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Moody's - Article
China is making big strides to improve companies’ environmental, social and governance (ESG) standards and create more ESG-related investment opportunities. The country has also been at the forefront of fintech growth.
As an asset class, ESG has stepped out of the niche into the mainstream in China’s capital markets. On the one hand, Chinese regulators have rolled out a series of policies and regulatory guidelines to push for more ESG awareness among investors and to create national standards for ESG disclosures. On the other hand, a growing number of ESG-themed funds have emerged in recent years.
Since the beginning of the year, the China Securities Regulatory Commission has required all listed companies to adopt ESG disclosures. Most recently, during the fifth plenary session of the Communist Party of China, Beijing proposed the promotion of green development for its 14th Five Year Plan. Per the policy guidelines, China will steadily aim to reduce its carbon emissions during the coming 15 years after peaking before 2035. In late July, the People’s Bank of China added a green finance provision into commercial banks’ macro-prudential assessment scores. Two months prior, the central bank, together with other state bodies, updated the list of eligible projects for green bonds, removing “clean use of coal.”
“ESG is no longer just a buzz word in the finance world. It has leapt into other facets of the economy, with the government taking tangible steps to advance it,” said Min Ye, Managing Director, Head of Moody’s International. “This translates into tremendous opportunities for investors and service providers alike and will contribute to China’s sustainable growth.”
The push towards more ESG awareness and higher-standard ESG disclosures does not only come from the top down. Many domestic market participants have joined the effort to become more ESG-aware even before regulators required them to do so. Industrial Bank, a domestic leader in green finance, had accumulated a green financing portfolio of more than Rmb1 trillion by the end of 2019. In September 2019, Chinese insurance giant Ping An became the first domestic asset owner signatory to join the United Nations Principles for Responsible Investment. Fund managers like China Southern Asset Management, E Fund Management and Hwabao WP Fund Management have also set up ESG-themed funds.
“We are seeing more investors become conscious about looking at not only monetary returns, but also returns to society,” said Moody’s Ye. “Traditionally, if you are a capital markets investor, you are managing your credit and market risk. But nowadays, financial returns can also be impacted by ESG risks.”
Moody’s itself has long been preparing for the shift towards a more responsible investing model. Together with its affiliates, Moody’s has been providing ESG data, assessments and benchmark products and services to debt issuers, investors and financial institutions worldwide for several years, in addition to embedding ESG considerations into its credit ratings.
In October 2019, Moody’s acquired a minority stake in SynTao Green Finance, a leading Chinese ESG data and analytics provider. The Beijing-based firm also offers green bond verification, green finance solutions and evaluates A-share listed companies’ ESG disclosures.
“SynTao has a unique dataset of Chinese companies’ ESG disclosures,” Ye said. “When combining their dataset with our ESG solutions, we can offer more comprehensive coverage [of the Chinese green market].”
Moody’s and SynTao have also collaborated on an ESG scoring methodology and research. The goal, said Ye, is to figure out how Chinese ESG goals can be potentially differentiated from European and US ESG goals and allow different markets to learn and understand from one another.
Apart from SynTao, in 2019, Moody’s also invested in Four Twenty Seven Inc., a leader in the climate data and risk analysis industry, and Vigeo Eiris, a global provider of ESG data, research and assessment.
“We are starting to fuel our technical capability [in the ESG market],” Ye said. “We believe China is in a unique position to take the lead in achieving sustainable growth. There are signs of this already, with China driving global green bond issuance, contributing $31 billion or 12% of global green bond issuance in 2019.”
The other fast-growing industry in China that Moody’s has laid its eyes on is fintech. Moody’s is in continuous dialogue with numerous fintech companies to explore capabilities in automated risk assessments, artificial intelligence and robotic processing. Some of these potential partner firms have the technologies to ingest Chinese companies’ financial statements automatically, Ye said. Others can ingest ESG data – which are often not in the form of numbers but in words, sentences and disclosure paragraphs – in Mandarin.
Just earlier this month, Moody’s acquired a minority stake in MioTech, a China-based provider of alternative data and insights. MioTech uses AI to track and scan alternative data sources related to ESG and KYC factors, supply chains and financial information for over 800,000 public and private companies in China.
“As a 100-year old company, we're proud to remain at the forefront of our industry in this fast-changing world,” Ye said. “We thrive because of our constant drive to innovate, to anticipate market needs – be they in China or beyond – and most of all, to remain customer-centric.”
Moody’s has nearly three decades of operating history in China, with offices in Beijing, Shanghai, Shenzhen and Hong Kong SAR. In the offshore market, Moody’s provides ratings on cross-border deals. The firm also participates in the onshore market through its 30% stake in China Chengxin International Credit Rating (CCXI), the leading Chinese credit rating agency with 40% rating coverage, as well as through Moody’s Analytics’ data and software offerings, which include vast comparable data on private companies via Bureau van Dijk.
“Although most people may know us primarily as an international credit rating agency, as well as from our investment in and joint venture with CCXI, our services in China go well beyond credit ratings,” said Ye. “We are evolving as an integrated risk assessment business, combining data, analytical solutions, and insights to help decision-makers identify opportunities and manage the risks of doing business with others.”
Fitch Ratings - Article
Chinese consumers’ migration to online shopping has accelerated due to the Covid-19 pandemic. The shift, which is both structural and long-term, is rallying e-tailing operators to compete in a fast-evolving market and unearth new frontiers.
The Covid-19 outbreak may have dragged down Chinese economy at the beginning of the year, but it has also boosted the growth of China’s online retail, or “e-tailing”, sector, Fitch said in a series of reports on the industry.
China’s e-tailing sector has been speedily expanding in the past years, and the Covid-19 pandemic accelerated it. In the first ten months this year, national online retail sales of goods exceeded Rmb7.5 trillion ($1.14 trillion), growing 16.0% year-on-year, despite a retreat of 9.7% in offline retail sales of goods in the same period; and the share of online retail to total retail (goods only) reached 26.8%, versus 20.8% in 2018 and 23.4% in 2019, according to the National Bureau of Statistics (NBS) and Fitch.
The pandemic has made the shift from offline retailing to e-tailing both structural and irreversible, from psychological, economic, and demographic angles.
“People usually do not change a habit once it has been formed, when there are no adverse factors against their habit,” Karl Shen, Associate Director of China Corporate Research at Fitch, said. “Shopping online makes life easier by saving time and effort, and goods sold online are of fair prices due to transparent competition.”
Although China’s online retail market has taken the top spot in the world in terms of size since 2015, it still has much headroom, Shen said. Internet users and online shoppers accounted for only 63% and 49% of China’s total population at the end of 2019, lagging behind over 85% and 60% respectively in most developed economies. That said, China’s internet and online shopping penetration rates may catch up with those of developed countries in two decades given the country’s rising urbanisation and robust economy, according to Fitch. In fact, China’s online shoppers had grown 17.3% year-on-year to 749 million or 54% of the total population by this June.
Additionally, China has a younger population compared with most developed nations. As time goes on, the internet and online shopping penetration rates will naturally go up as elders who do not use internet pass away. Besides, elders who are not yet online shoppers can learn.
“For example, my mother, 71, is a keen online shopper after I taught her how to do that last year,” Fitch’s Shen said. “Now she buys almost everything with her smartphone. So do my mother-and-father-in-law, who figured how to do that all by themselves during the Covid-19 lockdown earlier this year.”
But not all companies benefit equally from the e-tailing boom. Fitch categorised 233 Chinese consumer goods or retail companies (out of over 1,100 examined) with disclosure on e-tailing sales into three groups – “consumer staple” including raw and processed food companies, “consumer discretionary” such as beauty and cosmetics firms, and “retailer” such as supermarkets and hypermarkets.
Companies in the “consumer staple” group rely more on traditional distribution models and have lower online retail sales share than companies in the “consumer discretionary” group, which have been keen on expanding sales through online channels. Companies in the latter group also had the highest median online retail sales share of 20% in 2019, compared with only 3% for peers in the former group. However, those shares are very likely understated since online sales by companies’ distributors are usually not disclosed or included.
China’s e-tailing sector is highly concentrated with leading operators. Smaller players will have to offer unique features and focus on a niche market to stay in the game.
Large operators Alibaba Group, JD.com, and Pinduoduo dominate around 95% of national e-tailing gross merchandise value in 1H20, while Suning.com and Vipshop followed with only low single-digit market shares, according to Fitch.
The largest three operators each have their unique business models. Alibaba has created an ecosystem incorporating multiple online retail platforms, offline stores and a wide variety of products while JD.com sells goods directly but also offers platform services to third-party merchants. Meanwhile, Pinduoduo acts as a marketplace-platform operator only and targets lower-income consumers by offering extremely low prices and big subsidies.
“Newcomers and smaller players need to cut in with unique advantages and focus on a niche market but not compete head-on with the giants, and they must be prepared to be loss-making for years,” Shen said.
As competition intensifies, e-tailing giants have to pioneer new sales models, including new retail, social retail, live video broadcast retail and community group buy retail. Sales generated by these new models are often off the radar for NBS and therefore lead the share of online sales in total sales to be further understated.
For instance, offline stores can use the “new retail” model to blur the lines between online and offline sales by conducting sales online but sending goods via on-demand delivery. Sales made by this model are usually recorded as offline sales and attributed to these brick-and-mortar stores.
Besides, “social retail” sales are usually not monitored by the NBS at all because many deals that fall under this model are too small and conducted by individuals or tiny e-tailers. The “social retail” model essentially enables consumers, especially those with strong social influences, to be salespeople. Some social-sharing platforms also allow individuals to set up online stores easily, tapping their social networks and earning commissions.
Due to these inaccuracies, Fitch proposes to use the national express-delivery volume as a proxy when estimating real e-tailing sales growth since some of these new sales models still need to rely on express-delivery to send goods.
The live video broadcast retail model allows anchors (who are often celebrities) to showcase products real-time with more interactions with watchers. Meanwhile, the community group buy retail model enables consumers, who are often residents of the same community and share the same WeChat groups, to make bulk purchases and enjoy low prices.
Competition in China’s e-tailing sector is highly brutal despite high concentration, and new frontiers and players such as Meituan, Kuaishou, ByteDance and Didi add to uncertainty in the future industry landscape. But one thing is certain – as online shopping penetration deepens, fierce competition will continue to drive innovations and keep prices attractive for Chinese consumers.
For more insightful commentaries about China e-tailing, please visit the Fitch Ratings website here.
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Fitch Ratings’ research on the China retail sector is produced by Karl Shen, Jenny Huang, Cathy Chao and Kelvin Ho.