FT 11 June Anbang problems, China's poverty level, OECB sees scars, Arm in charge?

FT 11 June Anbang problems, China's poverty level, OECB sees scars, Arm in charge?

From the online edition The Big Read Anbang  The mystery document holding up China’s sale of Anbang hotels. Documents being disclosed reveal competing claims on the US hotels. A Delaware Rapid Arbitration Act agreement (DRAA) signed by Wu just weeks before he was arrested.  The DRAA makes things complicated because they involved a number of other powerful Chinese families.  Hardly surprising as Mr Wu had married Deng Xiaoping’s grand daughter.  A key clause in the DRAA is that to quote the FT 'in the event that Anbang is seized by China’s insurance regulator or other government entities, the Wu and Deng families “unconditionally agree to have the four parties of the United States to sue and file an additional complaint against the institutions”.’  The DRAA also warns that ‘...may not be leaked: “In particular, to Xi Jinping’s family, [then anti-corruption chief] Wang Qishan’s family and other families of members of the Standing Committee, or any personnel from the central government, any law enforcement personnel, and other personnel, lest that relevant personnel be subject to criminal liability or death penalty”. The document adds that any party that contravenes the agreement could be liable for a penalty of up to $270bn. Wu once described Wang to the FT as his biggest enemy. '
Also involved are Chen Xiaolu a princeling, son of Chen Yi a revered revolutionary and major of Shanghai. Chen died of a heart attack after being questions by Chinese regulators and President Xi sent a representative to the funeral who gave a speech in which he described Chen as an elder brother to the Xi family.
It goes on to look at how the transaction was being carried out and highlights the fact that in come cases the vendor did not make full details known until very late in the process. TH net result is that China could be left holding the assets and be liable to pay compensation and still face trying the sell the assets which are now seen as tainted because of the uncertain legal title. Interestingly it notes that before the DRAA came to light there were other questions over title but Mirae was told they were fraudulent titles and could be expunged. The article notes that since the early 2000’s the Chinese were seen as buyers of first choice. That is no longer the case, both buyers and sellers have lost their credibility.
Again for China this comes at an unfortunate time as it seeks to reassure global investors that doing business with China is safe. The fact that this case also involves prominent families and links to President Xi himself will put the party and Xi under more pressure.

Chinese premier’s admission on poverty provokes outcry Beijing is facing a public outcry over its claim to have “basically won” the war on poverty after the premier admitted more than two-fifths of Chinese people made less than $140 a month. It has raised questions about China’s ability to meet one of it biggest policy goals, that of eliminating poverty. President Xi said that had almost been met in a speech back in March. More worrying for some is the growing income gap between rich and poor in China; FT quote ' “If these 600m people can’t make ends meet, the rest of the population won’t live an easy life.”’
Official stats show those in poverty dropped to 5.5m out of a population of 99m in 2012. It is also notable that China’s definition of poverty is per capita income under Rmb3,500 (US$500) per year. The World Bank sets it at Rmb4,800 per year.
Just one more problem for President Xi at a time when he could really do with less.

Crisis will leave deepest economic scars during peace for a century, says OECD
Its latest forecasts show that whilst developed economies are likely to to see an initial rapid rebound from recession they resultant level would be far short of the pre-pandemic levels. The forecasts are far gloomier than those suggested by the current state of equity markets. They do not see a normal recovery; seeing some thing like a v-shaped recovery but stopping half way and that assumes no major second wave of covid-19; on the basis they expect a 12% contraction in 2020 and by the end of 2021 to still be below the level at the start of 2020. In another forecast which assumes a second wave of covid-19, then a further 10% would be knocked off output by the end of next year. It notes that each country will see a different impact; S Korea they forecast to only see a contraction of 1.2% but the UK -11.5%. I think that whilst their most dire forecasts are unlikely, I do support their view that it is not going to be a normal recovery and that it is unlikely to be a V shaped one.

Arm at odds with China unit over chief. A series of statements leaves confusion about what is really happening at the company and may highlight another risk of business in China. Arm said after an investigation it was replacing Chiarman/CEO Allen Wu and appointing a pair a co-CEO’s in the interim. But Arm China said that was not the case and Allen Wu remains in charge. Key here is to quote the FT ' that Arm China is “an independent legal entity registered in China according to the law” and that it is “currently operating normally and its support and services to Chinese customers [ . . . ] continues as always.” ‘
UK Arm then set out that Mr Wu had been investigated after complaints of ’serious irregularities’ which seen to be focused on outside business interests and conflicts of interest which he had not declared. It will be of particular interest at present due to concerns of technology transfer especially as Huawei is a key customer. Other businesses will be watching developments closely for the implications to their China structures. No doubt China will be watching carefully as it seeks to reassure businesses that the imposition of national security law onto Hong Kong makes it safer to do business.

Iron ore up 20% in a month as China flaunts steel supremacy Beijing’s ambitions boost miners while pandemic slows rival mills across the globe. As in previous downturns the steel mills keep running. It suggest big infrastructure expenditure, Beijing outlined transport spending last year but it has yet to say which areas will be prioritised. It will also being to export Steel and the target is likely to be Africa and its Belt and Road projects.
What is has meant is a boom for the Australian miners BHP, Fortescue Metals Group and Rio Tinto whose business has not been impacted by the diplomatic tiff over a covid-19 investigation. They are also benefitting from the covid-19 disruption to Brazilian mines But it also shows how focused China can be and in reality it means that Australia does have some leverage if it wants to use it. The other big implication is for a strengthening in the Aussie dollar.

China rattles sabre to warn Modi off Trump’s embrace Tensions between nuclear-armed neighbours simmer in remote borderlands. Not just about territory although that is key and marks the kicking off point but more about China seeking to put India down according to analysts. After India put restrictions on Chinese investment in India and it alinement with the US.
It seems that China took advantage of India cancelling its spring military exercises in Ladakh to seize several tracts of land long claimed and patrolled by India. Key among them is positions in the Galwan Valley that overlook a new Indian highway built to supply New Delhi’s most forward military base at Daulat Beg Oldi. China’s actions put India in a difficult position. A situation that will need watching because whilst India does not want a military conflict Mr Modi is under domestic pressure and will need to show his home audience that he is tough on China. The situation could also be heightened if the US lends support. One to watch.

US consumer spending shows tentative signs of recovery. Notes consumer spending picked up at the end of May as lock downs began to ease. 'data collated by Mastercard published yesterday showed total US retail sales, excluding the automobile sector, dropped 5.6 per cent in May from a year ago. In April, the figures showed a 14.1 per cent decline. Home improvement, ecommerce and groceries helped offset weaker sales of clothing, jewellery and other more expensive products.’
Worth noting Home improvement as I am still a big fan of Techtronics (669 HK) which hit a new high this week and I think will continue to see good number due to home staycations this year because of covid-19.
But on the bigger issue I worry that we a attaching too much importance to one or two months data. Lock down would have created a lot of pent up demand and I we know that retailers are offering discounts to clear stock. I think we will need to see three or four months data to be sure. Especially in the light of the news that on re-open Texas has seen three days of record hospitalisations.
Read also Worst of crisis is over for US economy, says Morgan Stanley chief. People are feeling optimistic but considering we still don’t know that much about the virus and have no vaccine or cure yet; I remain cautious.

LEX Samsung/Elliott: jail blazers Looks at Elliots attempts to get shareholder value and the fact that is putting pressure once again on Samsung’s head Lee Jae-yong. But notes that if Mr Lee is returned to jail shareholder should not worry, last time he was in jail and still running the company its shares hit new highs. To me it does make you wonder how S Korean jails are run; obviously not as dangerous as the jails portrayed in American movies! Maybe Lex is right and in S Korean jails they wear blazers?

EDITORIAL UK’s ties with China are set for a sea change Beijing is a strategic rival but one with which Britain must engage. Looks at the need for a change in the relationship but one that is realistic and not just a retreat to Cold War thinking. Worth a read.

Opinion Homeworking makes spilling secrets easier. A big risk as home working make compliance rules more difficult to enforce and means that software and machine learning tools currently used to identify ‘odd’ employee behaviour are rendered useless. That is in addition to the fact that working from home increasing risks significantly anyway, especially to hacking, be it data or conversations. There are products that help and measures can be introduced but it still comes down to the individual.

Opinion Cold war with China is the wrong way to define US policy. Looks at American policy on China and sets out how Trump’s actions are petty and put the US in a bad light and allow China seem to be doing more for Africa. In terms of funding the US still does more although not all through government channels. Yet China has got itself better publicity for its actions. Its key point is that the US shouldn’t treat Africa as a pawn but with respect and shouldn’t in its conflict with China stoop to petty actions that could have damaging results.

Safety first Best practices to limit further spread of coronavirus as the world reopens
Poses a series of questions and answers
Indoors versus outdoors. Not surprisingly indoors is worse
Proximity and time Again avoid camped conditions. One meter separation is good, two meters better. Ventilation important; recirculated air more dangerous. So good systems which introduce new outside air are better. Watch to see whether the air con makers start coming out with new models Daiken in Japan would be a beneficiary. LG & Samsung in S Korea already noted an increase in air purifier sales; I would expect more good sales ahead. At restaurants/bars it suggests a seat by the window or outside. It also mentions that ‘hot desking’ might be under threat due to increased infection risks.
Masks and other measures. Masks accepted as a good idea in high risk areas but less useful outside on the street. Avoid touching as many surfaces as possible. This could be good for makers of automatic doors and other touch free products going forward
Mass gatherings increased risk of super spreader so avoid
All these are useful things to observe the real question is how along are we going to have to observe them and are they going to become a permanent part of our lifestyle?

Why Europe may never follow the US airline industry’s path Worth a read it sets out that Europe should have seen more consolidation but the bailouts now being arranged mean that is unlikely to happen. The fact that governments are still supporting national airlines remains a problem. I don’t think its just a European problem but an international one. It suggests that the US has been more successful but I would question that and the success of the US airlines has been largely due to the Chapter process allowing them to restructure. With covid-19 the industry legitimately has an opportunity to restructure but it will not and for that reason I remain negative on Cathay Pac.
It notes 'barriers to exit’ in airlines have always been high, with operators having to make such huge capital outlays that they are often compelled to run flights even if they are loss-making, just to keep cash flowing through the business in the short term. That ought to raise red flags to most investors; just as 'burning cash’ eventually was recognised for what is was in the ‘Dotcom’ boom. Like a lot of industries there needs to be mergers and there will be job losses but the result should be a better run more efficient business; which will probably also mean a greener footprint.

Feedback and comment welcome