What is the city in the world with the highest penetration of electric vehicles? Very few probably know the exact answer: Shanghai, the capital of the transformation of urban traffic where, silently, the Teslas baked by the factory that rises on the outskirts of the metropolis parade, together with the Nio and the prototypes of the other "electric" houses. Much better than California, notes a report by JP Morgan, which notes that "China has an explicit desire to push the production of electric cars and has demonstrated this through subsidy policies and other initiatives". “This ambition – notes the broker – has helped to develop one of the battery supply chains for most comprehensive electric vehicles globally. Many strong companies have emerged from a period of chaotic competition, and the survivors are capable and globally competitive companies."
A nice case of social darwinism, in short, in a country that for decades has challenged the slogan "getting rich is revolutionary". Out of fashion however, as the executives of Alibaba, the e-commerce giant founded by Jack Ma, were hit hard by the new rules imposed by President Xi against "selfishness".
The test bed was the Singles day, or 11.11, which has transformed over the years into the most gigantic online shopping party in the world. How can this triumph of consumerism be reconciled with the spirit of "social cohesion" that President Xi wants to impose on Dragon on the eve of the Communist Party's centenary? Alibaba this year gave up the large billboard that updated sales trends in real time, on the other hand it encouraged the purchase of coupons in ecological products and allocated 100 billion yuan (14 billion euros) to finance good works. The turning point has not compromised the purchases. Indeed, at the end of the day the Yellow Amazon has realized $84,5 billion in sales more than 74 billion in 2020. But twelve months ago the festival of electronic sales, which lasted 11 days, coincided with the launch of the listing on the stock exchange of Ant Group, the financial arm of the group which should have been the most important IPO in history and the consecration of the autonomy of the hi-tech group from the rules dictated by the party. On the contrary, it was the beginning of a long crisis.
Alibaba, in the last year, it has lost about 40 percent in value on the stock market. Jack Ma, who recently reappeared in Spain, was subjected for long months to a sort of voluntary prison, the digital giants, from Tencent at JD.Com, they had to deal with various forms of censorship and all kinds of obstacles (including the ban on video games for the little ones) with the aim of "restoring order". A dangerous strategy because, according to a study by McKinsey, the extraordinary take-off of the Chinese economy is closely linked to the transition from the inefficient system of large public factories to a more advanced environment, with a consistent force of services and more sophisticated production, which in the last quarter of a century, from 1995 to 2017, it has grown four times guaranteeing 87% of new jobs while the share of exports from private industry has increased from 34 to 88%.
La political turn, which culminated in the decisions of the Communist Party Plenum which crowned Xi's thought "as the highest and most noble expression of the Chinese spirit", certainly entailed a high economic cost. Suffice it to say that this year loans to small and medium-sized private enterprises will rise by 6,7%, about half of the resources destined to support the giants of the public economy, hungry for capital as well as coal, the root cause of the dramatic situation environmental. Not to mention the "bomb" represented by real estate sector (about 30% of GDP) which threatens the stability of the system.
From what emerges from several recently published reports (S&P Global), the total debt of the Real Estate sector is higher than reported in the official balance sheets. Many companies have circumvented the constraints on credit and increased financing deriving from unconventional channels, first of all that of Wealth Management products (WMPs). These are investment vehicles issued by both banks and real estate companies and sold to retail customers. These “structured products” have had considerable success over the past decade as they promise significantly higher returns than the traditional bond market. Over time, the central bank has introduced strict rules on the matter, excluding however real estate companies, which have so far been able to operate in the shadows.
Evergrande, for example, in 2016 it sold its first WMPs product to more than 80.000 people, including its own employees, through its online lending platform, and has since raised approximately $15 billion through this channel. JPMorgan estimates that Evergrande's true debt-to-equity ratio is 177% versus the 100% reported on its balance sheet. Official data speak of a WMPs market of bank origin of over 4 trillion dollars while there are no data or estimates for the non-bank market.
“Beijing's dilemma is therefore clear – reads a note from UBS –: on the one hand it must necessarily remedy the “moral hazard” in a key sector for the economy; on the other, however, it cannot allow the domino effect of the real estate crisis to affect all other sectors”.
It is recent news that the PBoC will relax the requirements on refinancing activities in local currency in the interbank market for real estate companies, so as to ease the tension of recent weeks and inject liquidity into the system thanks to the support of the banks. “The Authorities have thus sent an important political signal – reads a note from Gam Investimenti – after the Federal Reserve warned that the fragility of the Chinese real estate sector could spread to the United States if it deteriorates dramatically. This would put China's internal offshore bond market at risk, and Beijing certainly can't let that happen.
In short, as always, the interpretation of Chinese events is extremely complex. But various signs suggest that, once the technology sector is brought under control and Xi's authority over the party has been reaffirmed, the government is preparing to restart the engine of growth, starting from some leading sectors. Just as a horizon of rising rates is looming in the West, starting from the future choices of the Fed, China could thus offer an interesting alternative, as various investment houses are noticing. Starting from Pictet which signals some themes to be cultivated in the long term. In particular:
- THEelectric car, today 20% of the market but in strong expansion thanks to the successes of local producers who control 70% of the market (against 40% for petrol vehicles).
- Le lithium batteries, in which China is the leader. Currently, with a global penetration of electric vehicles equal to 4% - writes Pictet - the world needs 155 GWH of lithium batteries. When this percentage reaches 50%, which should happen before the end of the decade, 25 times more battery power will be needed.”
- Another area where opportunities are growing is the consumer sector. Demand is picking up here thanks to the shift in consumer preferences towards local brands and the government's focus on improving the quality of life. For example, in 2020 the market share of local brands of sportswear rose to 22% from 14% in 2012. Cosmetics saw a similar trend. The quality of products is also rapidly improving, with local brands also having the advantage of knowing local tastes.
- Finally, surprisingly, there is la medicine, a field in which China is becoming competitive. Chinese universities produce about 4,7 million engineers every year, which gives them a big advantage in technology areas. In the Medtech, China has drawn on its medical knowledge and advanced manufacturing expertise to develop high-performance robotic surgical assistants and ventilators.
