FT Weekend Thoughts Chips in China, Dalio on China, Ma on Basel, Pandemics make the rich and more


28 Oct

FT Weekend Thoughts  Chips in China, Dalio on China, Ma on Basel, Pandemics make the rich and more

Jack Ma rails against global financial rules ahead of $30bn Ant Group IPO.  Basel regulations are not relevant for China’s phase of development, says Alibaba founder.  Calling the Basel rules and old peoples club.  He suggests that the rules focus on the risks and not the opportunities.  Suggests that lending should be based more on a credit rating system than a requirement for collateral.
The article notes that whilst Ant does operate a credit scheme its own experts question the success of Sesame Credit for predicting loan repayments and notes the company has predominantly stuck to traditional banking data for making loan decisions. It also notes how the PBOC’s attempt to set up a nationwide credit scoring system encountered problems when Tencent and Ant refused to share user data with it.
It will be interesting to see if Ant does move further in that direction, its currently profitability would suggest that it has the means to do so but it could prove to be an expensive experiment.

Opinion by Ray Dalio. Don’t be blind to China’s ascent in a changing world. Anti-Beijing bias has blinded too many for too long to opportunities. He stresses the need to be open to investing in China. He notes the significant advances since 1984. The growing well educated population and wide adoption of new technology. Says its fundamentals are strong, assets attractively priced and the world is underweight China. Meaning that more funds will have to buy China going forward. He notes the direction of China’s 'opening up to the world policy' could change but he doubts it.
Overall very pro China. I think he paints a rosy picture. Gains from investing well back in 1984 would be great if there were very lucky because there has been and is still a lot of fraud and corruption risk in China. You would also have had to had the ability to spot the growth of the tech, which few initially did; in China or the west. There is also still the huge gap between the developed coastal economy and the vast agricultural interior. The top tier cities remain the focus for growth. The US tariff war and covid will also impact China significantly and whilst many of the supply chains are now relatively low value and China will be happy to see them relocate to other developing countries its ability to keep the higher value ones is in question. Moreover a lot of the low value chains were very good employers for ordinary workers. China’s recent move to more state control rather than private SME companies does not bode well for job creation and yet that is probably what China still needs most of. All that said I do agree that there are some very good opportunities in China but careful research is required. Many have come to China on the same basis that Mr Dalio sets out but the key to successful investing in China is the same as everywhere else. Careful research and understanding of the market and the company. But as he says do not allow the anti China bias put you off looking. Once invested as will all investment close monitoring is required. There is no free lunch… anywhere in the world.

US chokehold pushes China chip self-sufficiency up the agenda. Beijing’s plans for the sector in spotlight as Communist party develops next five-year plan. Notes the stranglehold the US currently enjoys over the machines needed for making chips. So China will need to need to build from the basics to become self sufficient. A priority will be boosting its prowess in electronic design automation (EDA) the software used in chip design and in making the machines deployed in chip fabrication plants.
It suggests that in semiconductor equipment and EDA, China is today where Huawei and ZTE were in the late 1990s, a low-cost provider still lagging behind overseas peers in technology. Part of the issue is that it is not just about money it is about building up experience and talent.
It also points out that China may have to reappraise the way it makes its investments to support the development. 'The industry has also suffered because of inefficiency. Over the past three decades, hundreds of chip projects have failed because of investors lacking the required technical knowledge or after having redirected subsidies into unrelated property projects.’ So greater scrutiny of companies is required; it notes that 'In the first nine months of 2020, more than 13,000 Chinese enterprises registered as chip companies, even though many have no prior industry experience.’
This will be a key area for government going forward and it will need to be careful in where it invests its money. But it will still take a long time to catch up and in the meantime the industry leaders will keep making advances.

Europe rattled by new Covid surge. Looks at the surge In cases taking place and the concerns that there could be more to come as the weather turns colder in Europe. France has introduced and widened its curfew’s to try and stem the spread. Friday’s PMI data showed that covid was impacting the economy, with the Eurozone sipping to just below 50 having been just above the previous month. Services have seen the brunt impact of lockdowns so far. It is worth noting that Central and Eastern European counties are also seeing significant increase and bringing in sweeping social distancing measure to try the contain the spread.
The situation in the US is very similar with near record cases being reported although there was little evidence of its impact on the PMI, but that is probably down to the difference in size.
In my view market concerns will remain high until a vaccine is widely available. The key will be to introduce measure that allow business to at least remain open and trading even if at reduced levels. Also the ability of governments to get people act responsible is be key.
It will be interesting to see if the PMI data influences the the ECB meeting next week.

See also Eurozone business recovery loses steam. Services slowdown hits sentiment despite manufacturing gains

Vegans rejoice as MEPs vote to keep non-meat steaks and burgers on menu. I think the fact that it needed to go to a vote in the European Parliament illustrates a problem with modern governance. Food labels, for most people, are clearly understood; most will understand that a 'veggie burger' does not have meat. The money that has been spent on campaigning and documentation has just been wasted. Money that could have been spent on more worthy issues and needs. In this case it was part of a broader revamp the of the EU farming policy to promote sustainable agriculture. Environmental groups criticised the final package because it failed to impose tough green conditionality on farmers in return for EU money. That in my view should have been the focus. The government involvement in sustainable agriculture should not be about the food labelling unless it is wildly misleading but ensuring that EU money is spent wisely at, in this case, the grass roots level. The public can take the food companies to task over labelling there no need for the EU government to waste the public's money on such issues.

Pandemic makes world’s billionaires even richer. Enlarged fortunes of super-wealthy expose widening inequalities under coronavirus. The key though for them was not to sell when the pandemic hit but to build hedges (like gold) and then to make select investments It estimates that the last time the rich had it this good was 2009 after the financial crash. Again the ability to take advantage of the situation present by the huge injection of government money. The article ends by noting that 'Many of the world’s richest are expecting that to continue as the true economic costs of the pandemic become clearer. “It is triggering a lot of questions now about what lies in the future, how inflation might make a comeback,” said Mr Rochat.’
Again the ability to make select investment as inflation becomes apparent should give those with cash the ability to enjoy more upside.
But is does also raise the question of the widening gap between the wealthy and poor and the social issues that may arise from that.

Trump and Biden play by rules in testy final debate. Candidates spar over virus, corruption, foreign policy, migrants and oil. Gives a summary of the debate; although I don’t think a particularly good one. For example it mentions Trumps attack on Biden where he alleged Biden profited from his son’s business dealings. But it doesn’t mention how Biden retaliated and focused on Trump’s taxes. Biden made the point he’s declared all his taxes, which probably undermines the argument about receiving foreign money or illicit payments. Equally Trump’s attack also prompted Biden to mention about the fact that the President was still in charge of his companies and that Trumps family have taken key jobs in the administration.
On foreign policy the article doesn't mention that Biden said he would make sure 'China played by the rules’. For investors in Asian that is important. It is likely that Biden would united countries in their actions against China; making it harder for China to victimise individual countries as it has done recently; like Australia over covid. Many feel that China has exploited the rules to its advantage; adopting those it likes and ignoring those it doesn’t. If Biden wins and does what he is claiming China could be under a lot more pressure to change. That could involved further openings of the economy on a level playing field basis; which could put a number of the Chinese under pressure as it is something that the EU has been pushing for too. If the US and EU along with possible other countries come to the negotiating table as one China is likely to have a problem rejecting the claims.
Having watched the debate live I would say that Trump was keen to move on from areas like the handling of the virus. Also that Trump focused on personal attacks on Biden’s family whereas ofter Biden responded by talking about the American family and unity.
Also worth noting as I mentioned in my earlier note with 53m American votes already made, the floating voters are likely to be fewer. The debate itself also drew less views that the final debate last time; although that could have been due to more online views which don’t make the official numbers or the fact that Fox aired the New York Giants’ playing the Philadelphia Eagles (the Giant’s lost).... But what that really tells you is that for some American’s they view the election as less important that a sports game.
Full recordings of the debate can still be watched from most networks

EMs diverge on expectations of Biden presidential victory. Countries targeted by Trump have seen their exchange rates strengthen in recent weeks. Looks at the moves in the currency markets as investors anticipate a Biden victory. The basic premise it that Biden will act favourably towards countries that adhere to international norms and the rules based system. It suggests that Biden would take a softer mine on China and a harder line on Russia. I am not sure that Biden would be that much softer on China given his pledge to make China play by the rules. It’s also worth noting that emerging market currencies are generally benefitting from the weakness in the US dollar, which is occurring as investors factor in the expectation of more stimulus ahead.

Surge in risky PIK deals pitched by private equity. Another example of investors are finding that they have to take on higher risks and onerous terms in the hunt for yield. PIK are payment in kind bonds.

Global bond markets have entered an upside-down world. Sets out that in normal times uncertainty over the economy would prompt risk aversion aversion in investors but at the moment that is not the case. 'An important measure of how investors view the debt of companies comes from comparing their usually higher borrowing costs with those of the US government.’ Currently the gap is narrowing and is close to pre covid levels. There are record levels of debt issuance and yet borrowing costs have remained low. Part of the reason seems to be the fact that central banks are back stopping credit markets and encouraging the purchase of risky assets. Some suggest that the current activity suggests that the economy is past the worst but the past two default cycles would suggest that the all clear will take longer to arrive. It also suggests that distressed debt funds and rescue finance opportunities may not see the previous good levels of return as more investors chase the opportunities. But it is still better than the outlook for traditional investors given the prevailing low level of corporate bond yields and narrow risk premiums. But with so much debt out there it is likely to be a drag on the economic revival, as companies will focus on cost cutting at the expense of investing and hiring That will leave credit markets sitting on far more expensive values than what is warranted by the economic realities of high debt and modest growth prospects.

FT BIG READ. REGULATION. The battle starts against Big Tech The Department of Justice this week launched an important antitrust case against Google. Given the broad political support, it could lay the groundwork for other cases against large technology companies.
The article focuses on Google but also notes cases building against Facebook, Amazon and Apple. An interesting read on a case that is likely to go for years and could make a significant difference to the sector. Whilst some think it is too late but as with all these things I am sure that a lot more detail will emerge. Already out is the fact that Microsoft and Google have an agreement not to complain against each other; an agreement that ceases shortly.

Editorial Young’s discontent with democracy is worrying. Populism of millennials risks a vicious spiral of failure and disillusion. It appears they are even more disillusioned than previous generations at the same age. An interesting read the summary 'The warning is clear. We cannot risk running our societies for the benefit of the rich and old and stay confident that they will remain democratic. They must be seen to be run for the benefit of everybody. The calamity of Covid-19 underlines this truth. We must learn and act upon this understanding or risk falling into the abyss of demagoguery.'

Lee Kun-hee, Samsung family patriarch, 1942-2020. Died on Sunday aged 78. The executive was credited with transforming South Korean group into global technology leader. The obituary looks at his chequered career.

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