US ratchets up Huawei tensions China group accused of using American tech Loophole allows chipmakers to skirt rules. Additional pressure in a week when Trump threatened to cut ties with China and weaponised pension money. The loophole being closed is with regard to US made equipment that is manufactured abroad. The new rule prevents, the FT says 'any company from selling to Huawei without a licence if the product they are selling has been designed or made using US-produced technology or hardware.’ Understandable the news prompted retaliation not directly from Beijing but from a person closely associated with the Chinese government; outlining some of the things Beijing could do; like stop investing in US tech, making it more difficult to operate in China. I do think that the threat to stop buying Boeing Aircraft a little lame at this point. For Huawei and many other Chinese tech companies this is going to have another -VE impact. They have been looking at finding alternatives and designing themselves but it all takes time and money. It also underlines that, just as in the past, countries that wanted access to the Chinese markets didn’t and still don’t upset Beijing so in the future if Trump were to be re-elected might have to take the same attitude to the US; what would that say about modern capitalism?
Watch over the weekend for an official response from China, likely to depress market sentiment on Monday
US industrials and retail see record falls Factories, utilities and mines have biggest drop in data series history. Much worse than expected; panic buying of groceries eased MoM, clothing & accessories -90%, BUT non store vendors +21%. I still think consumer spending is going to remain weak until job security rises significantly and that is likely to take many months.
KEY for Asia is that a lot of those clothes and accessories are made in the region and shipped. So that is more bad news for the manufacturers and the shippers. It means that a lot of Chinese factories are going to see a significant drop in orders in the coming months. Coming on top of bankruptcies filings from the likes of JC Crew and now JC Penny. Also on Friday VT the maker of Vans and Timberland shoes announced April sales -10% and guided weaker ahead. Already Pou Chen has put shut some of its Chinese production that is likely to spread.
Chinese industry rebounds from Covid lows Looks at Friday’s data out of China. Key for me is that it is too early to be able to draw a trend from just two months data; especially coming just after Chinese New Year which further distorts the reading. There were improvements but I don’t think we should assume the recovery continues in a straight line. Talking to some factory owners they reopened and had back orders and some new orders. Now they are seeing orders cancelled, postponed or reduced.
Household consumption remain weak and the Chinese people tend to be either confident or cautious when it comes to spending. If they feel safe in their jobs they spend if not they are extremely frugal. Unlike in the west where we tend to slowly cut back. In Hong Kong we used to joke when time are good there is queue for taxi’s, when they aren’t there are queues for the bus. You don’t get both at the same time.
KEY remains Chinese stimulus; so far it has been limited to actions from the PBOC and some regional governments. Many expect the leadership to announce the stimulus at the forthcoming NPC but I wonder still how much they can really do. They have spent/lent heavily in recent years on Belt and Road and Made in China 2025 policies. They have tried to create a domestic consumption economy, they have been fighting a property bubble and they have already spent a lot in infrastructure following the GFC. That are facing a huge issue with unemployment and I don’t believe the 6% announced reflects the true picture if only because it ignores migrant workers which make up a large percentage of its working population. Add to that this years school leaver and graduates and the picture becomes increasingly worrying. As does the risk of social unrest. Don’t forget they have social unrest in Hong Kong over the Basic Law but that would be nothing compared to the potential for social unrest in China due to unemployment. For years Resident Xi has been trying to slim down the armed forces into fewer but better trained. The SOE’s into more efficient organisations but with limited success. The more recent policies seem to have reversed much of these earlier aims as seen in the marginalising of private SME’s who have the potential to create the jobs that China desperately needs. The next couple of weeks could be crucial especially as Trump ramps up the rhetoric.
Market reaction so far; the CSI 300 has been trending higher since the mid March lows. It was 4,200 March 5, then dropped to 3,530 by March 23 and hit 3,970 on May 13, but this week saw selling to close 3,913 Friday. Beijing may well be happy with the recovery is has seen so far and prefer to keep its powder dry in case of a broad second wave hitting the country (vs the limited outbreaks so far). I would not be surprised to see Beijing trying to talk the game up rather that specific policies; akin to Powell and Lagarde saying ‘we’ll do whatever it takes’. Trump’s turning the screws this week could change that because if Chinese tech companies cannot get the components they need then that will lead to more job losses raising the risk of social unrest. That to me remains the key driver for President Xi; avoiding social unrest. The social contract is under pressure. The government narrative on Covid-19 (see below) is about enhancing the good the government has done not the mistakes it made. Recent corruption cases highlight Beijing is good good for the people. All paint a good propaganda backdrop but if people don’t have work; especial school and university leavers, then President Xi has a dangerous problem.
Wuhan diary stirs tussle for control of virus response narrative. This has seen a very binary reaction in China. It’s the daily online diary of novelist Fang Fang who was in Wuhan when covid-19 broke out and became a ‘must read’ for many Chinese about the outbreak. It is one persons view of the events. Yesterday Harper-Collins published a collection of the online entries and social media posts. Some in China have praised it others have vilified it; sayings high lights the failures and not the successes. Some have questioned its accuracy and other called for her to be more positive about China. At heart peoples response in China reflect the way the State has conditioned them. Ms Fang thinks many in China are repeating the mistakes of the Cultural revolution in believing everything the state teaches them. Beijing is obviously trying to put a different spin on events as its legitimacy is being questioned on a number of fronts. It is trying to either remove such publications by censorship or investigate the authors in efforts to discredit them or just arrest people. We should not forget Dr Li Wenliang who first alerted colleagues to the new virus and was arrested and forced to sign statements about his ‘errors’ by the Chinese authorities. It seems simple to us in the West to seek more openness and accountability from our leaders and we have the tool in free elections and independent courts to leverage for it. China does not, there is little real accountability in a system where only 6.4% of the people (aprox membership of the communist party in China is about 90.6m total population china about 1.409b) control the whole system and for the most part many of those are merely the enforcers for the 3 guys at the top.
China or maybe we should say President Xi seeks recognition for China on the World stage and the status he believes China deserves. It is true that China has improved a lot of things and made great advances but Chinese Communism will only ever achieve that status and world recognition when it can deal with criticism and praise in the same way. The truest test of its legitimacy will only come when all or at least a majority of the people in China and under its control; freely vote to adopt its policies.
Restaurants and shops plot way out of crisis Businesses at the sharp end of dealing with the public know it will take more than changes in official advice to reactivate operations. Looks at operations in Europe and US.
For Asia many of the same principles will be true but for HK people have shown a willingness to go out and mixed. Australian are expected to be returning to the pubs this weekend too. For investors a key are still remains fast food outlets and I still think the likes of Cafe de coral and Maxim’s (Owned by Dairy Farm) will continue to do well. Their share prices have recovered and they are currently trending sideways. The next key for them will be further easing of social distancing. They are also likely to benefit from falling rentals over time. Worth watching
Opinion Paying for the pandemic will be painful by Willem Buiter former chief economist at Citi, is a visiting professor at Columbia University
He starts that point out the key point is that to the bill will have to be paid and that it can’t be 'magicked away by modern monetary theory.’ He notes that advanced economies have loosened policy (both fiscal and monetary) ’spectacularly’. Mentioned the rise in the US federal deficit and notes that there is more to be added as more stimulus comes out.
He asks and answers the question So how to pay for it? Looks the example of what happened after the second world war; "significantly higher real economic growth and higher inflation, combined with financial repression, did most of the job.” But this time we are unlikely to have that higher real trend growth
He makes the point that even without deglobalisation and protectionism we will see a move to ‘planned redundancy with just in case supply lines and multiples suppliers which I think will raise costs and hence inflation.
On inflation he does not see a rise to 5% levels as seem post war. But thinks the current low interest rate policy seen over the past decade since the GFC, could help but thinks it's ‘reckless to rely on that.’
He does expect real interest rates to rise as the its unreasonable for them to remain below the real GDP growth rate. Also notes that savings rates will change; highlights that in China the gross savings rate has fallen since 2010 'ageing societies save a lot, but old societies don’t. And as planned savings fall, interest rates rise.’ He mentions modern monetary policy as an option but puts it as hopeful at best.
His answer is a radical change government spending and tax policy. In some countries it will be rising taxes vs cutting spending whereas in other the reverse will be true. He believes that many countries will see changes to their political systems.
He thinks the US may be ready for a truly radical overhaul of its tax system as the flaws and failures of the existing systems have been exposed. He mentions 'Thomas Piketty’s magnum opus Capital and Ideology’ and thinks there may just be a chance so such a radical change.
Also Read Why investors should pay up for inflation protection which looks whether inflation will re-appear in the coming years; which would cause big problems for bond holders. Current low bond rates do not provide a buffer if inflation picks up. Currently we are seeing deflationary pressure as economies go into recession. It notes ‘..time is a slow healer of any pronounced “output gap” — a measure of spare capacity that estimates the difference between the economy’s current level of output and what it could produce without generating inflation. Many economists do not expect that gap to close before 2021.’ Meaning that central banks are unlikely to meet inflation targets in the near term or long term judging by the record since the GFC.
So recommends 'prudent investors’ should be looking to build in inflation protection ahead of rising price pressure as economies and oil demand rebound. Suggests that strategies should pay regard to 'cheap commodity prices and and companies in the industrials and materials sectors, which are trading at inexpensive levels on various measures.’
Notes that some expect inflation due to pent up consumer demand (I don’t expect that until after we see a confirmation of job security), others expect inflation as supply chains change and production costs rise.
The article focuses on whether central banks can persuade investors they are not engaged in 'monetary financing’ growing their balance sheets to finance government a point which BoE governor recently addressed in an FT opinion piece.
But whilst they may say they are not, that might not be the case. Notes that gold has been rising and central bank for the most part have increased their holdings.
Says that central bank policy is currently aimed at keeping long dated yields low which keeps QE locked in the system; which causes financial asset inflation rather than inflation in the broader economy. Whilst there has been a growth in the US stock of money its velocity has declined and this seems to have had an impact in the restricting inflation according the the St Louis Federal Reserve. It also cites the example of Japan. It quotes a Deutsche Bank report “As global demographics deteriorate, so disinflation becomes politically attractive; old people prefer low prices to protect their savings.”
I’m would want to qualify that, I think old people only prefer low prices if they are actually getting a return on their savings. Which would maintain their spending power. Japan, to me, shows that zero interest rates are a curse on old people, as their saving dwindle and their life expectancy increases. It is not without reason that Japan retirees are looking for work or that the prison population of old people is growing, with many there for petty crimes deliberately committed.
It notes that 'stemming an inflationary surge is the risk of exacerbating government deficits,’. It cites UBS Global Wealth Management who said 'that with a pick-up in price rises, government spending linked to inflation such as pensions will rise, meaning that deficits climb.’ That would prompt bond holder to demand higher yields on new issues being used to fund future deficits; which might lead to governments compelling institutions to buy government bonds via regulation which is financial repression (as seen in the post WWII era) and so try to control inflation.
In the light of all that it recommends be pragmatic; get some protection!
My view; both articles well worth a read and I agree with a number of the points. I do think we will see a rise inflation whether countries want it or not. I do think there is a hope by many governments that the alchemy of modern monetary theory is real whilst for others it's less about monetary theory and more about ‘kicking the can down the road’ for another administration to deal with. As long as the collapse 'isn’t on my watch style’.
I don’t that financial repression will work as it did in the past due to ability of money to travel globally.
I still think gold is going to be a beneficiary; it hit a 7 year high on Friday. I wrote on this last week 'Where does the US go from here and what does it mean for Hong Kong.’ Link https://5ebcf02f15e9b.site123.me/
Japan’s three megabanks put aside a collective ¥1.1tn in loan loss provisions. Reflects their worry about the losses that could occur in the Japanese economy. Key is that they have been vague about how they have calculated the amount needed. It is higher than was expected which could mean they are seeing more risk from their knowledge of their own portfolio’s. Or it could reflect an accounting change recommendation by Japan’s Financial Services Agency to move to a forward looking methodology rather than historic. Key is with the megabanks being super cautious the smaller banks are likely to be as well and that will reduce the available capital they can lend out just as businesses need it.
Bank hedging jolts investors into negative rates alert Officials struggle to dispel fears that sub-zero levels will arrive in US for first time. Looks at how the mere mentioning of the possibility has seen some banks and clients taking actions; especially in the Swaps markets.
Key here, to quote the FT is, 'the hedges have a hitch. If market rates stumble below zero, the company expecting to receive a floating rate payment would instead have to pay the bank.
To reduce that risk, they ask their banks for floor swaps that set a limit at zero. Some companies that did not have limits in place entered into transactions to hedge themselves in recent weeks.
While banks are happy to oblige, they must also hedge themselves. They do so by buying fed funds or other related products, pushing their prices higher.’
An interesting read about something that might just happen. Other countries have coped so the US will not doubt too if it decides to go that route.
Amazon pressed over virus measures as operations return to normal US officials demand data on staff infection rates in push for greater accountability. Looks at the current issues facing the company. The stock has done well in the crisis and hit a new high at the end of April. Its warned about increased costs going forward and it seems to remained well placed. But it’s still under investigation about unfair advantages. It is returning to normal operations which means a lot of the recent staff benefits will be removed. Now could be crucial to whether is can still attract staff and keep costs down; key may be its track record on the number of staff infections and deaths. Something it hasn’t released. I would also imagine in time there is likely to be litigation against the company from staff who have been infected. There are always lawyers!
African nations to pool medical orders Collaboration launched to bring in vital kit from Chinese manufacturers. It is a shame that the WHO couldn’t have taken responsibility and acted as a co-ordinator for the ordering and distributing of the required medical equipment but as ever an entrepreneur has stepped in too help African nations and I would think the system could be used but any group of small nations. It follows the model used by the UK’s National Health Service (although they seem to have made a few mistakes recently) of grouping orders in order to get better deals and services. Whilst the world may been seeing the breakdown for global supply chains it may be seeing the growth of centralised purchasing.
WHAT IF as we see global supply chains unwind and hence costs increase whether some sectors will think about going greener and centralising some standard items. A few years ago the mobile phone makers were considering a standard charging unit but then apple introduced the thunderbolt and everything went quiet on the matter. Maybe it is time for us consumers to call for the manufacturers to collaborate. It would save everyone and the planet a lot of waste in terms of wires, adaptors (sorry to the accessory makers that do so well from the lack of co-ordination) and packaging.
Trump and the great coronavirus meltdown The US is renowned for helping others in an emergency. But the White House’s mismanagement of the pandemic has left it unable to help itself. Edward Luce reports on the president’s first real crisis — and what it means for America. A very damming critique but one that resounds with the truth of Trumps handling of the crisis. Worth a read. Especially as, whilst Trump is likely to play up his version of events in the presidential election race. One can see a number of similarities between Trump and Xi. But Xi wins because he doesn’t have to be re-elected.
Coronavirus crisis is strengthening the hand of ESG investors. Notes that sustainability funds saw record inflows in Q1. Whilst some in industry think ESG will go on the back burner it seems that the investing public and fund managers think otherwise.
FT BIG READ. CORONAVIRUS Is it safe to go back to school? The decision to reopen schools is one of most difficult issues that governments face as they lift parts of their lockdowns. Some scientists believe the risk is manageable, but there are significant logistical problems.
Key for me is what Dr Fauci told the Senate committee this week and it is applicable to a lot of the decisions that governments, companies and individuals are making; he said and the FT quotes ''I am very careful, and hopefully humble, in knowing that I don’t know everything about this disease,”
In a similar vein Dr Tegnell Sweden’s epidemiologist behind the government policy made a similar statement saying that there are no scientific decision about covid-19 because we do not fully understand it yet. We are all working on best guess! Only time will tell what was right or wrong and even then there will be degrees. How many deaths are acceptable to keep the economy running?
Opinion People still look out for each other, even in a crisis Looks at the lessons from a minor cycling accident summary.
1. People are for the most part kindhearted and look to assist when accidents happen
2. The UK’s NHS system is fundamental good but in normal time overwhelmed.
3. Plans canoe changed even those seemingly set in stone.
4. Most importantly count your blessing
Obituary Drummer whose unique style gave birth to Afrobeat Tony Allen Musician 1940-2020. A legend.
How to holiday in the time of coronavirus. Lockdowns offer a chance to find the hidden gems nearer to home. Worth a read; another -VE for the airlines.
Facebook-led cryptocurrency Libra boosted by Temasek. Despite MAS raising concerns about Libra, MAS MD said 'Libra posed global financial risks that needed to be addressed by regulators.’ The government back fund has got involved. That could be a important driver for the hope for digital currency.
If you have time there are plenty of good articles in the Life & Arts as well a a number of articles on the on-line edition too.
We will miss the office if it dies. I don’t think the office will die this article and the Universities are now on a learning curve about on-line education make the point that we like human interaction and the camaraderie that comes from working in the same place.
Going with the Flow about getting out of Beijing and visiting relatives
Escape from lockdown Thailand reopens for tourism
What home schooling? In meltdown
How America fell out of love with prep style
The water-cooler century The obituary: c1900-2020 At first they resembled factories; later they could seem almost like home. Henry Mance charts the rise and fall of the office
Swingeing London by Thomas Hale about life in London and moving to Shanghai