FT Weekend China & the World BRI?, Vaccines, Inflation, US T Bills Train wreak? And more


12 Dec

Front Page
EU urges bloc unity on Brexit talks  Interesting that the Brussels is tell member nations no side deals if negotiations fail; which is increasingly likely with the deadline on Sunday.  Friday saw the pound's slide continuing and UK banks under pressure.  The key being that the EU wants to put pressure on the UK to return to the negotiating table as quickly as possible!  

Inside
China officials detain worker at Bloomberg News bureau.  The reason given was on suspicion of endangering national security.  Haze Fan, a Chinese citizen, had been detained on Monday but the news only broke on Friday; with Bloomberg saying it had “on Thursday received confirmation that Fan is being held on suspicion of participating in activities endangering national security”.
Comes at a time when China has increased their harassment and surveillance of international journalists who are foreign passport holders, as well as colleagues who are Chinese nationals.
Interesting to note that 'Chinese nationals working for foreign media do not sign contracts with their media organisations but with a department of the foreign affairs ministry and are forbidden by law from performing full journalistic duties.’ At present few real details are known but it is likely to increase concerns about the national security law in Hong Kong.

FT BIG READ. CHINA AND THE WORLD. Rethinking Xi’s ‘project of the century’  The massive lending by Chinese financial institutions that supports the Belt and Road Initiative (BRI) has fallen off a cliff. At the same time, Beijing finds itself mired in debt renegotiations with a host of countries.
The BRI was launched in May 2017 to great fanfare by China with a promise to spend about $1tn to build infrastructure linking China to the West and a host of other Asian and Middle Eastern Countries in the process. The article estimates the sums involved amounted to 7x what the Marshall Plan cost (inflation adjusted).
But over the past year the project has many headline issues and data this week shows that the project is not only failing but means that China is involved in an overseas debt crisis. Just as it needs to shore up its financial system at home as a result of domestic defaults and credit issues.
A quote from Mr Hillman, a senior fellow at Washington-based think-tank CSIS. “This is all part of China’s education as a rising power, It has taken a flawed model that appeared to work at home, building large infrastructure projects, and hubristically tried to apply that abroad.” He also notes that historically most infrastructure booms have gone bust; the key is whether the governments that China has lent to, who are now in financial difficulties, can renegotiate the terms and if they can’t what action China can then take.
It cites data from Boston University who maintain an independent database on China’s overseas development finance. They found that lending by the China Development Bank and the Export-Import Bank of China collapsed from a peak of $75bn in 2016 to just $4bn last year.The key point being that these two are under the direct control of Beijing; the Chinese equivalent of the World Bank an between 2008 and 2019 lent about the same as the World Bank. So a reduction in their lending is a huge issue in global terms.
The Change
The reason for the current position is a change in policy in China; from outward expansion to one of consolidation. Partly because of the tension with the US since Trump was elected and made worse by the covid outbreak this year. It notes that domestic media references to BRI have dropped. The new focus is on ‘Dual Circulation’; focusing on domestic consumption and less on commerce with the outside world. Although to an extent BRI was about domestic consumption too. In fact for the past 15 years I would say China has been focused on trying to increase domestic consumption. But with BRI under pressure from a number of countries President Xi had to come up with a new flagship policy.
It notes that the change in policy may also lead to a change in the way China approaches overseas lending in the future; with the potential that it co-operates with other international agencies rather than going it alone. I doubt that mainly because China likes to keep the terms of its deals secret and co-operating with other agencies would prevent or restrict that from happening.
Flaws
It notes that the problems with BRI may well have been evident at its launch when President Xi was accompanied by 'authoritarian leaders of countries with big debts and “junk” credit ratings, such as Alexander Lukashenko of Belarus, Hun Sen of Cambodia, Uhuru Kenyatta of Kenya, Aleksandar Vucic of Serbia and several others.’ At its concept there seems to have been little reference to the ability of the debtor countries to repay their debt or whether the projects were financially viable. It seems that many of the investment decisions were to an extent based on the premise that the host country’s government would not change in the near future; but that came unstuck in Malaysia, which lead to issues is other countries too.
It notes that the programme will not just be pulled but it will need significant re-assessment and better analysis in terms of debt sustainability along with social, environmental and many other issues; not least in my view the amount of corruption that was associated with the plans.The article also mentions the example of China supporting Venezuela to illustrate that sometimes China’s foreign policy is financially driven. It notes there are a raft of negotiations taking place a lot of them with African countries.
It notes that at present Beijing is taking a soft touch approach; deferring/rescheduling payments and it becoming more aware of the risks involved.
It concludes with a nice quote 'China is finding out, says Mr Hillman, that “risk runs both ways along the Belt and Road and the damage can return to Beijing”.’
I think it is worth noting that Beijing is also well aware of the pressure that some of the countries that owe money to China, who are also seeking the refinancing of other loans with Western Agencies are coming under to reveal the terms of the Chinese loans.  Those terms are currently secret but one wonders for how long?  Governments will ultimately do what is their own best interest.  At present they are likely to be pushing Beijing to allow them to reveal the terms.  But if it becomes a choice between getting or not getting money I suspect many will reveal the terms.  
That could be a further embarrassment to Beijing if the terms are seen to be onerous especially considering that there is a lot of consternation about the fact that many of the BRI projects it is Chinese rather than local companies who have been awarded the contracts and often they have used imported Chinese labour too. That has severely reduced the +VE potential economic benefit to the host country.  
Also worth noting that in some of the debt restructurings the Chinese banks have been pushing for special treatment over western organisations in order to agree wider restructuring as outlined in a recent FT article on rescheduling defaults.
Not mentioned in the article but also President Xi was coming in for criticism for supporting other countries whilst China’s economy was suffering under covid.  China will have no doubt have learnt many lessons as have a number of host countries.  It remains to see what the impact on its credibility going forward has been.  I doubt it will receive the same welcome next time.

Sanofi and GSK hit vaccine rollout hitch.  Poor results for older adults  (over 50) which means the launch will delayed to late 202, the data suggests that the dosage was too low.  It comes as Australia drops its homegrown product as trial results returned positive tests for HIV even though they were not infected with the virus.
Key is that the roll out of vaccinations may not be as straight forward as thought. Sanofi and GSK are the biggest vaccine makers in the world and are using existing techniques meaning that the transportation of their vaccine would be simpler that the Pfizer and Moderna ones which require freezing.
Read also Notebook asks Will wealthy Americans jump the queue for the Covid vaccine? It also notes that roll out in the UK will be relatively straightforward as it will all be controlled by the NHS.  In the US each state will have its own policy and that may raise issues.
Also see France faces challenge to counter widespread vaccine distrust. Which highlights that a lot of people may chose just not to get vaccinated (just as many choose not to have a flu jab).  That there is a lot of distrust about how quick the vaccines have been developed and how effectively nothing is known about potential long term side effects.
I think we will also see another issue; that of choice. Carrie Lam; in Hong Kong announced on Friday that the vaccine would be rolled out in January but that citizens would not be allowed to choose which vaccine they received. Will the deter some people from getting vaccinated and what will that do in the battle to control the virus. Markets have been very positive about the discovery of a vaccine but there is a big difference between finding a vaccine that works and getting people to take it. One wonders how many people will be lining up to get a jab and a vaccine without knowing which one they are getting. I think government’s are going to face more problems in the implementation they the market has been factoring in.

SoftBank sells robot maker in $1.1bn deal with Hyundai. Another profitable disposal for Softbank which will please investors and seemingly a good deal for Hyundai as it seeks to diversify from traditional auto making; with its stated aim of looking for growth drivers in robotics and urban air mobility.

LEX Pop Mart/Asian IPOs: go figure. Looks at yesterday’s PopMart IPO. It makes $8 boxes of figurines, its most popular one is Molly who has lifted the company from its loss making years. PopMart now trades at 150x trailing earnings; HK peers Playmates and Dream International trade 4x. Thin margins, fickle consumers and rising labour costs plague the sector.
It notes 'After yesterday’s jump, a single share of Pop Mart costs the same as one of its mystery gift boxes. Shoppers shake the boxes to try to guess what is inside. Investors may have more clues about their own purchase — but not many.'

LEX Disney/streaming: the empire strikes back. Looks the investor day the and expectations and notes 'Building up marquee Marvel and Star War franchises with spin-off shows will give fans more reasons to visit Disney resorts once the pandemic subsides.
But taking on Netflix will be expensive. Disney Plus is not expected to turn a profit until 2024. Disney’s $2.8bn loss for the 2020 fiscal year will give pause. But the pay-off should be big. With home entertainment demand up sharply, it makes sense for Disney to focus on grabbing as much of the streaming market share as it can.'

US Treasury traders facing ‘train wreck’ if T-bill rates go negative next year.  Notes that 'The US Treasury market, supposed to be the supplier of the world’s risk-free assets’   But the article looks at the likelihood that in 2021 there are a lot of other issues in play, not least too much cash chasing too little paper.
For a start it is possible and even likely that in the next few months Treasury bills will be negative for a significant period of time. That will cause market participants an issue that is not easily reconciled. That task could be made easier if there was a political consensus on federal spending and borrowing in the short term but there isn’t and the change of administration will further complicate issues.
It cites a nice analogy. 'At the moment, the Treasury dealers and market participants are like an engine-room gang in a nuclear aircraft carrier, fighting over who occupies the bridge while there’s a slow-burning fire (the pandemic) in the crew’s quarters.’
Key being 'under one of the laws governing Treasury issuance, the Treasury General Account (the US government’s current account) has a present balance of a bit more than $1.5tn. That is historically high.
Under the budget law adopted in August 2019, which includes a debt ceiling limit, the TGA should be reduced to $133bn by August of next year.’
That means the Treasury needs to allow between $500bn and $900bn of T-bills to mature in 1H21 without being replaced by new issuance.That is a lot of cash that funds will need to redeploy into other assets. But made worse by the fact that Treasury securities provide another essential function, in that they can be pledged as collateral for variation margin calls at dealers or clearing houses if there’s any market volatility next year.
Add to that the US Treasury’s 'Borrowing Advisory Committee wrote in November: “A substantial decline in T-bills supply is not desirable” and “stable value government money market funds face challenges should T-bill yields become negative for sustained periods”.’
This will no doubt be a key issue for Janet Yellen when she takes office it suggests she 'will have to decide whether or not to hold off on running down bill issuance in the hope of negotiating a budget with Senate Republicans and her own liberal Democrats. Then there is that hard stop of a $133bn TGA on August 1.'
Add into the mix what happens if the Democrats do get control of both Senate runoffs and the problem could get bigger with the Democrat spending plans.Another potential issue is that large banks have to comply with ‘G-SIB’ regs which limit their absolute size and consequent systemic risk. An alternative suggested is that there be a dedicated clearing house (CCP) set up for Treasuries.
Concludes by saying 'As one official who has been on the calls discussing the logistics of such a CCP said: “Eventually, it might have to be bailed out. The political cost of that bailout would, however, be lower than bailing out any banks.”’
An interesting read it will be interesting to watch and see how the new Treasury Team addresses the issue. As always I suspect we will see a compromise.

Inflation debate looms large over market outlook. Focuses on the Fed’s new approach as outlined in August to allow the economy to 'run hot’ above its 2% inflation target.  Currently its running about 1.2% it may seem moot but the key question is how long will the fed continue to buy bonds in order to keep rates down to try and stimulate the economy.
Key being that bind holders will suffer if higher inflation erodes the value of low fixed rates on their current holdings. It could impact equites too; it could be determined that they need a higher risk premium. It notes that the big consensus is that inflation is not an issue. As that view changes there will be significant changes in how investors view the whole spectrum of assets. It notes that market expectations of inflation are increasing as the global economy recovers, they are currently back to their average of the last 10 years but if the Fed keeps suppressing yields then expectations may rise. It notes the T10 is flirting with 1% vs 0.5% earlier this year. Real interest rates are negative keeping financial conditions loose which is good for equities and bad for the USD. It thinks this will continue but a change would prompt a pullback in equities and a stronger USD both of which are deflationary.
It notes 'Backing the Fed’s new approach is a view that the damage inflicted upon global activity by the pandemic means restoring full levels of employment will take several years. Entrenched secular forces of ageing populations, innovative technology and the global sourcing of labour and capital are disinflationary in nature and not seen as fading.’
That is why investors are bearish of the USD but a weak USD boosts commodity prices which historically has been a driver of inflation expectations.Some think the real issue will be 2022 by which time the economy should have recovered; that will be the Feds resolve will be tested. But by then it is also possible that expectations of inflation will have been established prompting people to buy assets that gain from inflation; gold and real estate and prompt a boom in loan demand. By that time the genie may be out of the bottle and the Fed and Treasury will face a different set of problems.

Editorial Big Tech faces its Standard Oil moment.  Allowing new innovative competitors to emerge is critical.  Looks at the FTC’s action against Facebook and the wider issues of governments (not mentioned but including China) are looking to set limits on the dominance and power of big tech companies; especially with regard to new competition.It does note that the regulation can take years to play out and there is no guarantee it will be successful but sometimes the threat of enforcement is a good deterrent on future deals.Key though is 'One of the challenges for regulators is the nature of the digital economy: services are often free so consumers do not face rising prices. Consumers also appreciate and often heavily rely on the products Big Tech companies provide. The platforms, meanwhile, argue they are being punished for entrepreneurial success and innovation. A new regulatory approach to the industry must aim to prevent monopolistic practices and promote the creation and growth of the next generation of competitors.’

For Interest
The Little book shops that could. Takes a look at how, during the pandemic, a number of book shops, that had already survived Amazon found ways to thrive.
Hong Kong’s Bleak House Books, is included. Run by Albert Wan he says “We’re kind of outspoken as a business”, says Wan, It notes that he is a former civil rights and criminal defence attorney. It doesn’t stock fashionable books but 'literary fare to nourish a restive city’s spirit. Popular sellers about Hong Kong’s pro-democracy protests share space with the anti-authoritarian canon: Joshua Wong’s Unfree Speech alongside Primo Levi’s If This Is a Man and Václav Havel’s The Power of the Powerless. A low table is covered with George Orwell’s oeuvre, which Wan says flies off the shelves. “We want to be selling more literature, more kids’ books, but everyone wants to buy 1984 and Animal Farm,” Wan says.’ Remarkably the shop broke events year for the first time and online sales have picked up too. Others in Hong Kong have not been so lucky; largely because of the lack of mainland visitors.
It notes that 'Hong Kong previously occupied a niche, publishing critical literature on contemporary Chinese history and politics. Readers from mainland China, where the works were banned, gobbled them up. “No more mainland travellers means no more sales of these books,” says Bao, whose father was the most senior official purged during the Tiananmen Square crackdown in 1989.’Looking ahead it notes the National Security Bill could put the sector under pressure. It notes 'The city’s once-boisterous publishing industry has been gutted. Beijing’s Liaison Office owns dozens of commercial printers, newspapers and more than half of Hong Kong’s bookstores, giving the Communist party another tool to drown out dissent.Bleak House has remained resolute despite opaque legal threats befitting its Dickensian namesake. “From day one, I always stocked the books that I wanted to stock,” says Wan. The legislation “has not changed the criteria”.'

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