FT Weekend 27 June:- China to end poverty? Belt & Road inflated costs? Arm China -VE and more

FT Weekend 27 June:- China to end poverty? Belt & Road inflated costs? Arm China -VE and more

In the Spectrum section China’s race to end poverty President Xi Jinping has committed to eradicating extreme poverty by the end of 2020. But slowed by the pandemic and with many rural areas struggling, will he meet his target? Yuan Yang and Nian Liu report

The answer really comes down to what you mean by eradicating? Like many things in China it will be, but with Chinese characteristics, which is likely to mean a re classification. People will not be registered as in extreme poverty. It's worth noting that China already has a lower standard for ‘poverty’ than the rest of the world uses.

It quotes a commentator who says going forward the 'goalposts will shift, I suspect towards issues of equality and equity,’. That is a growing problem in China and a far harder one to eradicate, especially as party members are the elite.
The article sets out that back in 2013 President Xi set the target to eradicate extreme poverty by the end of 2020. The previous four decades had already seen China make significant steps forward in achieving this. For the party achieving the goal is about gaining legitimacy both from inside and outside China. Although in my view I think the party should also admit that many of its historic actions were responsible for so many people being in extreme poverty. But anyway. The path was set and people were working towards achieving the aim. Then covid-19 hit and prompted a shutdown in China and a slowdown in the economy. President Xi wants the goal achieved so that he can say that China is prosperous and deserves to be a world leader. President Xi has reaffirmed it will happen. However achieving the objective on the ground is much more difficult not least because of the Hukou system that operates in China.

The article is good it looks at the Atule’er or Cliff Villagein southwest China’s Liangshan area. It gained prominence in 2016 when local media showed children using a crumbling vine ladder as part of their 2 hour decent to the nearest school. The resulting media interest prompted the local government to build an 800 meter steel ladder. Many from that village have been resettled, in new homes two hours drive from Atule’er. Most are happy with the move although the loss of some non-fan Chinese customs worries some. Some worry about the loss of land and the issues found elsewhere in China about forced demolitions and land grabbing by authorities.
In Atule’er the issue is that most want to be re-located but have seemingly been overlooked, in some cases because they have been registered as merely poor often through neglect or bureaucracy. The article notes that in some cases 'the government has solved meeting its poverty targets administratively: certain areas have stopped logging residents as “impoverished” since the start of the year. “It’s all been counted, the system no longer takes new impoverished households,..” So the problem will be solved ‘administratively’ even if not practically.
The article also makes clear that there is the party propaganda machine spin on this; photo ops, that portray one image but then the writers visited one venue later only to find the flat empty except for Government provided furniture.

The further problem after relocation is finding employment and many of the rural are still under educated and many do not speak mandarin. That problem is being made worse by the global slowdown and if something the party has made a priority but delivering results will be harder that just bringing it to the top of the agenda at the NPC.

For me the real shame is that the party seeks legitimacy and if it achieved eradication of poverty, not withstanding the fact that’s its historic policies put many of the people there, it would deserve it. But to fudge the reality to get the answer you want reveals the true sham nature of the organisation. Legitimacy is based on truth; real, verifiable truth. Not the truth of might or silencing others or rewriting the version of history that portrays what you want it too. Truth that can stand the test of time and open questioning.

Pakistan asks China to rethink repayments. Cost of Belt and Road power projects are inflated, claims Islamabad. Chinese companies; Pakistan is saying, have been exaggerating costs and other ‘malpractices’. The article notes
'coal plants Huaneng Shandong Ruyi (Pakistan) Energy and Port Qasim Electric Power Company were overcharging by about $3bn over the 30-year project lifetime through inflated set-up costs and interest payments. Set-up costs alone for the two plants were inflated by more than Rs32bn ($204m) over “misrepresentation” of interest payments.’
It also notes that a probe into allege corruption cases have been put on hold after pressure from Beijing.
Interestingly Pakistan is seeking to defer payments for up to 10 years rather than renegotiate the payments. Nothing like kicking the can down the road. It will be interesting to see if the ‘re-evaluation’ process is an open affair or whether China can continue to keep the terms under wraps. I am sure a lot of other countries are watching the events and wondering if the same it true of their projects?
For Beijing it is another pressure that it could do without at present.

Battle to topple Arm China chief leaves SoftBank facing the void
Multiyear legal case awaits Japan group and mainland investor after Wu refuses to leave. It follows up on an earlier report in the FT on the case.
For me this is a great case study of the problems of doing business in China.
That despite owning a company and having due reason to remove an executive it remain very hard to actually do. In this case the CEO. Interestingly one of his main hopes of a deal rests in the fact that he holds the company seal, a stamp that is necessary for company transactions. It has been the same in Japan with name stamps, inkan, until a few months ago when they decided due to remote working that they would be phased out. Not yet in China.
The article outlines the case against him. It notes that Softbank and Hopu have already requested a new company seal but the authorities are not currently being helpful and Arm is relying on Hopu’s deep political connections to find a solution. That in itself is troubling that one cannot rely on the law to settle disputes.
The fact that if/when Mr Wu leaves others will follow is a fact of commercial life but I would imaging the companies are watching very closely the IP issues too.
At a time when China is trying to promote itself as a place for business this is an embarrassment. Made worse, for China, I would think by the fact that Allen Wu is actually a US citizen using (well actually I think abusing) the Chinese system for his own benefit.
It reminds me of stories from when companies first went into China, buying into local companies only to find the owners then left and used the money to set up brand new companies just down the road doing exactly the same but with new equipment. China had managed to shake off that image and portray itself as a place for business. It has been successful in attracting firms like Arm which are important to its goal of moving up the 'added value’ ladder. It now needs, more than ever, good publicity about doing business in China to both attract new companies and keep those it has. Faced with sanctions and tariffs from the US, which will potentially increase with the imposition of the National Security Law on Hong Kong this is another problem Beijing could do without.

Alibaba appoints CEO to turn round lossmaking Lazada unit. Illustrates just how competitive the ecommerce business in Asia is. Shopee the leader, it is the ecommerce arm of Sea Group and backed by Tencent. Then comes Tokopedia (in which Alibaba is also a major investor) and last Lazada. Seems the obvious thing is for Alibaba to try and restructure its interests. Time will tell.

Cautious consumers likely to hold back recovery, says Lagarde. Having said we are probably past the worst she added that the recovery could be restrained. ECB data showed household savings have increased significantly since covid-19 hit in February. She also noted that some sectors will be ‘irremediably’ hurt. She also warned that the EU leaders were unlikely to agree on the recovery fund at their summit on 17 July. She also commented that the ECB had '“used all policy levers” to ensure financing costs stayed low for households, companies and governments and that banks continued to lend.’
But also noted that whilst debt levels had and are growing massively and would have to be repaid that the maturities could change; hinting at longer maturities.
It will be interesting to see whether the markets are quite so sanguine in the days to come.

Spending plans and nascent niches boost outlook for tech. Makes the point that having bounce back so impressively Tech remains the preferred sector 'other businesses with the revenue growth and models to carry on the fight’. The strength of tech is seen the fact that its forward PE is around 24; that’s Dotcom levels, which means there is an assumption of an economic recovery to justify. Which may explain the market’s nervousness. That recovery is questioned by some and not least the bond market. Excess debt stunts growth so with the US T30 adjusted for inflation sitting below zero the growth outlook is not good. So with little growth investors are looking for robust cash flow and potential to increase revenues. Hence tech especially that that not only benefits to the current work from home but also longer term structural changes. But at current valuations can Tech, Comms and healthcare sustain their performance. The article references Bank of America research as a reason why it might. It points to the fact that the US Govt is once again looking at directing and increasing its spending into R&D as it did back in the Mid 1960’s. Then it spend 11% on R&D today its 3%. But plans for an industrial policy to focus on R&D, mindful of the challenge from China and covid-19 should be good for those sectors.
That said, not all tech is the same and due diligence is key, especially of Chinese companies bearing in the mind the Luckin scandal. Green and Digital seems to be the key. It quotes Geraldine Sundstrom from Pimco ‘it’s chips not bricks that matter’.

Riskiest US companies left behind in rush to buy debt Weaker borrowers have ‘door closed’ to them as Covid-19 effects continue to be felt.
Article notes that while these are businesses that more leveraged balance sheets and weaker cash flows that they are a long way from bankrupt. I think that one needs to add the caveat ‘under normal circumstances’. It the current times the fact that they can’t get financing suggests otherwise. It also mentions that one commentator said that the finance was available but not at attractive rates. From the people I have talked to in Asia, and I imagine its similar in the US for some companies the money is just not available. This increases the risk to larger companies who rely on the smaller more highly geared business for essential parts. It underlines again an unintended consequence of cheap money it keeps companies going that would otherwise be bust or maybe we should look at it another way; companies whose margins have been squeezed so far that they can only survive on the fact that money is essentiality free. It is another indicator I think that post covid companies in the supply chain will be forced to raise prices and at a fast rate in order to repay debt.
Also mentioned in the article is the number of companies that have defaulted so far this year. That I think is set to rise and is probably one of the reason the Fed Stress Tests results recommended as they did.
I also think that the Fed stepping into the market for single company bonds will also skew the market and endanger the general investors. The Fed is only looking to get involved in the safest level of companies, forcing the normal market player in that market to move down a notch, which has a knock on effecting increases the risk for all… except the Fed. If the Fed really wanted to help ‘Main Street America’ maybe it should be the one offering to help those that are least able in the current situation and leave the grade A to the existing players?

Hail the dawn of a V-shaped recovery. Looks at how the public given the opportunity is returning as much as it can to its normal way of life. Cites the example of crowded beaches recently.
The article notes that normally the notion of ‘pent up demand’ makes no sense but the current situation is not normal. Pent up demand currently is due to being stores being closed or items being unavailable. It notes that most recessions are caused by 'something that slashes real disposable incomes one way or another, be it via a rise in interest rates, inflation or taxes, or because of a nasty cyclical imbalance that leads to a financial crisis. This recession has not been like that.’ As lock down measures have been eases restaurant booking have soared as people try to return to normal. The article says optimism is back which the article says could just be a temporary blip as new lockdowns could happen, although that is not a given.
It notes the amazing levels of fiscal and monetary support and notes that unlike 2008 when the money went to the financial sector this time it is going to non-financial corporates and households. Additional the basic financial system is in better shape and the progress in the digital economy since 2008 means that most are in better shape. Lastly that nationwide lockdowns are unlikely to be reimposed. But there are models that remain pessimistic, like the recent IMF report.
All that said the key for the article is that recovery is based on whether people ’feel’ it is safe to out and re-engage in life in a pre-covid-19 manner.
Says Morgan Stanley expects economic output will return to pre-covid levels by the end of 2020 and that the crowded beaches show its got a good chance of being right.
I must admit to be being less optimistic. I doubt a V shape. I think more Vw-j. Public confidence to go out socially is part of the equation but so is job confidence and I think that is more fragile due to the knock on impacts over time of debt levels. THE failure of a small company can impact on the success of a larger one due to the recent practice of outsourcing. The fact for example that over time Apple has been very good at squeezing suppliers to work on razor thin margins. If one or two suppliers go bust it will take time to find alternatives and that hits Apples sales. Now whilst Apple probably has contingency suppliers in the wings it still takes time to switch. But other companies may not.
Also until we know more about covid-19 we can’t be certain. The experts are already saying that like the flu vaccine each year its a choice at the producing the vaccine that is likely to be best at treating thus years strain of flu. Covid-19’s ability to adapt and mutate means that multiple vaccine may be needed. The fact that we don't know and the very least for me puts a big question mark over the V shaped recovery.

Read also The risk of harm and the greater good. Which looks at whether we should have more randomisation trials. Looks are various circumstances where they have been found to be useful. Even asks if should try a trial that deliberately infected healthy volunteers with coronavirus to see whether there was a way to trigger an immune response with a low-risk dose (I’d happily sign up to that for the greater good). The key is that policymakers should embrace randomisation more; which I guess also means that as individuals we should also be more open to the idea.

Bitter taste Burgundy’s winegrowers face sobering loss of sales. Like so many other sectors the winegrower are under pressure. It will be interesting to see whether vineyards end up being sold as a result or whether there will be additional support from the government.

FT BIG READ. US POLITICS Is Trump already too far behind Biden? Under attack for his handling of coronavirus and antiracism protests, Donald Trump is losing to Joe Biden in the opinion polls. Even some supporters say that he needs to do more than just play to his base.
I think the key is that in politics until the voting counting has finished anything can happen. The article highlights a number of factors that could impact Trump and Biden in the months ahead. The key ones for Trump are likely to be the economy and covid-19 which are so closely interlinked at this point. An interesting read and a topic that will be increasingly overhanging investor sentiment in the months to come.
Whilst I am not a Trump fan, I do think he has brought a number of key issues into sharp relief and highlighted the need to address them. I think his failure has been to try and make America do it alone.