The day at a glance | December 30, 2020

The Top

·     China and the European Union sign an investment agreement that will allow European companies to have greater access in the Chinese market. 

· Moody`s warns about PEMEX`s weak cash flow generation.

·     Economic indicators: December`s official PMI`s in china are expected to be published (Manuf. 52e.; Non-manuf. 56.3 e.). 

Economic environment

The European Union and China signed an investment agreement that opens up the Chinese market. In a videoconference, Chinese President Xi Jinping and Presidents of the European Council and Commission, Ursula von der Leyen and Charles Michel, signed an investment agreement between both countries, which will allow European companies to have greater access to the Chinese market. The Comprehensive Investment Agreement eliminates barriers to European investors in manufacturing, engineering, banking, real estate, telecommunications and consulting services. The intention is for European investments in China to receive the same treatment as local investments – through the elimination of requirements of having an association with Chinese companies or a forcible transfer of technology. Additionally, China has committed itself to being more transparent regarding its subsidy to local businesses and preventing State companies to discriminate European investment. Some restrictions were maintained for industries such as automotive, aerospace and health services. The agreement will not come into force until one year from now, but it`s an important development that deepens the economic relationship between China and the EU. The agreement was negotiated since 2014. China is the second greatest recipient of European foreign direct investment in the world – after the US. In the last quarter of 2020 alone, the EU announced up to $1.6 billion dollars in investment in China. 

Moody`s warned that PEMEX`s credit metrics and its ability to generate cash flow will remain weak in the foreseeable future. In its half-yearly revision to PEMEX, the international rating agency, Moody`s, reiterated that the company remains in a vulnerable position in light of low oil prices given its excessive levels of debt and weak liquidity. For Moody`s, PEMEX still faces important challenges in 2021, under expectations of crude oil prices remaining close to $40 dpb while having to face debt maturities. Furthermore, investment in exploration and production is still very low, which has favored the refining business and has generated losses in the last several years, according to the credit rating agency. In this environment, Moody`s forecasts a negative free cash flow of about 9 billion dollars in 2021. In this sense, more federal support is expected to be seen to back the State-owned company.