positive case of Covid-19. However, they are still monitoring more than 1,000 close contacts of the family that last week became the first positive case of the Delta variant. Once that had been satisfied, the government was likely to ease restrictions on activity for the city’s residents and visitors, but another round of testing might be necessary.

More interesting for the longer-term future of Macau than the current Covid-19 scare, however, was the release of a “recommendation” paper from the legislature’s sub-committee on the future of the six gaming concessions, which expire next year, June, 2022. The legislative group has called on the executive branch to provide clarity on the process and timeline for awarding new concessions, which it calls a “re-tendering”. It also says that there should be no rush in this, i.e., hinting that the existing concessions should be extended in order to provide sufficient time for a well thought-out process.

Although the document contains nothing startling, it does bring up the curtain on a public performance between the city’s legislative and executive branches which could end up accelerating rather than delaying the awarding of new concessions, contrary to what many observers might currently imagine. And the emphasis in the document on national security considerations, particularly the recently passed criminal statutes by Beijing against gaming promotion on the mainland, provides food for thought about what could amended in the Gaming Law during the coming weeks and months.

For deeper analysis on this subject, readers are welcome to get in touch.

Foreign influences out of tutoring; what could be next?

Reassurances that the recent tutoring industry crackdown was aimed at easing Chinese parents’s financial burdens turns out to have been only partly true. As the latest purges of overseas tutors from these platforms show, the crackdown was also aimed at ending foreign influence in the industry.

Could the same follow-up action be reasonably expected of “spiritual opium”, online gaming? What might that mean for the hundreds of billions still locked up in VIEs such as Tencent?

Moreover, what about the pending Bytedance IPO? Could “inappropriate” short-form videos – probably bigger time-sucking distractions for the nation’s youth than games – be next for criticism by state-run media? If so, why would China want to allow that tool to fall under the influence of foreign investors?

The Greater Bay Area has been at the vanguard of private-sector development of industries such as online tutoring and gaming. This is the home of companies such as Tencent because of the ease in melding entrepreneurial minds in Shenzhen, China’s experimental city, with capital-raising minds in Hong Kong, China’s offshore financing center.

Those advantages are increasingly starting to be seen as baggage. The question every foreign investor in the GBA should be considering now is whether China is reversing the push of the past four decades into greater private-sector participation in the economy, while at the same time cleansing industries of their foreign influence. It is hard to avoid that conclusion after witnessing what has been happening here over the past few weeks.

Bullish on the GBA? Check out Amazon

China bulls have been grabbing headlines this week. Top bank executives have declared their faith in the country’s longer-term economic potential, and their love of Hong Kong’s role in the rise of the Greater Bay Area. Heads of major funds have described regulatory crackdowns as “noise” and said they are buying dips. The Stock and Bond Connect taps have been gushing. Crackdowns on internet gaming, vaping, and extravagant celebrities have likely been but minor distractions for these titans of finance.

And why should they be anything but? Such men are not in the business of investing in “sin industries”. They are here to take wealth from people living in the GBA who would prefer to have it managed by experienced, worldly, friendly others, who know what to do with a hard currency. These men need not care that the US-China relationship is deteriorating by the day. It could even be said that the more the fear, the better for Hong Kong’s banks and other offshore wealth managers.

New US weapons sales to Taiwan or Chinese Foreign Minister Wang Yi’s rant at an Asean forum might not have made it into the daily news clippings of people like Bill Winters, head of Standard Chartered Bank, or Credit Suisse’s Thomas Gottstein. Ditto for Asoka Woerhmann, chief executive of the €859bn German asset manager, DWS. All believe that China’s growth story remains intact and will continue to follow the trajectory it has been on for the past 40 years, give or take a few squiggles.

They might be right. China is opening its wealth management industry, and now could be the time when centuries of historical precedent are erased as the Chinese government forgets the national security implications of allowing rivers of silver to flow into the hands of foreigners.

Then again, they might want to look into what is happening at Amazon. If they don’t, they could miss signs that the foundation on which the GBA’s prosperity is based – foreign trade ­– is wobbling and could soon head into structural decline.

Continue reading Bullish on the GBA? Check out Amazon

Shenzhen stays top for startups

Shenzhen’s number of newly registered companies jumped 10.4% in the first six months as the city kept its pole position in China for startups. From January to June, there were 258,449 newly registered commercial entities in the city. According to the official resident population of 17.5601 million, the city has 208.6 commercial entities and 131.5 enterprises per thousand people, No. 1 in the country.

Newly registered commercial entities were concentrated in the services industry, accounting for more than 90% of the total. Among strategic emerging industries, there were 17,074 registrations of “new generation information technology” companies, a year-on-year increase of 82.3%; 4,490 in digital economy (+63.6%); 3,319 in high-end equipment manufacturing (+58.1%); and 84 in the Marine Economy (+68.0%).

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Macau has responded to the discovery of a local family of four infected with Covid-19 by forcing the entire city of 658,000 to get tested. It has also closed all entertainment venues, except the casinos and hotels. This includes bowling alleys, massage parlours, beauty salons, fitness centres, health clubs, karaoke venues, bars, night clubs, discos and dance halls.

Around 180,000 residents have already booked their NAT tests. It is as yet unclear whether the latest measures have had a strong effect on vaccination rates. Macau has been slower than either the mainland or Hong Kong at dispensing vaccines, despite the small size of the city. Around 37% of the population have received both jabs. The latest lockdown measures do not differentiate between those and the unvaccinated.

Gaming stocks listed in Hong Kong plunged for a second day on the news. They are now mostly below their lows seen soon after the start of the Covid-19 outbreak in February 2020.

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More tough judicial reforms coming for HK?

Hong Kong appears set for further sensitive legal and judicial reforms, judging by Justice Secretary Teresa Cheng’s comments following her return from a trip to Beijing. The one getting the most attention is the imminent enactment of local laws to implement China’s recently passed Anti-Sanctions Law. This would enable the local government to act against financial institutions responsible for implementing sanctions by other governments against people or institutions here.

If passed, the new legislation would place international business groups, particularly banks, in a bind. Cheng, who is herself a victim of US sanctions that prevent her from operating a bank account at international financial institutions in the city – i.e., all of them – says the anti-sanctions laws would be used with “care”. But her definition is the opposite of reassuring:  Any new legislation will “only” be used in retaliation for punitive actions taken by foreign governments – as if there were any other circumstance in which they might be used.

Continue reading More tough judicial reforms coming for HK?