7 Aug FT Weekend: Apple & Privacy, China's nanny state and crypto

07 Aug

This and previous notes can be found at asianmarketsense.com and Substack ( Asian Market Sense )
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Front Page 
India to refund Cairn $1bn as it scraps tax law
• Delhi bid to fix business reputation
• Vodafone and SABMiller to benefit
A significant change of policy that is likely to help India become a more attractive investment destination which is especially important as the government seeks to revive the covid hit economy.
Apple wins ministers’ backing for plan to scan iPhones for child abuse images
There seems to be widespread govenmental support for new app which will search devices for illegal photo’s of child sexual abuse. It is expected to increase the pressure for other device makers to follow suit.
But some are disappointed by the fact that Apple decided to go alone rather than join a cross industry body that is already in discussions with regulators around the world. Some are also worried about the potential precedent it sets that could be exploited by repressive regimes.
As with most tools there is potential for good that can be hijacked for bad. It notes that India already has laws to trace the source of unlawful messages which effectviely breaks end-to-end encryption.

US job data signal staff shortage easing
Labour market adds more positions than expected as unemployment rate falls.
The US jobs data was better than expected taken as a sign that the people are increasinly returning to work and raising hopes that the shortages that were hampering the recovery may now be easing.
It notes that the biggest gains were in leisure and hospitality but says that was a result restaurants and hotels raising wages. Also Education-related local government jobs saw a boost too but the Bureau of Labour Statistics warned normal seasonal distortions have been exaccerbated by covid.
Whilst the data is improving there is still a long way to go before the labour market is back to pre pandemic levels. The recent surge in the delta variant could also upset the positive trend.
The raising of wages to attract workers is something the Fed is likely to be watching carefully.
Short term this is positive news and presuming the trend continues it is likely to mean that people become increasingly focused on when the Fed tapers and the impact that will have on the recovery.

S Korean activists accused of spying for Pyongyang
An interesting read, allegedly the activist were staging protests against a plan to buy US fighter jets. According to the National Intelligence Service they were acting on orders from Pyongyang. There are also rumours of links to Presdient Moon.
It would appear that N Korea is still actively looking to meddle in the South’s affairs.

Output falls in German factories for third month
Bottlenecks and parts shortages continue to hamper capital goods production; especially vehicle production. Economists are warning that supple issues could continue into the 2H which will be a further hinderance to Germany’s recovery. The computer chip shortage will continue to be a problem for the auto sector.
It is also worth noting that supplier prices are rising at a record level too.

Xi’s nanny state
The Communist party’s crackdown on gaming and private tutors reflects its desire to maintain social control. But it also provides a window on to the strains of many middle-class families in big cities.
A good read but makes the point that maybe China is addressing the symptoms and not the problem.
President Xi has correctly understood that the citizens of China want the best possible future for their children; they want better education, stable employment, higher incomes, reliable social security, healthcare, comfortable living conditions and a clean environment. Effectively the same as most people in the world.
The party has decided that it needs to regulate peoples lives to achieve that and it is prepared to take what seem like extreme measures to achieve that.
But was the article makes clear restricting tutorials and limiting video game time in unlikely to ensure that the peoples children are better able to pass the gaokao (the National College Entrance Exam) or the University entrance exam.
In taking such radical action it is obvious that a lot of people associated with the tutoring industry will have lost their jobs and it mentions that some of the biggest losers will be this year college graduates as around 17% would have been employed in the sector.
It will be interesting to see whether that recent crackdown has an impact on the unemployment numbers.
The article also mentioned the high pressure sales tactics used by some of the tutoring companies playing on parents worries.
It concludes with
‘“The anxiety is not going away because it’s not like you’re not in the race any more,” says the father, who went to university in the US and is also educating his children outside China. “Are you rich enough and have connections to do one-on-one tutoring? Online education was the starting point for average people. Their anxiety will come back very soon unless the government completely reforms the education system.“Look at South Korea, Japan and Taiwan,” he adds. “When is tutoring ever going to go away in Asian cultures?”’
It could be, that in attacking the symptoms, the party actually creates bigger resentment from ordinary people and further highlights the disparity between the rich; those that can still afford personal tutors, and the ordinary citizens.
No country has an ideal education system or perfect parenting, we all just try out best to understand and do what is best for our children. President Xi is right in his understanding of what the people want from the party in order, so that the party can continue to rule. Only time will tell if the current action is right.

Edtech tycoon submits to some painful tutoring from Xi
Looks at Yu Minhong founder of New Oriental Education (NOE) and how the recent law changes have impacted his business model. It’s estimated that the sectors earnings are expected to drop from circa US$100b to less than US$25bn. For NOE the group had 70,000 staff along with 12,000 contract teachers in 100 cities and almost 65m students.
It notes that Yu did not have a easy educational up bringing himself and his business had been through a probe from the SEC and an attack by short seller Muddy Water. It also notes his determination and how he built his business by using real test questions that his staff memorised when they took the exams. He’s timing to list was optimal and his lifestyle simple. Also that, whilst he had some party connections they were not significant and it mentions that a consultant that worked with Yu said he did not ‘link his business with the with national policy. How can you run such a big operation without making yourself part of the state interest?” New Oriental had essentially competed with public schools. “That is the part of the business that couldn’t be allowed under China’s political system.”
It quotes Yuen Yuen Ang of Michigan university who said ‘the problem was unequal access to education, which Xi was trying to combat. The “real issue here is that rich families have privileged access to education through private tutoring”.’
Some think Yu will not be able to recover others think he will. Time will tell. The fact that none of the tutorial companies or investors recognised the warning signs show that he was not alone. Recently people have been going through President Xi’s speeches to try and identify other sectors that might be out of alinement with policy.
Going forward investors will have to factor in party doctrine in their assessment of Chinese investments.

TikTok rival Kuaishou tumbles after Beijing takes aim at ‘bad fan culture’
Comes as state media called for more regulation having accused the sector of having a bad influence on the nation’s youth. The stock had already been under pressure as the post IPO lock-up period expired and then it announced shutting down its short video app that had competed with TikTok.
Key concern was over it’s use of algo’s to urge fans to send payments to internet idols which coinsided with the detention of internet idol Kris Wu on the suspicion of rape, which Wu denies.
China’s Central Commission for Discipline Inspection said “This extreme idol chasing culture has challenged the bottom line of the law and morals many times,” it added that the sector needed to be cleaned up by the “drawing a red line” and “standardising words and actions”.
It concludes ‘Much of the recent tech crackdown has focused on sectors that Beijing views as having too much influence over the youth. Last month, authorities stunned investors by forcing companies that tutor students to reorganise on a nonprofit basis, wiping billions of dollars from the market value of the sector’s biggest players.’
It is interesting to note the focus the party is putting on the youth and its development into what no doubt they hope will be model citizens. Again, as elsewhere, the party is not concerned about the finances of business or investors but the primacy of the party’s view on how life should be. Investors are going to have to factor that into their invesment decisions. It will also be interesting to see whether the people of China appreciate it or resent it?

The Long View
Crypto buyers show resilience in face of regulatory threats
Looks at the comments from Gary Gensler and his desire to properly regulate the crypto world. A key point I think is that summed up in a paper from the Bank for International Settlements ‘counter to common assumptions, cryptocurrencies are not sought after as “an alternative to fiat currencies or regulated finance in the US”. Buyers are not particularly preoccupied with security and anonymity — supposed benefits of a blockchainbased currency divorced from governments or central banks. Generally, they do not “distrust” the existing financial system.’ ‘most buyers are not trying to change the world. They are looking for a way to make some money, generally over the long term. “A clarifying regulatory and supervisory framework for cryptocurrency markets may be beneficial for the industry,” the BIS paper said.’
Many are hoping that with his close knowledge of crypto that Gensler will “regulate, don’t obliterate” and that will give the sector more validation.

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