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US-Asia Business

US-China Market Watch: Bilateral Trade, China Microlending

December 04, 2017
Trump's China deals and news on China's financial sector.
(Photo credit): Brill

Your monthly roundup of the latest US-China business and industry news.

White House claims $250 billion in China deals

During his first presidential visit to China, Trump claims to have closed $250 billion in business deals with China, ranging in industry from agriculture, to energy, to technology, and more. However, there are multiple reports that a significant number of these touted deals are nonbinding, which means they can change or fall apart before contracts are actually signed.

Some of the deals included are a 20-year, $83.7 billion investment in West Virginian shale gas and chemical manufacturing by China Energy Investment Corp. (the largest of the proposed deals), a $37 billion Boeing deal with China Aviation Supplies Holding Co., and Chinese e-commerce giant’s agreement to import $1.2 billion of U.S. beef and pork.

However, critics say that, despite the impressive number, these deals will do little to curb the bilateral trade deficit because they don’t address the actual trade policies that hurt American companies. The Wall Street Journal also adds that the trade deficit is driven more by macroeconomic trends, such as savings and investment behaviors, rather than a deal-to-deal basis.

Two major Hollywood-China financing deals end

Two major Hollywood studios have ended their slate-financing deals with Chinese entertainment entities. Sony Pictures’ deal with Dalian Wanda Group, which owns China’s largest chain of movie theaters, has run its course and will not be renewed, according to a Sony Pictures spokesperson. The decision to end the relationship is attributed to the Chinese government crackdown on Wanda’s overseas dealings.

Paramount Pictures' slate financing deal with Huahua Media, which was valued at $1 billion and intended to finance a quarter of Paramount's films over a three-year period, has fallen through. The studio also cited increased Chinese government regulations on outgoing foreign direct investment as the cause for the dissolution. However, according to Variety, the deal had been tenuous for a while because Huahua was unimpressed with the lackluster performances of Paramount's Transformers: The Last Knight” and “Ghost in the Shell.”

However, not all is lost—just last month, Universal Pictures and Perfect World, a Chinese video game and film company, closed their second round of financing with a $250 million deal. The line of credit comes from East West Bank and JPMorgan, and is meant to finance over 50 Universal titles.

Tencent and Alibaba’s hefty third quarter growth

Chinese tech giants Tencent and Alibaba both have exceeded analysts’ expectations and experienced another incredible quarter, with both companies citing a 61 percent increase in revenue, year-over-year. Tencent has also achieved another milestone this month: it is now the first Asian company to be worth more than $500 billion and has surpassed Facebook in value.

Growth was driven by each business’ core areas: mobile games, for Tencent, and e-commerce, for Alibaba. In fact, Alibaba reached a record-breaking $25.3 billion in sales during Singles’ Day, a Chinese holiday that has become the largest shopping day in the world.

Perhaps as a result of these successes, both Tencent and Alibaba are expanding further into their core industries. Tencent acquired a 12 percent stake in Snap Inc., fueling speculation that Tencent might be helping to create Snapchat-focused mobile games. Alibaba, in an effort to merge its online and offline retail strategies, has purchased a 36 percent stake in China’s largest WalMart-style hypermarket, Sun Art Retail Group.

China pledges to open up its $40 trillion financial sector

China announced that it will raise the foreign ownership limits in financial firms, in what Reuters considers a concession to pressure from Western governments and businesses to lighten up regulations and restrictions. Foreign firms can now own a majority (51 percent instead of 49 percent) of a joint venture in futures, securities and funds, amongst other changes. China’s Vice Finance Minister Zhu Guangyao says that the limit may even be removed in three years. However, there currently is no official timeline or details for when and how the government will roll out these changes.

Reuters also purports that the loosened foreign ownership cap will stoke interest in smaller banks and China’s life insurance industry, the latter because of the industry’s growth potential and low penetration rate.

However, Bloomberg says some analysts are skeptical about how much change these new policies will affect. Many foreign firms have already scaled back or completely left their Chinese ventures, such as Citigroup and Goldman Sachs, and see this more as a symbolic step towards smoothing out U.S.-China relations than trade reform.

China cracks down on online microlending

The central bank issued a notice to provincial governments to stop giving licenses to online micro-lenders as part of China’s attempt to rein in financial risks, particularly ones related to internet finance after several high-profile scandals, frauds and failures. As a result of this announcement, Chinese fintech companies listed on U.S. exchanges like Qudian and PPDai have plunged in stock price.

Online lending currently makes up only 1 percent of China’s financial system, but regulators are concerned over its rapid growth (online consumer lending jumped from $3 billion in 2013, to $156 billion in 2016). These online microlenders (whose loan amounts can range from a few hundred yuan to tens of thousands and typically come with high interest rates, which leads to more consumer debt) arose because individual consumers couldn’t get loans from banks, which usually favor large corporate clients.

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