June 13 FT Weekend thoughts; G7: China, climate and covid. Wuhan, Toshiba, Crypto and ransoms.

13 Jun

This and previous notes can be found at Substack ( Asian Market Sense)
Check out ERI-C.com for  interesting research and trading analysis

Before looking at the paper I’d just like to comment on Hong Kong re-opening. I can understand people being frustrated, I’m trying to arrange a quarantine hotel;  there are just 8,958 rooms available for returnees to quarantine in.  
Whilst that may sound a lot (some facilitate two or three people) but many do not accept students under 18 travelling alone (overseas students coming home are thought to be occupying a lot of rooms).
Currently most are fully booked until mid July.
To put it 8,958 in context; a 777 can carry up to 550 people, so that’s just 17 aircraft per day. Something that Chap Lak Kok pre-pandemic could handle in just over an hour.
The government along with many others is concerned about the drop in innoculation take up but it is sending a mixed message saying that vaccination is important but then by treating vaccinated returnees to similar quarantine restrictions as non, saying it dosen’t matter.
If the government believes in the vaccines then it should prove it not with words but actions. It would be interesting to know if any vaccinated traveller has developed covid after arriving back in Hong Kong?

On line
G7 set to agree ‘green belt and road’ plan to counter China’s influence.
The G7 meeting will no doubt raise concerns within China about the west seeking to contain its ‘rightful’ ascension. Interestingly PM Johnson wanted a narrower focus than Biden so as not to be seen as anti China. But it looks like on a number of issues like climate change, global supply chains and human rights there is agreement.
‘China criticised the announcement from the US and other G7 members, arguing that “genuine multilateralism” was based on the UN and not “so-called rules formulated by a small number of countries”.
“The days when global decisions were dictated by a small group of countries are long gone,” a spokesperson at the Chinese embassy in London said.’
China’s comment would appear to be at odds with its own foreign policy which is increasingly centered around President Xi.
But even so I suspect that the G7 decision will show that in this case China may be mistaken.

Ticket for space flight with Jeff Bezos auctions for $28m
Unnamed passenger will pay more than $9m for each minute of zero gravity in the Blue Origin capsule.
Maybe an extreme example of pent-up spending?

Struggling Aung San Suu Kyi faces multiplying junta charges
A sad reflection that in this day and age that the world can only look on at the sham that is taking place. Interestingly China took the step of acknowledging the junta last week.

China’s sea-level rise raises threat to economic hubs to extreme
Commercial hubs at risk from higher tides and flooding unless cuts made to greenhouse gas emissions.
Looks at the potential impact on Shanghai and Guangzhou. Interestingly the impact on Hong Kong would be minimal, although the new airport could be at risk.


Biden wins backing from G7 leaders to ‘carry on spending’
• Focus on developing world • Counter to Beijing ‘jab diplomacy’ • Push against inequality.
The tone of the meeting seems to be very positive.  Interesting to see Draghi agreeing with the spending element but qualifying it with ‘even if western countries had to commit to longer-term fiscal prudence  to reassure markets and to ensure central bankers did not take fright  and excessively hike interest rates.’
China comes out badly, the donation of 1bn vaccine doses in response to Beijings vaccine diplomacy. But they will need to step up not just with vacccines but with support in other areas too which they termed ‘to counterweight’ Belt and Road.
Read also inside G7 pledge to provide 1bn vaccines for poorer nations branded inadequate  Campaigners welcome end to ‘dithering’ but warn it is too little to bridge global gap in supplies

Thousands of Olympics volunteers quit as paid workers are hired for same roles.
Another set back for the games which in many people’s eyes are becoming a huge white elephant.
Also inside Japanese sponsors fear brand damage from Tokyo Olympics 
An interesting read and I would expect a number of them to pull their advertising campaigns which will hurt those businesses associated with advertising and gifts.

Likud vows peaceful power transfer
Netanyahu’s 12-year rule set to end after security services warn of violence
More claims of electoral fraud but this time not at the ballot box but by Naftali Bennett who switch from the rightwing camp (the mandate undeer which he campaigned) to the centre-right; which is the stance of government he will be heading.
It rather proves the point that for all they say, most politicians are in it to have power and will adapt whichever way is necessary to get there.

China escalates legal battle over sanctions
Beijing rushes through law after Biden updates Trump-era investing rules.
China puts into law the statutes that were first unveiled in January. Details have not been released and the law was passed after two readings rather than the normal 3.
The key being that Beijing seems to have been surprised that Biden has maintained many of the Trump era practices. The speed with which it was done suggest that China is seeking to ensure that it has reciprocal options.
But the key element of the new legislation is that “If [the commerce ministry] issues a prohibition order under this law, then it would be illegal in China for a subsidiary of a US bank or any company to comply with US sanctions,” At this stage it is just a weapon. Worth noting that two years ago, in response to a Trump action it threatened the use of ‘unreliable entities’ another tool that it has not used so far.
The problem is that actually using these tools risks more damage to China in its efforts to attract foreign companies. For companies already set up in China it introduces another potential land mine, I would imagine that China is hoping that the threat is enough to get companies, especially US ones, to lobby Washington for restraint. But I think any such lobbying at present would fall on deaf ears.

All eyes on elephant herd
There is a herd of wild elephants that has been trekking across Yunnan province since last spring and they have captured the public’s imagination and are being followed with the authorities sharing their progress with the media. It shows the extent of the authorities ability to track their progress and the effort being put in to find them a new natural habitat.
I guess everyone likes them except the farmers whose crops they are damaging. It concludes ‘Authorities have blocked roads and laid trails of pineapples in an attempt to lure them away from densely populated areas of Kunming.’

Pandemic fallout. US-Sino relations
Wuhan lab row threatens scientific co-operation
Years of fruitful partnership at risk as dispute continues over virus origins , fear researchers.
Looks at how because the source of covid 19 is still unknown years of co-operation between US and China over the analysis of seasonal flu strains may come to an end.
‘The Nature Index ranks the US-China scientific relationship as the world’s most academically fertile. The amount of joint research undertaken exploded in the 2000s, as China opened up and invested more in its research capabilities.’ Interestingly the research was fruitful in China because fewer people use private doctors and Chinese authorities allow more access to medical records.
It notes that under Trump the relationship was strained due to his ‘China Initiative’ designed to identify US researchers who were passing scientific secrets to China but also prosecuted a number of US scientists who were paid by Chinese Universities; like the case of Charles Lieber, chair of Harvard University’s chemistry and chemical biology faculty.
Some had been critical of the links to the Wuhan lab for some time and the ‘risky’ research that was being undertaken there; some of it with very little safety.
But now there is concern that other areas of joint research or co-operation will be halted or never even started as universities become wary of anything that could have fall foul of the new US law.
Some are saying that the breakdown could hamper research co-operation into work that might prevent futures outbreaks.

I think that is a serious loss. The easy solution would have been for China to have allowed a full and free investigation. That didn’t happen and the longer that passes before it does the less chance there is of ever finding the truth. That means that doubts about China will also remain; hurting both China and the world.

New bank rules restrain and recognise crypto
Banking rulemakers rightly view the digital assets as official but risky
Looks at the announcement by the Basel Committee has set rules for lenders that hold crypto assets. Makes the point that the Basel Committee has taken action whilst regulators dither and whilst it cannot regulate crypto it has tightened the rules for the banks/lenders who are increasingly getting involved. It’s proposal is basically to make it the riskiest asset and require banks to hold the same amount of capital as the exposure they face in crypto. It’s more about disuading them from getting inolved.
It concludes
‘There is an irony to crypto being recognised as part of the established financial system when it was created as an anti-establishment snub. There are elements of traditional finance that can be improved, and certain crypto assets may help. Easing cross-border settlement and payments is one such area. Not entirely coincidentally, a second and welcome announcement from Basel revealed that together with the national banks of France and Switzerland, it will work on a wholesale settlement system using CBDCs.The Basel committee has limited power. It has done what it can in the face of inaction by governments and differing views on the crypto market, even within the same regulatory bodies. It is now time for more coherent policy: whether hazard or haven, crypto is here to stay.’

Cryto has had an interesting week. From the myth about it being used by criminals for its anonymity busted by the FBI, to recognition as legal currency by El Salvador. It has recently seen significant price swings and it and its mining has been banned in China. Bitcoin’s green credentials have also been found wanting but others are better. So it and the blockchain associated with it I believe are here to stay. Mike Howell’s of Cross Border Capital inarecent webinar noted it how crypto is a very useful store of value in the face of monetary inflation, and that it has replaced gold for some; which is why the gold price is struggling as people become more open and are tempted by the upside potential over gold and the cheaper carrying cost.

Ransomware attacks have to be stopped — here’s how
By Alex Younger a former head of MI6, Britain’s Secret Intelligence Service, and a founding partner of Vega Cyber Associates.

He expects things to get worse because the incentive to the criminals is high whilst the cost of carrying out such crimes is relatively cheap and easy. Sohe sets out a number of steps.

First accepting its not just a criminal problem but a national security and geopolitical one. The criminals live somewhere, chief suspect is Russia but Putin is not acting against them. That needs to change and may well be addressed at the forthcoming summit between Biden and Putin.

Building on the recent FBI success in recovering the ransom from the Colonial Pipeline hack. He advocates not paying ransoms; ‘I saw first-hand the effects of the nonpayment of terrorist ransoms policy adopted by the UK and our allies in the Five Eyes intelligence-sharing group. Such a policy is often heartbreaking to implement, but it is the right thing to do. The alternative is to finance the very activity that you are trying to prevent.’
‘If one accepts that this is a national security problem, then it becomes hard to defend the suggestion that governments should simply leave these decisions to private citizens. As a first step, I think it should be mandatory to disclose payments publicly and in detail. Attackers seek to present payment as the easy option. We have to change that.’ He is also against hacking insurance as that tends to give criminal insight into how much to demand without it ‘hurting’ the target. Lets face it if they can hack a company system they know all about you. Which I guess means that the insurance companies need to be very careful about their systems.

On crypto he makes the point that banks need very good ‘know your client’ (KYC) procedures. The FBI watched the ransom money be ‘laundered’ through hundreds of accounts. He says ‘This is not to argue for a ban on such currencies, which are obviously here to stay. But it is to urge the development of robust know-your-customer and anti-money laundering laws fit for the digital age.’ Unfortunately its not so much the KYC but the fact that some people and banks can be bribed. But there is a case for greater scrutiny of transactions.
He also suggests better controls on penetration coding; ‘an irony. Often, the software used by attackers is based on code written with the best of intentions by penetration testers who help organisations probe their systems for vulnerability. While there are significant practical obstacles, we need to draw on our experience of counter-proliferation licensing techniques and identify ways in which we can restrict the use of such code to its intended purpose.’
He concludes ‘Ultimately, this is about human agency. Individually, we are easy to pick off and intimidate. But collectively, we are far from helpless. These attackers are bullies. And bullies come back for more, unless you bully them back, preferably in company. If anything good comes out of the recent attacks, it will be that the day that happens has come closer.’

Makes a number of good points and a key requirement is going to be the co-operation of law enforcement across national borders.

Companies & Markets
BlackRock scores first with China fund unit green light

Looks at Friday’s announcement. Larry Fink said ‘“China is taking significant steps in opening up its financial markets, we are honoured to be in a position in which we can support more Chinese investors access financial markets and build portfolios that can serve them throughout their lives.”
I think the most interesting aspect is that came a day after China imposed new anti sanction legislation. Previously the fear was upsetting the regulator but that was minimised by having a good local partner who could provide good local advice about how to deal with the regulators.
That is changing. No doubt Blackrock have brought in people with very good local connections both the regulators and the client base. But the new legislation could be a nightmare. Beijing is using the carrot of a huge middle class client base but it has the stick of legislation. As noted above it has not to date used the ‘sticks’ in its armoury but there could come a time; just ask the guys at HSBC and Standard Chartered.
I doubt China is doing this to benefit Blackrock or others. It will hope that its domestic institutions will learn from the Blackrock, JP Morgan and others and then apply that to build thier banks better. If it can also use their operations in China for leverage or lobbying for China in the US, it will.

Didi prospectus sets the stage for $65bn-plus IPO
Didi Chuxing, the Chinese ride-hailing company, revealed filings for a US public share offering, disclosing the pandemic’s financial hit to its business last year and the strength of its rebound — and setting the stage for one of the largest international listings of 2021.
It says its core business has been profitable on an adjusted earnings before interest, taxes, depreciation and amortisation basis since 2019.
It’s funny before the dot.com era a profitable business used to be able to cover interest, taxes, depreciation and amortisation. Also interesting is that ‘Business rebounded in the first quarter of this year, however, allowing Didi to book Rmb42.2bn in revenues and net income of Rmb5.5bn. The company lost money from operations during the quarter but made a profit when including gains from investments.’
It would appear that its investment strategy is more successful than its core business. I still don’t believe the business model but I am sure Softbank and Tencent will be glad if the IPO is successful.

LEX Didi Chuxing: surge pricing.  Highlights that some of the information in the prospectus is not what it seems; for example ‘What Didi refers to as revenue in its IPO prospectus is actually gross  bookings, or total fare from its rides. Uber and Lyft report revenues as  gross bookings minus payouts to drivers.’  ‘Didi’s equivalent of headline revenue is opaquely labelled “platform  sales”. This came out at $5.3bn in 2020. A $100bn valuation would put  Didi on nearly 19 times that figure. Talk about price gouging.’
It concludes ‘There are regulatory risks at home and abroad. Didi’s investment in deliveries and electric vehicles will remain a cash drain for the foreseeable future. To entice investors, Didi needs to lower its targeted valuation.’

HSBC’s ‘indispensable’ taipan with friends in high places
A look at Peter Wong of HSBC who announced his retirement last week. Worth a read. The fact that Peter will stay on as Chair of HBSC illustrates how important he is. Most importantly is that he is a Hong Konger bringing something that Noel Quinn and Mark Tucker cannot. But his announcement of retirement; as Quinn decides to bring out four heads of business from London does not bode well. To me it illustrates a lack of awarness by Quinn of the importance of the local touch. The original reason Peter Wong was hired was that HSBC realised it had almost no senior executives from Hong Kong or China.
It mentions that his signing of the national security law petition caused problems for HSBC in London and Washington but it showed two things. He has his principles and whilst one might not agree with them he must be respected for holding onto them. Secondly is that banks and other international businesses are going to increasingly find themselves used as pawns by governments.

LEX Toshiba: foreign relations
Highlights how the Independent shareholder commissioned report into Toshiba’s management’s activities explains why shareholders usually lose in trying to get management to change. The close links with government. PM Abe made a big thing of changing the culture but it would appear that that was lipservice only.
It also notes how foreign investors have been hit with the requirement to get official approval to buy stakes of more than 1% in over a hundred stocks (including Toshiba and Softbank) deemed of significance to the government.
It also notes ‘Foreign investors make up about 30 per cent of the local market. This comes as the local investor pool ages. Individuals aged 65 or older own half of money held in local personal financial assets. This demographic group has long preferred bank savings to equities.
Many Japanese stocks already trade at a discount to global peers; they are marked down for weak governance, complicated crossholdings and historically low shareholder returns. The report into Toshiba may widen that discount.’
I think the fact that PM Suga is mentioned and implicated in the report is likely to hurt his re-election chances along with his insistence on proceeding with the Olympics. That could produce further turmoil for Japan.

Private capital industry soars beyond $7tn amid hunt for higher returns
An interesting read which highlights that the commoditisation of the asset management business has put pressure on fees and hence firms are targeting Private Equity which has better margins and potential.
It reflects I think that search for yield that QE and other cental bank actions have made harder. It is interesting to wonder whether when interest rates do start to rise again whether investors will return to the previous ways of investing or continue to embrace the newer avenues.

Weaker dollar shows traders relaxing after tantrum
An interesting read about the outlook for the US dollar. The key remains the FOMC’s view on the inflation information that it is monitoring and its willingness to allow inflation to run hot.
Market participants are tyring to work that out from the comments and nuances that can be gleamed from speeches.
The fact that Yellen mentioned that higher interest rates could be good for the US economy for example.
At the end of the day it is all speculation but expectations can bring with them pressure. The Fed itself is watching inflation expectations.
Worth a read, it concludes ‘But while an earlier than expected announcement would cause some ructions, the real risk is that investors will have to start anticipating the timing of rate increases in the US, which could come sooner and harder than they anticipated.
“The taper sets the clock ticking for the first rate hike and real rates rise [and] big changes in Fed policy are rarely smooth sailing,” said Brennan.’
With an FOMC meeting this week the matter will be in focus and likely to prompt cautious trading.

The Long View
Undertones of The Clash in the great inflation debate
By Michael Mackenzie
Another look at the debate over whether current inflation indications and whether they are transitory or permanent.
It concludes ‘In turn that will keep bond market expectations of inflation elevated and leave investors in a corridor of uncertainty. Investors will have to bet on just how much inflationary pressure the central banks are willing to tolerate before they act.
“It will be important for investors to monitor not only the strength of the rebound but, perhaps more importantly, its duration,” said Dario Perkins, global macro strategist at TS Lombard in a research note.
This will not be easy. There will be many more “teasers” of inflationary pressure in coming months.’

One thing is for sure, that no one knows for sure at the moment and it will take at least six months before it becomes clear.

Life & Arts
Down and out in China’s tech boom
A new generation of tech workers is demanding an end to brutal working conditions. Yuan Yang reports on why they may get what they want.
An interesting insight into the methods that Chinese companies have been using to grow their businesses. In many ways they were/are a reflection of the communist’s party approach to life.
A good read.

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