FT Weekend Thoughts; TikTok ban, Taiwan tensions, A message to the emperor and more

23 Sep
FT Weekend Thoughts; TikTok ban, Taiwan tensions,  A message to the emperor and more
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Hope you have a good weekend

As mentioned in my markets note this morning; over shadowing Asian markets this week will be China’s relations with other countries and especially the US on trade, India on the boarder dispute and Taiwan as more countries look to build ties.
For Japan there is still the overhang of whether PM Suga will call a snap election.  I think it is quite likely as he is well liked according to the polls.
On the wider front the big question is will the US Tech sell off continue? The main 5 companies have strong balance sheets but still stretched valuations. But with some funds still sitting on cash whilst I would expect more downside it to be limited if that cash gets put to work. Still expect more consolidation and rotation.  Quality companies will remain top of peoples buy lists.

FT front page
TikTok banned from US app stores.
WeChat also hit by order • Oracle-ByteDance talks continue • Big data contest intensifies

The move justified by the administration as combating 'China’s malicious collection of American citizens’ personal data’. The order applies to the App stores in the US and not those for China itself. An obvious sign that Trump was not happy with the ByteDance proposal or the carrot of a US IPO for TikTok. TikTok is to challenge the move but one has to think the damage has been largely done to the app. Some of its ‘stars’ are already moving to other similar apps who are likely to grow as the uncertainty continues. Getting them back if an acceptable solution is found I think will be difficult.

One cannot help thinking that part of this move is as a result of the damage TikTok’s younger users inflicted on the Trump Oklahoma rally. I think that and the power that showed the app users had is the real motive.
The extension to WeChat will worry investors holding Tencent along with the news Friday about Epic and Riot being asked about their security protocols. There is a clear threat to the Chinese e-commerce groups. For Alibaba and Tencent or other Chinese platforms thinking about expanding their finance businesses in the US the prospect must now be almost zero.

Read also FT Big Read Trump’s TikTok dance. The success of Chinese-owned video app TikTok has raised national security concerns in the US. But the potential sale of the business has been one of the most politicised deals in recent history. Looks at the background to how the deal progressed and how it now looks to be in jeopardy. Not least because Trump is worried about the election implications. It says

'Mr Trump is worried that by banning the app, he risks galvanising younger Democrats in the election, says one person who was discussing the terms with the White House.

On the flipside, Mr Trump is also worried that approving a deal where ByteDance retains a majority stake in TikTok could make him look weak on China, the person added.’

LEX Tencent/US: Epic battle. Notes that on-line games are platforms that have been transformed into communities and that increases the amount of data being shared. It notes that 'On Epic’s Fortnite, US venture capitalists have used virtual meetings to find deals. Sensitive payments data can be exchanged.’

If the US decides these platforms are then a risk and Tencent has to unwind its holdings it will be huge. Tencent stakes are worth more than $20bn. Unlike WeChat which affects less than 1% of Tencent’s users; nearly 10% of game revenues could be threatened. Online games have been Tencent’s growth driver this year off-setting weak media advertising. Lex notes

'In the worst-case scenario in which Tencent was forced to divest its stakes, US game companies would scramble to find buyers while losing out on business in China. Until global data privacy standards are agreed upon, everyone stands to lose.'

China raises tension in Taiwan Strait as US official visits Taipei. Looks at the increased military action around Taiwan; which China justifies on the basis of “necessary” to “safeguard national sovereignty”. But the reality is that it is threatening Taiwan’s sovereignty. The worry to me is that these are becoming much more frequent and bolder each time. They look very like a pre attack probing, seeking to find the weaknesses in the Taiwanese defences. They also risk an escalation because of an ‘accident’.

Not mentioned in the article but the bill introduced in the US on Thursday calling for closer ties by Representative Tom Tiffany who said “Now is the time for America to stop parroting Beijing’s one China fantasy, and for US policy to reflect the reality that Taiwan is a free, democratic and independent country,” will no doubt further worry Beijing.
From Taiwan’s side that visit is another step forward to recognition and it pulled out TSMC’s retired founder Morris Chang to attended Tsai’s dinner with Keith Kracht and he appeared prominently in pictures of the event put out by the presidential office. Taiwan will be stressing the importance of its tech as a reason for the US to expand bilateral relations. As recent months have shown China is well aware of its vulnerability over tech. Despite a stated aim to catch up, that is not easy without US tech. The alternative is to buy the technology but nobody is selling. The last alternative is invade someone who has it!
Most ordinary, reasonable, people see that as unlikely but President Xi does not fall into that camp. He has stated that Taiwan will be brought back into Chinese control, for that not to happen would undermine his position and that should not be under estimated. As an Economist article a while ago pointed out; most Chinese people cannot understand why Taiwan doesn’t want to be part of China; they have been so indoctrinated by the party thinking. That means that any change of tack on Taiwan would shake the foundations of belief in the party. Something that Xi will not let happen on his watch. It is difficult to see an acceptable compromise, which makes a war more likely.

EDITORIAL China’s assertiveness is against its own interests Beijing has stoked a series of flashpoints on the country’s borders.

Looks at the boarder dispute with India and whilst it has de escalated from its heightened state a week or so ago, it remains fraught. It says the 'clash discredits the idea that rapid economic development and surging trade ties can quell strategic ambitions.’ It has also led to the US pledging support for India and calling for Indian companies to decouple from China. It notes that behind all the Asian hotspots for China there is the common theme Beijing’s tough posturing with regard to its neighbours; be it Japan, Vietnam, Phillipines or Taiwan.

It says that Beijing believes it has been provoked into this course of action; citing 'US president Barack Obama’s “pivot to Asia” in 2012, the US bombing of China’s embassy in Belgrade in 1999, Japanese leaders who visit a shrine where war criminals are commemorated, India’s building of infrastructure in disputed territories and several other actions.’ But the reality is that President Xi changed China’s approach from low profile, to as he summarised '“China has stood up, grown rich, become strong and . . . is moving towards centre stage”.’ It notes that some Chinese commentators oppose the assertiveness pointing the the fact that with 'a GDP per capita of US$10,262 in 2019; ranking 68th on the World Bank’s figures — China has not yet “become rich”. They say Beijing should reinstate its low-profile policy and focus on economic development to boost its people’s livelihood.'

The editorial agrees with this view, saying 'Beijing should realise that its extraordinary rise from deep poverty in the late 1970s to its current middle-income status has been enabled by an era of globalisation that China did much to shape. Its turn to strategic aggression is not only alienating neighbours and the US but much of the rest of the world. Such a course undermines the cause of globalisation of which it has been a leading beneficiary.’

Whilst I agree with much in the Editorial the issue is really that the people have been indoctrinated with the party’s mantra and they believe that it is China’s right to dominate the region, that the nine dash line is Chinese territory, Taiwan is a rouge province etc. Having set this course in 2013 it will be nigh on impossible to change it and certainly not in the short term. One only has to look at the one child policy in China. People were told it was the right way for years, now with a declining population China revoked the policy but it hasn’t resulted in bigger families in China because most people believe the original policy. Furthermore because the change of approach is key to President Xi’s personal standing he will not change. He may not have to worry about re-election but he does worry about ‘face’. Nothing short of a huge, unified, international confrontation is going to change the way China acts.

OPINION Forced labour is the price of a cheap cotton T-shirt. Starts by pointing out that cotton has long been associated with human rights abuses, from slave labour on plantations to child labour in Uzbekistan. The sector often feels bad about it but never enough to stop the practices. But the move to stop it in Xinjiang is a step in the right direction.

It goes on to ask if one knows where the cotton in the clothes one is wearing came from? It says it's an almost impossible task because cotton is traded, blended, threaten and woven globally.

'After it is picked from fields by low-paid humans or machines, it is cleaned at a cotton gin and sent in bales to mills. There, bales are blended into thread, often mixed from various sources. Before the cotton is woven and reaches textile factories in Bangladesh or Turkey, its origins are fading.’ Add to that cotton is often exported, US cotton is exported to Vietnam, China and Bangladesh to be turned into thread because the US has largely lost its textile industry.

But now there are ways to track the origins of cotton, from spraying a synthetic DNA on the fibre at the gin stage or by using forensic science to trace its origins. But to work it must be adopted by the mass of the industry, whilst at present its limited to the luxury brands seeking to protect against counterfeits. There is then an additional cost which ultimately must be paid by the consumer. The CEO of Supima a luxury brand says “People like us have become so greedy that we are not willing to pay the true value of clothes,” As the article concludes 'It is easy for him to say, since he is in the business of marketing expensive cotton, but he has a point. Cotton’s mills, weavers and brands are not the only ones to have turned a blind eye for a very long time.'

From the Life & Arts
A message for the emperor.
By Yuan Yang is the FT’s deputy Beijing bureau chief

Starts by looking at the use of 'fake news' in China. Looks at the case of the gas leak in Leshan. Initial reported as fake news then admitted as true. Similar to the situation in Wuhan. The locals know the truth; in Leshan they could smell the air and knew something was wrong.

So why does this happen in China? The answer seems to be it always has been so; 'no official wants their boss to hear bad news. So they’ll cover it up all the way along the chain.’

The key being that there are only two ways it ends; either the emperor hears or a journalist finds out.

She wonders if this is why President Xi has tightened up on the media following their voicing dissent over his move to remove presidential term limits. Since then China’s best investigative newspapers have been closed except Caixin; which broke the Wuhan story. Beijing has also attacked the foreign media expelling 16 US journalists and threatening more. Although that started after the US restricted Chinese journalist’s visas. It notes we have also seen Cheng Lei the Australian journalist for CGTN detained on undisclosed charges and two other Australian journalists leaving after national security agents arrived on their doorsteps at midnight.

She then notes that whilst she doesn’t self-censor; many of the interviewees may. Subject that previously were considered mundane are now ’sensitive’. Both sides are unhappy; she notes 'Last week, one commentator called my front-page story Chinese Communist party propaganda while another source declined an interview, saying he did not want to be used “for US propaganda”.’

She then goes on to reflect that in smaller cities foreign journalists are welcomed as a ‘multi-tool’ for resolving problems. Because the Chinese legal systems does not give citizens much protection for abuses of power, so journalist are often seen as more useful than lawyers. Many in the provinces believe local injustices can be resolved by a petition to Beijing; either through the media or directly with a letter. She notes 'The further I travel from the capital, the more likely it is that a petition will be pressed into my hands, with the writer asking me to send it on my return to Beijing.’

She says 'Social inequality also creates greater reliance on journalists.’ Especially as the migrant workers cannot access the social welfare system unless they are in their home town. They treat journalists as people with knowledge who are interested in their lives and of whom they can ask questions; 'We receive questions we can only try to answer: how do I get my loan back; how do I report my sexual assault; what’s wrong with my work contract. I often prove much less useful than a lawyer, but at least I can recommend some.’

Many locals in China think the media is the fastest way to resolve issues; that local officials are more concerned if a journalist is involved. The key is that in China many officials don’t want the ‘dirty laundry’ aired in front of foreigners but when they aren’t delivering the services or promises, the people don’t care about that. The problem is that in China there is no where to voice opinion let alone criticism. Something that retired well educated officials are often disappointed about.

She notes that people in China want to be heard; some to resolve issues others to be remembered. She finishes by saying

'But I do feel increasingly grateful to still have a journalist visa: new ones will not be processed at all until China’s borders open, which means a freeze on new foreign correspondents arriving in China. This gives us a responsibility, too, to educate readers about China’s nuances. The more polarised the outside view of a country is, the more important it is to humanise its people. And the fewer newspapers there are that can hold the emperor to account, the more important it is for us to do so.’

Well worth a read and I think very true of China, the people want to be heard but the party is scared about what will be said. I suspect if they allowed the peoples voice and reacted to the complaints the standing of the party would be greatly enhanced. Especially if they purged the local ineffective or dishonest cadres. On a wider issue it also gives an insight into why Hong Kong is so resistive to the new security law. Hong Kong people know the benefit of free speech in keeping officials accountable and of ensuring that the courts do offer protection to the ordinary people; something the new security law does not.

For Interest

Covid era’s opening chapter leaves clues on how to invest next. Looks at the lessons to be learnt from the last six months. For a start don’t fight central banks and the liquidity they provide. It points out that momentum trading and 'simply buying assets that keep appreciating’ have done very well. Especially in the case of 'companies with strong growth prospects and solid balance sheets, and long-dated bonds.’ BUT that asset mix is not bullish but reflects a gloomy economic outlook with little inflation.

Investors who shunned long dated bonds or who bought into cheap valuations in the US like

'financials, leisure, transport, energy and industrials’ have been hurt and whilst growth and inflation could boost such companies it might be a long wait. The Fed is not expecting inflation or unemployment to recover until 2023.

On the bright side consumer and companies are saving money; which the article expects will one day be spent. Although I would caution that we might have a higher savings rate for a very long time due to covid. It has highlighted to many how little ‘reserves’ they have for such crisis.

The other positive has been residential property which has seen strength in some areas, notably larger homes in the suburbs. Which must mean that some areas in the cities are seeing weakness? Morgan Stanley’s CIO of Wealth Management notes the US housing market has not been this robust for 15 years.

Another point for consideration is whether the potency of Central bankers will wane. Here it thinks that is likely, seeing bankers have few levers left to pull. From here it is likely to be Fiscal stimulus that is the driver. But Ms Shalett MS WM CIO makes an important distinction when looking back at the lack of inflationary pressure over the past decade. That reflected “aggressive deleveraging by banks and households — two factors that are not present today.”

US bond market expectations for inflation over the coming three decades are sitting around 1.75 per cent. Any increase above 2% could have holders of the richly valued tech stocks and long dated bonds worried. So how to protect against that; Ian Harnett, co-founder of Absolute Strategy Research, says increase exposure to emerging markets and commodity plays. It notes that there are certain some good opportunities out there. It notes 'The gap between valuations of technology stocks and financial stocks, for example, sits at its widest point for almost 20 years. The banks face plenty of problems, of course, including a rise in bad loans, but the sector is far stronger in capital terms than it was in 2008. Mr Hartnett says that cheaply priced banks have historically provided “significant protection for equity managers when inflation risks have risen in the past”.’

No clues on calling the turn but suggests watching for a vaccine and 'long-dated bonds for a rise in yields, and equities for a broader recovery beyond the current narrow group of winners’

An interesting read

Trump reins in campaign TV ad spending. Rival Biden dominates airwaves as president shifts to digital marketing. Suggests that the Trump campaign is short of money whilst Biden is still being well funded. There are just seven weeks to go before Election Day (and 97 days to Christmas if you're interested). It seems that Trump has cut his spending in some key swing states significantly. Samantha Zager, deputy national press secretary for the Trump campaign, said Trump 'and his campaign have spent years connecting directly with voters, in the field and with ads.’ She said they were targeting their spending and expected to have 'two or three times the funds we had in the closing days of the 2016 race.’

The one area Trump has outspent Biden is in on-line ads on Facebook and Google. Which again signifies the importance of the whole on-line scene and could in part be behind Trumps dislike of Apps that don’t support him.

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