?????? CHINA: THE SWEET AND THE SOUR ??????

(+) ￥ Could the Yuan be the best news of the year for the Chinese government?

Thanks to the recent surge in foreign investment in Chinese stocks and bonds, the?international use of the Yuan has hit a new record high.?The Renminbi/Yuan Globalization Index developed by Standard Chartered which had slumped in 2015 with the tightening of capital controls has recovered and surpassed its all-time highs.

For its part,?according to Goldman Sachs, the Yuan could become the world's third most important reserve currency by 2030, behind only the USD and the EUR.

This development is explained both by the?increase in cross-border payments in Yuan?and by the?greater inflow of capital into the country.?For example, during 2021 net inflows of funds into China are reaching their highest levels in seven years. During the first quarter of 2021 alone, net foreign capital inflows into China exceeded US$ 88 billion.

And this does not appear to be a passing phenomenon. According to a recent Invesco survey,?40% of sovereign wealth funds plan to increase their allocations to China?over the next few years. Moreover, more and more of the world's central banks (53% in 2021 vs 40% in 2018) hold reserves that are nominated in Yuan.

Why is this important?

The Renminbi/Yuan has strengthened nearly 10% against the dollar over the past year to a three-year high last May. This is consistent with the?Chinese government's goal of making the Yuan an internationally used currency?that will allow the country to overcome its dependence on the USD.

Moreover, at the same time, the increased demand for Yuan has led the government, in order to cool the exchange rate and avoid hurting exports, to?reduce capital controls?so that Chinese companies can invest large amounts of money all around the world. In other words, we may soon see?a new explosion of corporate operations related to Chinese companies and investors.

(-) ???? Is Xi Jinping's campaign against tech companies getting out of hand?

Over the last few years China's economic growth has had a lot to do with the new economy led by the technology sector. For example,?over the last decade the share of the digital economy in China's GDP has multiplied by four. Today about 40% of the Chinese economy depends on or directly benefits from the digitization process.

This has led to the emergence of giant?technology conglomerates?that could be posing a serious?challenge to the communist regime. For example, while China had no billionaires with a net worth of more than US$10 billion just a decade ago it now has about 50.?In 2020 alone, 238 Chinese became billionaires, more than twice as many as in any other country.?Of course, most of that wealth came from technology.

But not only that. Chinese tech giants have become companies open to the world, controlling a plethora of sensitive information and data on Chinese citizens and companies. Many of them, as is the case of Alibaba or Tencent, are even listed on US stock exchanges.

Xi Jinping's response has been none other than to launch a huge pressure campaign to strengthen the Chinese Communist Party's control over these companies.?The latest action was taken on 2 July when Chinese regulators announced an investigation into data processing security at Didi Global Inc, also known as the Chinese Uber.?

This investigation was launched just two days after this Chinese company began trading on the New York Stock Exchange, causing heavy losses among international investors.

Shares of Didi, the Chinese Uber, plunge 30% on the New York Stock Exchange due to the app's suspension in the Asian country - Business Insider

And, as we told you, it was not an isolated case. In recent times, Xi Jinping's government has been launching a constant offensive against large domestic technology companies, particularly those listed in the United States.?

And that is not all. At the same time companies like Facebook, Twitter, Amazon or Google are coming under more pressure from the Chinese and Hong Kong authorities to share private user information with the government.

Why is this important?

While the Chinese government's crackdown may in some cases have positive effects or be justified in terms of antitrust, these are the exceptions.?Xi Jinping's heavy-handed policy threatens to slow down or even, at worst, stop one of the most dynamic and thriving sectors of the Chinese economy.?And some results are already showing:

Since Beijing launched its pressure campaign,?the market value of Chinese tech giants has plummeted by 30%, resulting in a loss of over US$1 trillion. In addition, the emergence of new unicorns has dried up and?many companies have halted their IPO plans?with the resulting consequences in terms of capital raising and growth.

To make matters worse, 244 Chinese companies are currently listed in the United States with a market cap of approximately US$1.8 trillion, almost 4% of the entire value of the North American stock exchanges. We are talking about 244 companies that are now suffering intensely from what is known as country risk.?

Since Xi took control of China, its economic results have not been as good as the regime would have us believe. For example, total debt has risen from 225% of GDP to over 275%. GDP growth has slowed and?if in 2012 it took 6 yuan of new credit to generate one yuan of growth, today it takes almost 10.?Meanwhile, the slowdown is also affecting the evolution of wages and productivity.

The Chinese Communist Party wants to maintain its power at all costs, but the latest campaign launched against the most thriving and prosperous sector of the Chinese economy may end up having very negative consequences for the country.