There is one theme that seems to be running through every asset class at present. Perhaps it is because we have been locked up for a year, and literally can’t wait until it is all over, but there is a distinct air of impatience in every circle of life. The pandemic has accelerated the decision-making process for everyone in every facet of our lives.

Mrs. Treacy and I have been discussing moving from Los Angeles for two years but there was never a push big enough to stir us into action. We looked at Las Vegas suburbs in 2019 and toured schools but my eldest daughter was accepted into one of the most prestigious high schools in Los Angeles, so we decided to linger.

The experience of living in Los Angeles during the lockdowns, from schooling to public safety, made us impatient for a change. Like many others we decided to move and have only been delayed by reapplying to schools for our daughters and finding a suitable home.

A team of researchers claims that it found evidence of multiple viruses — including several brand-new coronaviruses — in agricultural genomes from labs in Wuhan and other Chinese cities.

Genetic sequences of crops like rice and cotton released between 2017 and 2020 contained the entire genetic sequences of new viruses that seem to be related to human diseases like MERS and SARS, according to research the team shared in the preprint server ArXiv on Sunday.

The “unexpected discovery,” as the team put it, of the presence of dangerous human diseases in these agricultural research facilities, suggests that safety protocols may not be up to par — and, as the team argues, that viruses may have accidentally been released as a result.

It’s important to note that this is all coming from preprint research that hasn’t been vetted by an academic journal or other experts in the field. While four of the six study authors are affiliated with hospitals and universities in Spain, Canada, and Japan, the first two researchers listed in the paper are independent researchers without affiliations to any research institutes, and a third is affiliated with an LLC named after himself.

China is the wild west for genetic research. The level of control and care in research is a function of standards of governance.

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on March 5th. These reviews can be found via the search bar using the term “Secular Themes Review”.

The pandemic has been an accelerant. The full ramifications of what that means are becoming increasingly clear.

The pandemic took trends that have been in evidence for a while and exaggerated them. At the same time, it introduced new challenges which require new solutions.

Corporations operating without the safety net of cash on the balance sheet has been a feature of the markets for decades too. They continue to be bailed out when they get into trouble. There is no evidence that the trend of using all available means to buy back shares has ended. In fact, buybacks are back at pre-pandemic levels. Companies were touting “resiliency” last summer. It appears to have been just talk. Buybacks represent a powerful tailwind for stock markets that were absent for much of 2020 but are now back in force. 

A market optimist might brush off Friday’s massive liquidation as a one-off event — a huge stumble by a fabled player now in decline. But this is no time to be optimistic. Hwang is representative of, not distinct from, the rest of the hedge fund crowd. His bets are also their bets. He may have gotten margin calls faster because he was more leveraged. But his positioning is by no means unique — and that commonality is where trouble may lie. 

Take the trades involved. Media companies such as ViacomCBS and Discovery have net exposures that are the “highest level we have seen since 2016,” according to a recent note from the prime brokerage unit at Morgan Stanley, which, alongside Goldman, managed some of the block trades on Friday. Last week, when ViacomCBS was using the steep run-up in its stock to sell new shares and bolster its balance sheet, the pressure on leveraged hedge funds must have been intense. 

Rising yields and companies selling additional shares at rich valuations puts pressure on leveraged trades. It was inevitable that the rotation out of stay-at-home champions, who saw a one-time boost to business, would see a reality check in 2021. Last week’s block trades were an example of that.

Credit Suisse and Nomura took the brunt of selling pressure in the financial sector because of their net exposure. However, exposure has been limited within the broader sector so far.

China hasn’t been this frugal in its cash offerings to banks in almost a year.

The People’s Bank of China has avoided net injections of short-term liquidity into the financial system since late last month, increasing concern that access to funds is becoming more difficult. The CSI 300 is headed for its steepest monthly loss in more than two years.

Japan’s Nikkei is falling for a fourth straight day after the BOJ said last Friday that it’s scrapping its annual target for stock purchases.

Stocks in both China and Japan had gotten used to these forms from the central banks. Now this backing, while not going away, is ebbing, and that could mean less central bank handholding for equities. 

The PBoC has been quite vocal in stating they do not want a bubble to form. They have very different priorities from the Federal Reserve. China’s administration wishes to preserve social harmony at all costs. In their view that is the only way to ensure the continued survival of single party rule. That means they will prioritise stability over asset price growth in the property or stock markets.

If that means restricting liquidity to the banking sector and curtailing the reach of the tech sector, those are deemed acceptable measures for China. The ChiNext Index is full of smaller companies that purportedly represent high growth. The Index has experienced it largest pullback since the lows and will need to find support soon if the benefit of the doubt is to be given to the recovery.

Taiwan stepped up its fight against its worst drought in decades, further reducing water supplies to areas including a key hub of semiconductor manufacturing in the central part of the island in an effort to stop reserves from running dry.

The government issued its first red alert on water supply in six years Wednesday, warning that reservoirs in several parts of central Taiwan are running dangerously low. Authorities will cut the water supply to companies in two major science parks in Taichung by 15%, economics minister Wang Mei-Hua said at a briefing in Taipei.

Water will also be cut to non-industrial users across Taichung and Miaoli County two days a week, Wang said. The measures will come into effect from April 6.

While Taiwan Semiconductor Manufacturing Co. and Micron Technology Inc. both have chip-making operations in Taichung, Wang said the restrictions would not affect their production. TSMC’s headquarters further north in Hsinchu has been spared further restrictions for now.

TSMC says it plans to increase the amount of water it uses from tanker trucks but the new restrictions would not affect operations, according to an emailed statement. A Micron representative in Taiwan declined to comment, saying the company is now in a quiet period.

The relative dry spell is putting pressure on the Hua said government to ensure continued supplies to water-intensive industries, such as its crucial semiconductor manufacturing, at a time when global companies are clamoring for computer chips. A shortage of semiconductors has slowed output at automakers worldwide, prompting TSMC and its peers to run their fabs at close to full capacity to try and keep up with demand.

Taiwan’s usually ample supplies of water have plummeted after a significant drop in rainfall last year. The situation was further exacerbated by the fact that no typhoons made landfall in Taiwan in 2020.

Wang said earlier this month that Taiwan has sufficient water reserves to keep its technology companies operating smoothly until late May, when seasonal rains usually replenish supplies depleted during the drier winter months.

The meteorological situation adds to a new challenge to TSMC just as it’s grappling with competition from Samsung Electronics Co. and Intel Corp., which has unveiled a $20 billion plan to create a foundry business that will make chips for other companies.

The world is swiftly waking up to how dependent the global economy is on Taiwan. Rising geopolitical tensions, a global shortage of chips and water concerns mean there will be concerted efforts to ensure there is significant investment in additional sources of alternative supply.

“The message is clear that seeking government approvals in deals like these are a must.” said Ye Han, a partner at Beijing-based law firm Merits & Tree, who specializes in antitrust and M&A.

“While we haven’t seen cases where companies got broke up or mergers got unwinded, such evaluations are likely going on behind the scene.”

Didi Mobility Pte, a unit of ridehailing giant Didi Chuxing, and Japan’s SoftBank Corp. were also issued fines of 500,000 yuan each -- the maximum penalty possible -- for setting up a joint venture without permission. A ByteDance unit and its partner Shanghai Dongfang Newspaper Co. were also penalized the
same amounts for a 2019 partnership that created a video-copyright venture. ByteDance said the joint venture has since been canceled.

Technology companies like Tencent had previously carried out mega mergers and acquisitions through so-called Variable Interest Entity structures, which operate on shaky legal grounds. The new antitrust rules, accompanied by the fines handed down by the regulators, are a signal VIEs are now under
their oversight.

Being a Chinese billionaire is a dangerous profession. Wang Jian, head of HNA group, fell to his death while posing for a photo in France in 2018. Richard Lu, CEO of JD.com, was accused of rape in the USA the same year. Jack Ma fell foul of the Party late last year and disappeared from view for months. Lin Qi was murdered by a business colleague in December. In the eight years up to 2011 China executed 14 billionaires for various reasons including murder and graft.    

I am shocked at your remarks about China. It is not the China I know, and have seen develop over the last 40 years. A country where Harvard (Ash Center 9 July 2020) surveys found 95.5 percent of respondents were either “relatively satisfied” or “highly satisfied" with their government compared with 38% in the US.

The article from Politico is am interesting read, but does not mention that a partner of the Wuhan Institute was the US Galveston National Laboratory, of whose activities we know very little too.

Bad things happen in every country, including China and the US, but it behooves us to have a sense of proportion and get the facts both right and complete. Take one example: you mention a man in China who altered a gene to suppress HIV - he ended up in jail for breaking the rules.

I am sure you would embrace Deng Xiao Ping's instruction "find the truth through facts", and please recognize that most of the almost 1.5 billion people in China have just finished a perfecting satisfactory day!

And this from David Brown:                 

Thank you for this article and comment Eoin. On February 13 2020 I gave a presentation at my company's All Hands meeting about the viral epidemic in China. I made slides describing the evidence trail going back many years that indicated it was manufactured in the Wuhan lab. I removed those slides at the last moment as the meeting organiser gave me just 10 minutes for a 30 minute presentation - as you can imagine, the remaining content of the 1 hour meeting was trivia. Staff reaction to my presentation could be described as 'has he gone crazy!' They thought I was exaggerating. Nevertheless, I had them practice 3 days working from home, and we have not returned to the office since those days. I am sad to say that woke culture has come into the company as it has expanded over the past year with naive virtue-signalling new recruits, and I would be causing a storm if I now presented those slides showing the likely origin of the virus or showed them your comments. It's a sad world that has emerged in the past couple of years. I am glad I do not have many years to live.
 

Thank you both for these comments which are representative of the divide in perception. I might also add we all wish a mind such as David Brown’s will be with us for years to come.

No country is perfect and most have some part of their history they are embarrassed about.  However, there is the world of difference between countries with an independent judiciary and free press compared to authoritarian regimes. Freedom to discuss alternatives and to openly air grievances is the basis for western liberal society.

A little-noticed study was released in early July 2020 by a group of Chinese researchers in Beijing, including several affiliated with the Academy of Military Medical Science. These scientists said they had created a new model for studying SARS-CoV-2 by creating mice with human-like lung characteristics by using the CRISPR gene-editing technology to give the mice lung cells with the human ACE2 receptor — the cell receptor that allowed coronaviruses to so easily infect human lungs.

After consultations with experts, some U.S. officials came to believe this Beijing lab was likely conducting coronavirus experiments on mice fitted with ACE2 receptors well before the coronavirus outbreak—research they hadn’t disclosed and continued not to admit to. In its January 15 statement, the State Department alleged that although the Wuhan Institute of Virology disclosed some of its participation in gain-of-function research, it has not disclosed its work on RaTG13 and “has engaged in classified research, including laboratory animal experiments, on behalf of the Chinese military since at least 2017.” That, by itself, did not help to explain how SARS-CoV-2 originated. But it was clear that officials believed there was a lot of risky coronavirus research going on in Chinese labs that the rest of the world was simply not aware of.

“This was just a peek under a curtain of an entire galaxy of activity, including labs and military labs in Beijing and Wuhan playing around with coronaviruses in ACE2 mice in unsafe labs,” the senior administration official said. “It suggests we are getting a peek at a body of activity that isn’t understood in the West or even has precedent here.”

This pattern of deception and obfuscation, combined with the new revelations about how Chinese labs were handling dangerous coronaviruses in ways their Western counterparts didn’t know about, led some U.S. officials to become increasingly convinced that Chinese authorities were manipulating scientific information to fit their narrative. But there was so little transparency, it was impossible for the U.S. government to prove, one way or the other. “If there was a smoking gun, the CCP [Communist Party of China] buried it along with anyone who would dare speak up about it,” one U.S. official told me. “We’ll probably never be able to prove it one way or the other, which was Beijing’s goal all along.”

Back in 2017, the U.S. diplomats who had visited the lab in Wuhan had foreseen these very events, but nobody had listened and nothing had been done. “We were trying to warn that that lab was a serious danger,” one of the cable writers who had visited the lab told me. “I have to admit, I thought it would be maybe a SARS-like outbreak again. If I knew it would turn out to be the greatest pandemic in human history, I would have made a bigger stink about it.”

China is the wild west for medical research. The moral, ethical and safety considerations that slow down research in much of the developed world are ignored in China. That means if one wants to do research that would be frowned upon at home, you will find a welcome in China. The result is that all manner of experiments with new biomedical technology are taking place, often behind closed doors.

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on January 8th. These reviews can be found via the search bar using the term “Secular Themes Review”.

The rollout of vaccines to COVID-19 continues to accelerate and that will continue through the balance of the year and 2022. There is encouraging news about the number of different vaccines which have been approved and their success against variants. By the end of the year, the world will be inundated with doses which will provide at least some protection from the virus for anyone who wants it. That’s all the rationale any government needs for reopening the economy.

On Valentine’s Day 2020 Mrs Treacy and I went out for dinner with another couple. We talked about the news of a virus threat from China and how it could potentially cause ructions further afield. We told them we had stocked up on rice, meat, protein bars and batteries just in case. They thought we were crazy crackpots jumping at shadows.

It was hard to imagine then just how disruptive the decision to lockdown was going to be. A similar condition exists today. After a year of being confined to our immediate vicinity it is tempting to think this is how it will always be. The reality, however, is we are going to see a surge back to normalcy much quicker than most believe possible.

Humans are social animals and we yearn for social contact. We’ve been starved of that basic need for a year and we’ll overdose on it when we are able. That suggests we are looking at a boom in consumer activity over the coming couple of years.

There have been many false dawns in China’s quest for the yuan to challenge other major currencies. But underpinning the explosion this time lies a torrent of capital flowing into China’s markets, fueled by a frantic search for returns with over $14 trillion of debt globally paying less than 0%.

That appetite for some of the highest-yielding government bonds in the Group-of-20 countries has elevated interest in China to fever pitch and is generating demand for liquidity from investors looking to finance and hedge their investments. It’s also spurring volatility and attracting speculators who overlooked the market for years.

“It’s certainly a top currency in terms of the flow that we’re seeing,” said Kevin Kimmel, New York-based global head of electronic FX at Citadel Securities, one of the world’s biggest market makers. “Trading activity in the yuan has increased significantly.”

The shift comes as China continues to relinquish control -- albeit slowly -- of its tightly-managed currency, a linchpin of Beijing’s long-term plan to encourage its greater global use. China is considering easing restrictions on citizens investing in securities outside its mainland, a move that would facilitate two-way capital flows.

Capital is both global and mobile and it will always flow to the most attractive assets. There are no developed markets where one can pick up a yield above 1% in an appreciating currency. Investors have no other choice than to look elsewhere.

In doing so, they have to weigh how likely it is that tensions with China are likely to escalate. With a new US administration, the potential for surprises is lower and therefore the risk from investing in the renminbi is reduced but not eliminated. This trend of Renminbi strength has been very persistent since March and some consolidation will occur eventually.

The main reason seemed to be “growing unease in Beijing over Ant’s complex ownership structure and the people who stood to gain most from it”. The Street Journal said in a report on Tuesday.

“Behind layers of opaque investment vehicles that own stakes in the firm are a coterie of well-connected Chinese power players, including some with links to political families that represent a potential challenge to President Xi and his inner circle” the report added.

One of Ant’s investors is Boyu Capital, a private equity firm founded in part by Jiang Zhicheng. Jiang Zhicheng is the grandson of former Chinese leader Jiang Zemin, Many of Jiang Zemin’s allies have been purged in Xi’s anticorruption campaign, though he remains a force behind the scenes the WSF said in its report.

Many people are familiar with the fact that Chairman Mao was a prodigious reader of history. Few comment on the kind of history he focused on. His primary interest was in courtroom politics. He understood that he was now the emperor and that the only way to hold onto power would be to ensure his supporters were rewarded for their efforts. At the same time, they had to compete with one another for favour which strengthened his position. That’s how every dynasty functioned up to that point and he reintroduced the system of palace politics.

Always enjoy the service, Eoin and look forward to the daily updates. To better my understanding of reading charts, would you please walk me through the consistency pattern you see in the Commercial and Industrial Bank of China's chart that make its purchase, "shooting ducks in a barrel", as a very wise man would say. Thank you.

At The Chart Seminar we begin by trying to imagine ourselves as the judges at an international beauty contest. We are only interested in the most beautiful charts. Those that have either truly consistent trends or the potential to develop them. Now ask yourself what is beautiful above ICBC’s chart?

The share was listed in Hong Kong in 2006 and since then it has done nothing but range in a very volatile manner. That’s neither beautiful nor consistent, so we need to ask whether there is anything occurring that may change the outlook?

Firstly, thanks for the terrific service, it’s been so helpful in these turbulent times.  I was interested to read the subscriber feedback in today's comment. 

I agree with the comment that sometimes it’s quite hard to find investable ideas in some of the themes that you so accurately pick up on. 

For example, soft commodities/agricultural products, some direction as to likely beneficiaries would be really helpful.  I’m a UK based investor, so in general like to stick to our market or Europe and it has not been easy.  Perhaps Bayer?  ABF but the Primark exposure is confusing.  In the Eoin’s Favourite’s section of the chart library some of the categories do help, but there’s doesn’t seem to be one directly related to rising soft commodity prices other than farm machinery or fertilisers?

Lithium is another one where I am struggling to find the right investment, even though I looked at your collection of related companies.  As the price seems to have broken out of a long-term downtrend some suggestions as to likely beneficiaries would be really helpful, although understand that one must also do one’s own research.

With Bitcoin, which I’m not that keen to buy, but you highlighted the Greyscale Bitcoin Trust which although I’ve not invested in it was really helpful to have an idea related to the concept you were right about. 

Hope this feedback helps and thanks again.

And

I found the criticism yesterday, a bit harsh.  There are few sites that provide the breadth and depth that we get from FTM.  Here, in West Aust, I wake each morning to your market summary of the principal events.  I find it cost effective for that point alone.

The suggestion above regarding missed opportunities is one worth pursuing, not so much regarding the chartbook but for highlighting early chart indications of emerging opportunities.  I feel that perhaps FTM may report facts that are available elsewhere but the site is not fully exploiting your chart analysis skills that are not available elsewhere.  You should exploit your strengths and don't reproduce stuff that is, or soon will be, in the media. We all want to know where Eoin Treacy sees emerging or imminent changes. 

Thank you both for this feedback and your kind words. I am a firm believer in giving the people what they want. Afterall, why else would one subscribe. Let me address the challenges in the order they are outlined in the above emails.

There are two parts to most markets at present. There are the strong trends which have been in evidence for years and continue to perform. The new IPOs and SPACs also fall into this category because many of these companies have seen their values trend higher for years before they sought listings.

The other category are the catch-up plays which are only now just breaking out of their respective bases.

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on January 8th. These reviews can be found via the search bar using the term “secular themes review”. 

Highlighting secular themes has been a hallmark of this service for as long as I have been a part of it. I first met David Fuller in Amsterdam in 2003. He was giving a talk to Bloomberg’s clients and we went out for dinner that evening. His way of looking at markets, with a focus on suspending ego to see what the market tapestry is telling us, answered all of the questions I had about how to interpret
markets. I felt honoured when he asked me to come work with him a few months later.

The easy way to find secular themes to is to look at long-term ranges. Prices can so sideways for a long time, sometimes decades, and the whole asset class can be forgotten by investors. These kinds of markets need a catalyst to reignite demand. Once that new theme gathers enough pace, prices break on the upside because the supply side is not capable to responding in a timely manner to the new phenomenon. Sometimes that’s because they don’t believe in the new trend, or it may be because they simply do not have the financial wherewithal to expand. As the power of the new catalyst gathers, it takes time for supply to respond and the market will proceed higher until there is a robust supply response. That can take a long time because demand continues to grow as the new theme increases its dominance of investor attention.

In mainland markets, a gauge of interbank borrowing costs jumped 36 basis points to 2.78% on Tuesday, the highest level in a year. Futures on Chinese government bonds due in a decade were poised for the biggest decline since September, while the CSI 300 Index of shares in Shanghai and Shenzhen, which has been approaching 2007’s record high, fell 2%.

“The PBOC wants to bring investors out of the euphoria caused by abundant liquidity in December,” says Xing Zhaopeng, an economist at Australia & New Zealand Banking Group. “The PBOC is unlikely to loosen its purse strings at least this week, which will make cross-month liquidity very tight.”

PBOC Governor Yi Gang on Monday said the central bank will seek to support economic growth while limiting risks to the financial system -- a continuation of its existing policy stance. Yi said China’s total debt-to-output ratio climbed to around 280% at the end of last year.

In many respects China is running conventional monetary policy. The economy has been spared from an epic contraction and therefore the requirement for outsized liquidity to support growth is less compelling than in the OECD. It remains likely that China will be the first major economy to raise interest rates after the pandemic abates.

“To build small circles and start a new Cold War, to reject, threaten or intimate others, to willfully impose decoupling, supply disruptions, or sanctions, or to create isolation or estrangement, will only push the world into division and even confrontation,” he said.

Xi’s speech had been widely anticipated for the tone it would set for relations between the world’s biggest economies over the next four years. Though Xi did not name Biden by name, many of his comments were clearly targeted at the new U.S. administration.

Xi repeated many of the same talking points about multilateralism and “win-win” outcomes that he deployed in his last address to Davos four years ago, days before Donald Trump’s inauguration, but he also signaled that he does not intend to change course in the face of U.S. pressure.

“Each country is unique with its own history, culture and social system, and none is superior to the other,” Xi said, warning against imposing a “hierarchy on human civilization” or forcing one’s own systems onto others.

This all sounds very reasonable and is a perfect example of China’s efforts to exude a façade of reasonableness. Perhaps it would be better to measure China’s actions in the four years since Xi’s last speech to Davos where much the same call to embrace appeasement was made.

Much about the future of China’s most famous businessman remains unclear. Yet analysts said Wednesday’s video was a sign that worst-case scenarios -- such as jail time for Ma or a government takeover of his companies –- are probably now off the table. It’s unlikely Ma would have participated in the event without at least tacit approval from Beijing; state-run media including the Global Times were among outlets that posted snippets of his talk or wrote stories about his appearance.

“There’s still a lot of uncertainty on regulators’ next moves, but this does mean the status of Jack Ma is much better than a lot of people speculated,” said Fang Kecheng, a professor at the Chinese University of Hong Kong.

There is no getting around the fact that Ant Financial prospered in the grey area between consumer finance and traditional banking. By offering a higher interest rate than banks, it grew into a massive deposit taking operation without having to submit to banking regulation. When he publicly showed distain for banking regulators, it signalled Ma had forgotten that his success was based on the ability of Ant Financial to operate outside the regulatory umbrella of the banking sector. They dropped the hammer on him and the company will now be part of the regulatory environment. It remains to be seen if the rule breaking on deposit rates will still be tolerated. 

A link to the full report is posted in the Subcsriber's Area.

The US government expects to issue about $1 trillion more bonds than the Fed currently expects to buy in 2021. Without a clear move to boost the amounts committed to the bond buying program yields will inevitably rise. It’s a simple supply and demand argument. Of course, no one really believes the Fed will fail in its commitment to provide assistance while unemployment is well above trend.

Until the beginning of last year you often spoke on the theme of the early stages of a secular bull market. David had begun speaking about it as long as 4 years ago. But with the onset of the pandemic, you have been largely silent about it. Has it stalled or, in your view, already peaked?

Thank you for this important question. In October 2008, I remember sitting at my desk and looking at the calculation that the S&P500 was sitting on the widest overextension relative to the 200-day ever. Acceleration is always a trend ending and the crash signalled the beginning of the bottoming process. By the time Wall Street reached its nadir in March 2009 many instruments were well off their lows and by the end of the year the leaders were making new highs.

Gold, commodities, ASEAN and technology took off. Of these, technology is the only one which had uninterrupted staying power all the way through the bull market to date.  

I started writing Crowd Money in 2011. At the time a host of big international companies, with global franchises, that dominate their niches were breaking out of long-term ranges. It was a clear signal that a new secular bull market was underway. By the time the book was published in 2013, it was still a minority view that a new bull market was underway.

China has already been moving steadily to secure iron ore resources. Some of its overseas mines include Sinosteel Corp.’s Channar mine joint venture in Australia and Shougang Group Co.’s Marcona project in Peru. But the focus is on Guinea, where some of China’s biggest state-owned firms are close to getting the go-ahead to develop Simandou, the world’s largest untapped iron ore deposit.

“It’s entirely feasible that China could raise its self-sufficiency in virgin and secondary iron units to 45% from its current level of just over 30% if it successfully develops the Simandou project,” said Navigate Commodities co-founder Atilla Widnell.

To reach 45%, Simandou has to produce 200 million tons a year to displace imports from other countries, said Widnell. Still, “it may be a stretch” to achieve that level by 2025 given geographical challenges in the area, and he estimates that with the current pace of development, the goals will be reached by 2030.

Ownership of Simandou has been a point of contention for much of the last decade. Payments to politicians by Rio Tinto eventually resulted in the company selling all of its interest to Chinalco in 2017. That provided China with full ownership of the asset bloc and it has no issue with making payments to politicians to ease the development of the mine.

5. The economy develops momentum on its own because of pent-up demand, and depressed hospitality and airline stocks become strong performers. Fiscal and monetary policy remain historically accommodative. Nominal economic growth for the full year exceeds 6% and the unemployment rate falls to 5%. We begin the longest economic cycle in history, surpassing the cycle that lasted from 2010 to 2020.

6. The Federal Reserve and the Treasury openly embrace Modern Monetary Theory as their accommodative policies continue. As long as growth exceeds the rate of inflation, deficits don’t seem to matter. Because inflation increases modestly, gold rallies and cryptocurrencies gain more respect during the year.

7. Even as energy company executives cut estimates for long-term growth, near-term opportunities are increasing. The return to “normal” increases both industrial activity and mobility, and the price of West Texas Intermediate oil rises to $65/bbl. Rig counts increase and energy high yield bonds rally soundly. Energy stocks are among the best performers in 2021.

8. The equity market broadens out. Stocks beyond health care and technology participate in the rise in prices. “Risk on” is not without risk and the market corrects almost 20% in the first half, but the S&P 500 trades at 4,500 later in the year. Cyclicals lead defensives, small caps beat large caps and the “K” shaped equity market recovery unwinds. Big cap tech is the source of liquidity, and the stocks are laggards for the year.

9. The surge in economic growth causes the 10-year Treasury yield to rise to 2%. The yield curve steepens, but a concomitant increase in inflation keeps real rates near zero. The Fed wants the strength in housing and autos to continue. As a result, it extends the duration of bond purchases in order to prevent higher rates at the long end of the curve from choking off credit to consumers and businesses.

If we contrast this list of potential surprises, I get the feeling they are less ambitious than in years past. I have heard the rumour from many quarters that President Trump is planning to set up his own TV station and there is plenty of speculation that the entire effort to overturn the election is to create a sound footing for a re-run at the title in 2024.

"SMIC could be blocked from 7nm or more advanced technology while overseas rivals like Taiwan Semiconductor Manufacturing Co. dominate the market."

​With the massive importance of semiconductors, one wonders if this alone could be the trigger that leads to China invading Taiwan - and the Third World War!

Thank you for this question which raises an important topic. Semiconductors are a major choke point for China’s goals of achieving and sustaining global hegemony. Therefore, they will do whatever is necessary to secure supply lines. There are only a limited number of ways that can be achieved. Domestic manufacturing is difficult, time consuming and expensive. However, they are certainly pursuing this goal by funding new companies, attracting talent from overseas and developing next generation technologies like quantum computing.

Some lidar suppliers gained Tuesday after Reuters reported that Apple Inc. plans to build a self-driving car for consumers and is tapping outside partners for elements of the system as it develops its own battery technology.

Apple is approaching companies for some parts, including lidar sensors that provide autonomous cars with a real-time, 3-D view of the world, the report said, citing unidentified people familiar with the matter.

Lidar supplier Luminar Technologies Inc. rose as much as 12% on Tuesday, while Velodyne Lidar Inc. surged 16%. Blank-check firms that are bringing more lidar players to the market also advanced: InterPrivate Acquisition Corp. climbed 17%, while Collective Growth Corp. jumped as much as 24%.

Apple has been working on driverless car technology since 2014, but pared back its ambitions from a full-fledged vehicle in 2017, Bloomberg News has reported. Since then, Apple has been working on the underlying autonomous system. The company has been deciding whether to attach this system to its own car, or existing vehicles, or to partner with an established carmaker, Bloomberg News reported earlier this month.

Apple enjoys an almost 40% gross margin on its iPhones and tablets. Porsche has about a 47% gross margin on the 911 and Ferrari has a more than 50% gross margin on its cars. Tesla’s is 16.5%. Toyota’s is 18% and Volkswagen’s is 19.5%. No mass market producer has been able to achieve margins on the scale technology companies are accustomed to.

Within the company, engineers are scrambling to assess the fallout and figure out workarounds to secure the equipment it needs, much like Huawei did two years prior, another person familiar with the matter said. At issue is the administration’s focus on drawing a line at 10-nanometer technology, banning the sale of equipment intended for use in more advanced processes. SMIC could conceivably repurpose 80% of older-generation gear to crank out more advanced chips, but that tactic won’t sustain production for the longer term and much depends on how far President-elect Joe Biden decides to take the rules, a third person close to the situation said, asking not to be identified discussing sensitive matters.

“The company has already got critical equipment and materials needed to continue production,” said Xiang Ligang, Beijing-based director-general of the Information Consumption Alliance. “In the past, China wasn’t too sensitive about the technological bottlenecks it has. But now, Beijing is fully aware of the potential damage and is determined to solve these issues.”

Chinese government-backed SMIC, a manufacturer of chips for global names from Qualcomm Inc. to Broadcom Inc., relies on U.S. gear for its longer-term technology road map. While its engineers may be able to sustain research and output in the short run, the latest sanctions basically freeze its capabilities while the industry advances. If a Biden White House takes it to the max, SMIC could be blocked from 7nm or more advanced technology while overseas rivals like Taiwan Semiconductor Manufacturing Co. dominate the market. The heightened scrutiny may also discourage clients leery of dealing with the uncertainty.

Self sufficiency in semi-conductors is a central policy objective for China. It is the basis on which the country seeks to compete with the USA in future. China may be able to do without Australian coal or wine but it has no hope of competing effectively on the geopolitical front without securing the supply line for technology’s basic ingredients.

Yiwu, a city in eastern China known for making products such as flags and badges, has not only switched off all its street lights during the evening but has forced factories to cut working hours by up to 80 per cent until the end of this year.

“We are not living a normal life when our factory can only work two days a week and the streets are dark at night,” said Mike Li, owner of a plastic flower factory in Yiwu.

Chinese authorities have blamed these problems on a combination of an unusually cold winter in parts of the country and high energy demand.

Power plants, however, said their operation had also suffered from the suspension of Australian coal imports.

Official data show Chinese plants obtained about 3 per cent of their thermal coal from Australia last year. The ratio, said an official at trade association the China Electricity Council, could exceed 10 per cent in more developed provinces that are drawn to the high quality of Australian coal.

“The import ban doesn’t make economic sense,” said the official.

Christmas is not a holiday in China but Chinese New Year is. Therefore, December is the time when orders are placed for delivery in January because nothing tends to get done over the two-week Spring Festival break. The slowdown in manufacturing capacity across many of China’s major industrial areas is likely to have a knock-on effect of delivery timelines towards the end of the quarter. That suggests inflationary pressures will mount as a result of this trend of putting politics ahead of the economy.

One reason it hasn’t leaned on its balance sheet as much as global peers is the PBOC largely handed the task of increasing money supply and lowering interest-rates to state-owned banks. It cut bank reserve-requirements, meaning they had more cash to dole out in loans.

With the economy growing again, policy makers have signaled they want a more sustainable pace of credit expansion. By contrast, the Fed, European Central Bank and Bank of Japan have all announced plans to maintain and step-up stimulus into the next year.

“Advanced economy central banks will try to use negative real interest rates and inflation to erode the real value of their sovereign debt,” said Andrew Sheng, chief adviser to China’s Banking and Insurance Regulatory Commission. “This is why real money flows will go to the economies that show growth, higher productivity” and steady monetary and exchange rate policy, he said.

The difference in yield between Chinese government bonds and U.S. Treasuries is already near record levels, with many market players expecting the gap to widen further next year

The Chinese approach to the pandemic has been to allow companies to issue a lot more debt and to give banks the leeway to facilitate that practice. That has occurred despite the uptick in corporate defaults. That has amounted to an addition CNY5 trillion in debt issuance this year or an increase of about 40% over the peaks of the last four years.

Very interesting interview for those interested in our regional and international affairs Just ignore the first 3 minutes of the intro in the Malay language if you don't understand Bahasa.

Worth 93 minutes of you time. Download & watch at your leisure.

Kishore Mahbuhani, a Singaporean diplomat, Mahbuhani is brilliant.

Thank you for this video which I agree highlighted a number of interesting themes. The challenge for governments in Asian countries is how to balance the demands for loyalty coming from the world’s superpowers. That’s a particular challenge for those that have historically depended on US support for markets and military protection. They now see their primary growth engine in China while China’s Belt and Road program is the primary source of FDI for many potential projects. 

China’s household debt ballooned in the first half of the year, rising by about $380 billion, according to new Bank for International Settlements data. That increase was almost four times as large as the second-place U.S. And it compounds one of China’s biggest economic vulnerabilities.

It has been widely reported that China’s industrial production and exports have helped to power its recovery this year. But the other leg of the recovery is the continued rapid rise of real-estate investment, which is set to outstrip GDP growth again in 2020, as it has in 16 of the past 17 years.

Interest rates this year fell sharply in most countries, but the People’s Bank of China has resisted this trend. That means that whereas borrowers in the U.S. were at least able to refinance real-estate loans, Chinese borrowers are left with largely unchanged debt-servicing costs.

A common sence way of looking at the market is to buy the assets that domestic investors favour. In the USA that’s equities, in Germany it's bonds and in China it is properties. A portfolio made up of that mix would have done rather well over the last few decades.

Generally speaking, an investor’s primary motivation for making a portfolio allocation to emerging market equities is the desire to tap into superior structural growth. However, equity market returns rarely correlate tightly to economic growth. There are many attractive secular growth companies in emerging markets—and they exist regardless of the economic growth conditions of their domestic economies. Investors wanting to tap into the powerful long-term benefits of superior structural growth trends can benefit from seeking out highly active strategies. In our experience, a strategy succeeds by continuously seeking out innovative companies with superior growth trajectories. A clear and consistent investment philosophy and repeatable investment process can help to ensure that a portfolio reflects bottom-up decisions that incorporate the superior growth available in EM equities.

The growth opportunity set is bigger than is generally thought. EM companies face challenges and problems different from those of their developed market counterparts, but their distinct circumstances often spur them to innovate and disrupt existing practices. EM companies are moving up the value chain, from export-oriented business models built on low-cost labor and cheap manufacturing to higher-value-added businesses based on technological and scientific innovation. Low recognition of these dynamics by investors and indexes creates an opportunity for growth-minded investors. Add to the mix companies that execute well to exploit a superior economic growth backdrop, and the opportunity set expands.

A link to the full report is posted in the Subscriber's Area.

China’s success in developing domestic champions has been truly impressive and they are now among the largest companies in the world by market cap and revenue. Success in expanding internationally has been limited in the technology sector to the Chinese diaspora because the global market tends to be much more competitive than the sheltered environment domestically.

On November 24th I posted a review of candidates I believe likely to prosper in the emerging post-pandemic market. It was well received by subscribers so I will post an update on my views on the first Friday of the month going forward. That way subscribers can have an expectation that long-term themes will be covered in a systematic manner and will have a point of reference to look back on.

Media hysteria about the 2nd or 3rd waves has not led to new highs in the number of deaths. The success of biotech companies in deploying vaccines means there is going to be a substantial recovery in the economic activity in 2021 and going forward.

The stay-at-home champions saw their sales growth surge in 2020. It will be impossible to sustain that growth rate in 2021. That’s particularly true for mega-caps. One-way bets on the sector are likely to work less well in the FAANGs going forward.

This is an interesting if alarming piece about China and adds weight to your observations about war.

Thank you for this interesting article which may be of interest to subscribers. Here is a section:

In the meantime, though, the distinction between Earth and space has been blurred. Geopolitics used to be Earth-bound, world war was war between continents. Now it isn’t. China is ahead on this. Clausewitz is taught in its military academies and so too is the Prussian argument for a Feldherrenhügel, the mound from which commanders can direct battles. Space is the ultimate “higher ground” from which all strands of a battle can be monitored and directed. That is why the moon is more than a sentimental prize.

A senior Chinese general was quoted in 2016 as saying “the space between the Earth and the moon will be strategically important for the great rejuvenation of the Chinese nation”. The head of the Chinese lunar mission says “if we don’t go there now, even though we are capable of it, then we will be blamed by our descendants. If others go, then they will take over.”
 

I hope life for you in California is more fun than it is here in England. But let's hope we really are past the low point as far as the virus is concerned. I had thought that would be true for economies too, but this latest move by President Trump (summarised in the article by Ambrose Evans Pritchard) does raise questions. With this move, which asset classes do you think will benefit and which will lose on a 3-6 month timescale?

Best wishes to you and family. 

Thanks for the well wishes and this article which may be of interest to the Collective. All is well with us since the streets were blessedly free of protestors following the election. I guess they got the result they wished for. Here is a section from the article:

He instructed Fed chairman Jerome Powell to return the unused portion of a $454bn (£342bn) account approved by Congress during the market meltdown in March. This seed money gave the Fed $4.5 trillion extra lending power under a policy of 10:1 leverage and had an electrifying effect on market confidence, helping avoid the errors made in 2008.

Krishna Guha from Evercore ISI said the Fed’s market stabilisation policy had been politicised. Congressman Bharat Ramamurti, a member of the House oversight committee on stimulus, called Mr Mnuchin’s move an unjustified and ideological decision by the treasury department.

The Fed retains its monetary policy powers and can purchase further US treasury bonds but that is a blunt tool at this juncture unless it is married to aggressive fiscal expansion, which the Republican Senate has vowed to block.

The Fed is concerned that more QE will chiefly inflate asset prices without doing much to help the real economy, exacerbating social inequality.

Congress stripped the Fed of its discretionary powers under Article 13 after the Lehman crisis. The Fed now needs permission from the treasury to go beyond its normal mandate. This was granted immediately during the panic in late March.

#1: A global synchronous recovery: We expect a broad-based recovery, both geographically and sectorally, to take hold from March/April onwards. Driving this synchronous recovery will be a more expansive reopening of economies worldwide and the extraordinary monetary and fiscal support now in place. Global GDP, already at pre-COVID-19 levels (based on seasonally adjusted GDP levels), continues to accelerate and is on track to resume its pre-COVID-19 trajectory by 2Q21. We expect China to return to its pre-COVID-19 path this quarter, and the US to reach it by 4Q21.

#2: EMs boarding the reflation train: After a prolonged period in which EMs have faced a series of cyclical challenges, macro stability is now in check. With the COVID-19 situation improving in a broad range of EMs, their pace of recovery is catching up. EM growth rebounds sharply in 2021, helped by a widening US current account deficit, low US real rates, a weaker dollar, China’s reflationary impulse, and EMs ex China's own accommodative domestic macro policies.

#3: Inflation regime change in the US: We see a very different inflation dynamic taking hold, especially in the US. The COVID-19 shock has accelerated the pace of restructuring, creating a significant divergence between the output and unemployment paths. With policymakers maintaining highly reflationary policies to get back to preCOVID-19 rates of unemployment quickly, wage pressures and inflation will pick up from 2H21. We expect underlying core PCE inflation to rise to 2%Y in 2H21 and to overshoot from 1H22, with the risk that it happens sooner.

A link to the full report is posted in the Subscriber's Area.

With millions of people out of work it is easy to form a gloomy picture of economic potential. However, even at a US unemployment rate of 10%, there are still 90% of people with jobs. Moreover, many people who have held onto their employment have boosted savings this year.

When 90% of people come through a crisis in OK shape and a significant minority come out ahead, there is ample scope for a significant bounce back in activity. There is a great deal of pent up demand in the global economy and all that cash on the side lines is fuel for bull markets. The fact monetary and fiscal policy is aimed to improving the outcomes for the remaining 10% suggests loss credit and low rates are here to stay.

CEP will connect about 30% of the world’s people and output and, in the right political context, will generate significant gains. According to computer simulations we recently published, RCEP could add $209 billion annually to world incomes, and $500 billion to world trade by 2030.

We also estimate that RCEP and CPTPP together will offset global losses from the U.S.-China trade war, although not for China and the United States. The new agreements will make the economies of North and Southeast Asia more efficient, linking their strengths in technology, manufacturing, agriculture, and natural resources.

The effects of RCEP are impressive even though the agreement is not as rigorous as the CPTPP. It incentivizes supply chains across the region but also caters to political sensitivities. Its intellectual property rules add little to what many members have in place, and the agreement says nothing at all about labor, the environment, or state-owned enterprises — all key chapters in the CPTPP. However, ASEAN-centered trade agreements tend to improve over time.

Southeast Asia will benefit significantly from RCEP ($19 billion annually by 2030) but less so than Northeast Asia because it already has free trade agreements with RCEP partners. But RCEP could improve access to Chinese Belt and Road Initiative (BRI) funds, enhancing gains from market access by strengthening transport, energy, and communications links. RCEP’s favorable rules of origin will also attract foreign investment."

The ratification of a free trade deal between China and much of Asia and Australasia is a significant bonus for its ambition of enmeshing as many countries as possible in dependency on its economy. China is already a major destination for exports from the wider region as well as a source of manufactured goods. This agreement will expand its role in the debt/credit markets too.

With your comments yesterday on the video commentary about investing in China, I would appreciate some assistance. Bearing in mind your comments, and David's mantra that "Governance is everything", I do have some concerns about my investments in China. They are all through ITs (such as Aberdeen Asian Income and Schroder Oriental Income) but all have high exposure to China + Hong Kong (16% and 30% for those 2 ITs). Do you know of any income funds that invest in Asia excluding China? Many thanks for your continuing excellent service.

Thank you for this question which gets to the root of many of the conflicting arguments around monetary policy, growth prospects and geopolitics. Interest rates have been risible in Europe, Japan and North America or more than a decade. That promoted growth opportunities over value and in the process compressed yields. Hong Kong and the wider Chinese market offer some of the most attractive income opportunities globally and are not easily replicable.

Resolution requires concerted and consistent effort over a long period of time. It took 25 years to reform Finland’s primary education system before it topped the league in PISA scores. Singapore achieves superior health care outcomes at 25% of the cost of the US and 40% of Europe thanks to a system which gives consumers “skin in the game”.  It’s now thirty years in the making. Denmark’s commitment to wind power dates back to the 1970’s when the benefits were egregiously uneconomic. More than half of its energy is now from renewable sources. Ontario Teachers’ Pension Plan has evolved over thirty years since Lamoureux convinced Canada’s labor unions that the fund needs to attract and pay the best people from Goldman Sachs and Blackrock to work for them, rather than paying them fees.  Ontario Teachers’ has had an annualized total-return of 10% since reforms were made in 1990, and retirees’ pensions are fully funded with 100% inflation protection provided on all pensions.

It may be far-fetched to think that small, successful, experimental nations can fill this vacuum of leadership, but the world is begging for consistent leadership and a positive example, so an opportunity presents itself to step up.  

There is a good reason small countries tend to succeed in niche areas, and are often more successful than larger countries on specific metrics. They have to. Israel, South Korea or Switzerland have spent lifetimes grappling with the uncertainty of geopolitics. They understand the reality that if they don’t succeed on their own no one is going to help them.

Ireland is small rainy island on the tip of Europe, without a commitment to education and active courting of FDI, coupled with low corporate taxes and light regulation it would be a very dreary place indeed.

“It is extremely difficult to project growth 15 years out and, although we view growth of 5%-6% over 2021-2025 as likely, growth above 5% over 2026-2035 appears quite challenging,” Nomura Holdings Inc. economists, led by Ting Lu, wrote in a note.

To overcome some of those challenges, the Communist Party is promising to build the nation into a technological powerhouse and focus on quality growth over speed. Key to that objective is developing a robust domestic market and becoming self-reliant in technology -- especially in chips, the building blocks for innovations from artificial intelligence to fifth-generation networking and autonomous vehicles.

The greater the size of the economy, more difficult it is to grow quickly. That is why standards of governance are so important. If graft and political ideology gets in the way of innovation and the pass-through effect to a greater wealth effect the headwinds to growth only growth stronger. China has demonstrated repeatedly that subservience to the party comes ahead of every other factor. That was particularly clear this week with the smack down of ANT Financial’s IPO.

Ant will have to make changes that include capital increases at its lucrative micro-lending units, people familiar with the matter said. Ant must also reapply for licenses for the units to operate nationwide, the people added, asking not to be identified discussing a private matter.

It’s unclear how extensively Ant will have to overhaul its business to meet all of China’s new regulations, which took effect on Nov. 1 and were designed to rein in systemic risks posed by companies that straddle at least two financial business lines. Representatives for Ant and China’s securities regulator couldn’t immediately comment on the issue after business hours.

The Shanghai Stock Exchange cited a “significant change” in the regulatory environment when it unexpectedly put a stop to Ant’s $35 billion share sale on Tuesday, upending what would have been the biggest market debut in world history. The move came just two days before Ant was due to start trading and a day after Jack Ma, the company’s billionaire founder, was summoned to a rare joint meeting with the country’s central bank and three other top financial regulators.

ANT Financial ignored banking regulations to grow its business at an exponential rate. The government was willing to look the other way for a long time which created the illusion they were willing to allow the company to continue to flourish as an innovation within the broader technology sector. That impression was dispelled today.

As expected, the plenum declared that China had met the critical political goal of becoming a “moderately prosperous society” in 2020. By the end of the year, China’s GDP is expected to reach nearly 100 trillion yuan (RMB)—equivalent to $14.3 trillion—a figure higher than the plan’s forecast of RMB 92.7 trillion, which makes China’s economy in nominal terms about 66.7 percent the size of that of the United States in 2019 ($21.4 trillion), up from 40.6 percent the size of the United States in 2010. China reportedly lifted 55.75 million people out of poverty and created 60 million jobs in urban areas over the past half-decade. By the end of 2020, there will be basic medical insurance coverage for 1.3 billion and basic pension support for nearly 1 billion citizens.

Looking ahead, the plenum emphasized that the 14th Five-Year Plan will build on the 13th Five-Year Plan’s principles of innovation, regional coordination, green development, international openness, and social equity. That said, there was a distinct emphasis on strengthening the domestic economy. There was no mention of a growth rate target; instead, the country will focus on improving quality and raising productivity. The plan will highlight China’s need to gain technological independence; become a powerhouse in manufacturing, cyber, and the digital economy; and raise China’s international competitiveness. At the same time, China will need to expand domestic consumption as a share of the economy, which will be dependent on raising wages, building a more complete social safety net, and expanding economic opportunities in rural China.

The middle-income trap has been escaped by only a handful of countries. South Korea, Singapore and Taiwan spring to mind. They have mustered the wherewithal to evolve their governance structure to become more efficient and successfully transitioned to high-end manufacturing and services. Relatively small populations relative to the scale of their exports has been a significant aid in achieving those goals.

Markets were born free but are now everywhere in chains. Cash deposit rates are now derisory, but with added bail-in risk. Bond yields are likely to remain squashed indefinitely, helped by governmental funny money. So, cash and bonds are largely out of the question. The one market too big for even the world’s central banks collectively to kick around is the currency market. So, we would not be surprised to see some kind of reset develop there. Our way of anticipating that reset is to own precious metals and the shares of sensibly priced mining concerns in “safer” jurisdictions. Because we anticipate an ultimately inflationary outcome due to those aforementioned torrents of funny money, we value claims on the real economy in the form of equity ownership of cash-flow generative businesses run by principled, shareholder-friendly management with an excellent track record of capital allocation, especially when such stocks can be bought at a discount to their inherent worth. And because we frankly have no clue how the Great Suppression will necessarily play out, we hold uncorrelated (systematic trend-following) funds that offer the potential to zig when the markets finally and conclusively zag. Our watchword: if in doubt, diversify.

Not the sort of commentary we would prefer to be sending out into the world. But sometimes spades must be identified as such. On a more positive note, some wisdom from the ages: this too shall pass. It just better gets a bloody move on.

The question for investors is whether the ECB announced additional stimulative action to support the economy or arrest the advance of the Euro. The region’s plan for climbing out of the lockdown-induced recession will be founded on exports. A weaker currency would certainly help and the ECB is delivering.

Australian central bank chief Philip Lowe’s move to emphasize current inflation rates rather than projections suggests the economy will be allowed to run hotter with interest rates staying lower for longer.

Lowe conceded that assessing the outlook is problematic when inflation dynamics aren’t well understood and the world is so uncertain.

“We will now be putting a greater weight on actual, not forecast, inflation in our decision-making,” Lowe said, outlining the RBA’s latest thinking on prices in a speech on Thursday that hinted at further easing to come.

Annual inflation has averaged 1.7% since Lowe took the helm at the Reserve Bank of Australia in 2016, versus a target of 2%-3% over time, and has now dropped below zero.

 

Central banks have no choice but to pursue inflation with every tool they have available to them. Not only has the pandemic unleashed massive uncertainty, but their is no plan for how the debt taken on to combat it will be repaid.

European Central Bank officials agreed at their latest policy meeting to avoid any complacency in their battle against the recession, and to counter investors’ perception that the euro would inevitably strengthen.

The account of the Governing Council’s Sept. 9-10 meeting showed officials fretting that currency gains had offset some of their monetary stimulus, with a “material impact” on the outlook for consumer prices. Chief economist Philip Lane said inflation expectations were at “very depressed” levels and at risk of falling further.

“In the prevailing environment of high uncertainty, keeping a steady hand with respect to monetary policy was seen as most appropriate,” according to the document published Thursday. “At the same time, the case was made for keeping a ‘free hand’ in view of the elevated uncertainty.”
 

One of David’s most insightful adages is “no country wants a strong currency, but some need a weaker one more than others”. Between March and August, the USA did the most to devalue its currency. The massive supply of money supplied accounted for about half of all global liquidity. That has been one of the primary factors behind the Dollar’s decline. No currency exists in isolation so if the Dollar went down, a lot of currencies expressed upward pressure.

In fact, China is responding to these changes in corporate behavior using a variety of techniques, including becoming a larger and more powerful domestic economy that relies on its own production (what President Xi Jinping calls “domestic circulation”). In the current environment China may also better leverage its higher interest rate curve (both real and nominal) to try to attract capital to support this more permanent shift towards a consumption economy. A more stable currency outlook is also helping. Our bottom line: Expect a heightened rivalry across multiple facets of the relationship, including some decoupling. However, given the absolute size of the opportunity in China, now is actually the time to think through different ways to harness China’s growth in thoughtful, risk-adjusted fashion, particularly investments that reward long-term, patient capital. Specifically, we think that further implementation of domestic circulation as a policy will lead to the rise of more domestic corporate leaders, and as a result, more – not less – corporations will look to find ways to serve this emerging consumption base.

China’s golden week ends today and the market opens back up tomorrow. Over the last month there have been significant announcements about investments in infrastructure, boosting the consumer economy and championing the green energy movement. These points all likely to become actionable in the 4th quarter.

Earlier this year, China agreed to buy U.S. crude as part of a broader deal meant to ease rising trade tensions between the two world powers. The Trump administration agreed to cut some tariffs on Chinese goods in exchange for purchases of American farm, energy and manufacturing exports. ~

China's buying so far is a long way from fulfilling commitments made in that deal, and to some extent it is simply restoring crude flows that were cut off amid the earlier U.S.-China trade tensions. As part of a deal, Beijing agreed in January to buy $52.4 billion worth of oil and liquefied-natural-gas from the U.S. by the end of 2021. The buying was delayed by the outbreak of the Covid-19 pandemic, but has ratcheted up more recently.

“The Chinese had to catch up," said Petro-Logistics Chief Executive Daniel Gerber. That is now upending traditional oil-trade routes world-wide and further depressing some prices. Global prices have been hammered by falling demand caused by the pandemic.

Amid the new U.S. shipments to China, Saudi Arabia recently cut prices for its crude for buyers in Asia, a move that could make that oil more attractive to other regional buyers. It is also now resorting to storing unsold oil at home and overseas, including at depots in Egypt, Singapore and China. Saudi Arabia's domestic crude-oil inventories rose 7% to 81 million barrels in the two weeks to Sept. 20, a level not seen since June, said Paris-based commodities-analysis company Kayrros.

China has a significant energy deficit and that is not about to change in the next few years. In fact, assuming continued economic recovery it may widen significantly. At the other end of the spectrum the USA, Russia and Saudi Arabia has large quantities of oil and gas available for export. That pretty much ensures competition for end markets will remain active and explains why Russia and the USA remain at odds on a wide number of issues. 

Dear Eoin, I suppose you are doing well since I’ve been following your research through all these months. Pandemic changed a lot of things, but we had the crisis of our own. We built the leading Russian business daily but this year, after more than 20 years of our efforts, it was effectively taken from us through machinations brought about by forces close to Kremlin. You can have a look, this is the early July statement by Reporters Without Borders 

By now, almost all members of the newsroom have left, Vedomosti degraded very quickly and stopped being independent, honest and objective. But a group of journalists and editors including myself have launched the new online publication VTimes - https://vtimes.io . The full-fledged launch including new web-site is scheduled for October but we’ve been active with our articles and podcasts on social platforms, such as Telegram, Facebook etc., since August and feel tremendous support from readers many of whom switched from Vedomosti to VTimes. Last week we began crowdfunding campaign that can be supported from anywhere. I have already used your most valuable comments in my stories for VTimes and will continue to do so.

I am writing now about rather quick rebound of the global trade. In particular, according to calculations by the Kiel Institute for the World Economy, the trade volumes recovered about half of this year’s historic loss in four months while it took 13 months after 2008 crisis had begun. Some other information on the issue can be found in the WSJ story - 

And major exporters of goods, such as China, Korea, Germany, now recover quicker than economies more depending on services. You several times wrote about US-China trade from your personal point of view, or rather your wife’s business. I also remember you describing situation in Los Angeles port. Can you tell, what is the situation now, for me to get first-hand experience?

Thank you for this update and please accept my condolences in seeing your work disappear into the hands of an interloper. I also wish you the best of luck with your new venture. Journalistic independence is under threat all over the world, not just in Russia. The price for holding a contrary opinion is rising all the time. That’s a clear sign of deteriorating standards of governance globally which suggests the risk premium is rising.

As a result of their longer history and their more intensive studying of it, the Chinese are much more interested in evolving well over much longer time frames than Americans, who are much more interested in making quick hits—i.e., the Chinese are more strategic than Americans, who are more tactical.  The arc that Chinese leaders pay the most attention to is well over a hundred years long (because that’s how long good dynasties last) and they understand that the typical arc of development has different multidecade phases in it, and they plan for them.  For example, the first phase, which occurred under Mao, was when the revolution took place, control of the country was won, and power and institutions were solidified.  The second phase of building wealth, power, and cohesiveness without threatening the leading world power (i.e., the United States) occurred under Deng and his successors up to Xi.  The third phase of building on these accomplishments and moving China toward where it has set out to be on the 100th anniversary of the People’s Republic of China (PRC) in 2049—which is to be “a modern socialist country that is prosperous, strong, democratic, culturally advanced, and harmonious,” which would make the Chinese economy about twice the size of the US economy[4]—is occurring under Xi and his successors.  Nearer-term goals and ways for getting toward these goals are set out in nearer-term plans like the Made in China 2025 plan,[5] Xi’s new China Standards 2035 plan, and the usual five-year plans.[6] 

There is a quote from the movie Pirates of the Caribbean which is doing the rounds on the social media. It’s “part of the ship, part of the crew” The Communist Party equates itself with the country. That means that if you are Chinese you owe fealty to the Party. That belief is at the essence of the ruling ideology.

“The PBOC is sending a signal that it will not tighten monetary policy quickly, but also it’s less likely to use broad easing measures such as a reserve ratio cut,” said Xia Le, chief economist at PingAn Digital Economic Research Center. “This will benefit government bonds in the short term. But in the longer run, the performance of the debt is more dependent on China’s economy and the U.S. election.”

The yield on 10-year government bonds dropped 4 basis points to 3.11% as of 4:15 p.m. in Shanghai. The yuan last traded at 6.7815.

The PBOC offered 600 billion yuan ($88.1 billion) of one-year funding with the medium-term lending facility, according to a statement. That will more than offset the 200 billion yuan in loans that come due on Thursday, implying a net injection of 400 billion yuan, the largest monthly addition since July 2018. It kept the interest rate on the funds unchanged at 2.95%.

Chinese lenders -- the main buyers of government debt -- are compelled to buy 1.13 trillion yuan of new debt this month and repay 1.7 trillion yuan of short-term interbank debt. Financial institutions are also hoarding funds for quarter-end regulatory checks. Adding to the liquidity strain is the authorities’ crackdown on high-yielding financial products, which has limited their ability to attract deposits.
 

Chinese stimulus has taken a slightly different path to that followed by the Fed or ECB but it is certainly present. China’s steel and aluminium production are hitting new highs and Chinese demand for copper is the primary factor behind recent strong pricing. The clear message here is that China is pulling on the traditional levers for growth which is spurring infrastructure and industrial development. They clearly intend to come out of the pandemic in a stronger position than before they went in.

A link to the full report is posted in the Subscriber's Area. 

The fall of the Iron Curtain and ensuing spread of liberalism greatly enhanced the argument for globalisation and offshoring. The process lifted billions out of abject poverty and into the middle classes. Unfortunately, it also had a levelising effect which robbed lower middle class, less educated people in developed markets of their likelihoods.

The low-end service jobs that replaced manufacturing and mining do not offer the same compensation. That has hollowed out the middle class in much of the developed world. More reliance on social services and debt accumulation papered over some of the cracks but the credit crisis, housing busts and austerity have contributed to the rise of populism. That is a global phenomenon and is at its root a rebellion against the status quo.

In a detailed statement, the Army said on Tuesday that the Chinese troops were "attempting to close-in with one of our forward positions along the LAC and when dissuaded by own troops, PLA troops fired a few rounds in the air in an attempt to intimidate."

"It is the PLA that has been blatantly violating agreements and carrying out aggressive maneuvers, while engagement at the military, diplomatic and political level is in progress," the Indian Army said.

The Army's statement came after China claimed that Indian troops "illegally crossed" the LAC near Pangong Tso on Monday and accordingly Chinese troops were forced to take "countermeasures" to stabilise the situation.

It added that despite this provocation, the Indian troops exercised great restraint and behaved in a responsible manner.

"Indian Army is committed to maintaining peace and tranquility, however, it is also determined to protect national integrity and sovereignty at all costs," it further said and refuted the statement by the Western Theatre Command (one of the five commands of China's PLA) as an "attempt to mislead their domestic and international audience."

India recently outflanked China by taking control of strategic height near Pangong lake's southern bank. It thwarted an attempt by the Chinese army to transgress into Indian areas near the southern bank of Pangong Tso near Chushul in Ladakh.

India and China have been engaged in a standoff since April-May over the transgressions by the Chinese Army in multiple areas including the Finger area, Galwan Valley, Hot springs, and Kongrung Nala.

With the world focused on the chances of delivering a vaccine in the near term, it is worth remembering that the world keeps turning. For military planners the pandemic represents an opportunity to probe defences and the commitment of adversaries to continue with active resistance.

Iron Ore
While the state-linked Global Times earlier this year raised the possibility that Australian iron ore supply could be targeted, it’s likely to be low on the list of possibilities. The country dominates China’s iron ore supply, accounting for more than 60% of its imports, with next-biggest supplier Brazil making up less than 20% so far this year.​
​
In fact, the trade is booming, with China importing a record amount of Australian iron ore in July. Still, investors will keep a close eye on any sign of tensions spilling over as even small moves to restrict the movement of Australia’s most valuable commodity -- worth about A$100 billion this fiscal year -- would send a powerful signal.

LNG
Australia has accounted for just less than half of China’s liquefied natural gas imports this year. The proportion has grown in recent years as new Australian projects came online, including two in Queensland in which Chinese oil majors are partners.

Those partnerships, along with long-term contracts that obligate Chinese buyers to purchase millions of tons of LNG a year from Australia well into the 2030s, make the trade flow a
more complicated candidate for disruption.

China’s demand for commodities is likely to remain robust for the foreseeable future but that will not deter the administration from using resources as a bargaining chip in trade talks. The reality, however, is rising living standards create demand growth for products and services. If China is going to succeed in its aims of creating a modestly wealthy society for its billion plus people that is going to entail continued imports. Obviously, it is more dependent on imports for some commodities than others.

Demand was strong enough to push rates up, even with cancelled sailings restored and carriers adding temporary and even new permanent services on the lane,” said Freightos CMO Eytan Buchman.

“With reports of rolled shipments and container shortages out of China indicating the extent of the demand rush, carriers will likely introduce another China-US GRI for September, which would be the sixth in just three months,” said Mr Buchman.

In his weekly US import update report, Jon Monroe, president of Jon Monroe Consulting and a representative for Worldwide Logistics, said the big US retailers were “experiencing a major surge in online orders”, and were converting many of their stores to fulfilment centres.

He said, however, that the substantial freight price hikes were taking their toll.

“Importers’ budgets are ballooning and, in some cases, about to explode from having to pay the extremely high cost of transport,” said Mr Monroe. “The record high rates will undoubtedly cause bankruptcies in the worst case, and major budget excesses in the best case, scenarios,” he warned.

There a couple of complimentary trends that have resulted in a significant bump in container shipping rates over the last month. The first is the surge in demand for new furniture as people flee the confined environment of the city for the space of the suburbs. Bigger houses need more tables, chairs, sofas, desks and TVs. These are bulky items so demand for 40ft containers has surged.

Shipping inventory has also declined because of the cost of compliance with IMO2020 regulations. The hit to demand during the lockdowns was likely a significant negative catalyst for what was already a highly pressured sector.

China’s central bank supplied liquidity to commercial lenders on Monday to help them manage upcoming government bond sales, while leaving the price of the money unchanged as the economy recovers.

The People’s Bank of China added 700 billion yuan ($101 billion) of one-year funding via the medium-term lending facility. The central bank said Friday that today’s operation is meant to offset the 400 billion yuan in loans coming due Monday and another 150 billion yuan maturing on Aug. 26.

With the economy recovering slowly, the PBOC is trying to provide markets enough funding to purchase government bonds and make loans without fostering financial risks. In addition to Monday’s money, the central bank last week offered the most short-term funds since May, replenishing a banking system which needs about $500 billion this month.

The net injection indicates “a more accommodative stance on keeping liquidity levels ample” so that commercial banks can continue to support bond issuance and to stabilize credit growth, said Liu Peiqian, a China economist at Natwest Group Plc. in Singapore. The move is “a signal to ensure policy continuity and stability” rather than a reaction to a slower pace of economic recovery, she said.

The PBOC kept the interest rate on the funds unchanged at 2.95%. The yield on China’s 10-year government bonds fell 1 basis point to 2.93%.

“The MLF injection is larger than expected,” said Ming Ming, head of fixed-income research at Citic Securities Co. in Beijing. “The PBOC’s overall neutral monetary policy has an easing bias in August. I expect the 10-year government yield to drop to around 2.8%.”

The big unknown for the Chinese debt markets is where the natural default rate resides. It’s impossible to know since they never allowed defaults until quite recently. The current situation does not give an accurate picture either, since the aftershocks of the lockdowns are impossible to predict with any kind of accuracy. What we do know is the number of defaults is rising and has not stopped rising since the first were announced a couple of years ago.

Some of the biggest countries are recording amazingly low figures. In India the virus has killed only two people per hundred thousand. In Brazil less than 4 per cent of those infected are dying. Nowhere is Covid-19 much worse than a bad outbreak of flu. That’s why I call the extreme policies of lockdowns and border closures the Self-Inflicted Disaster.

You may remember that I suggested months ago that the extraordinarily low infection rates and deaths in East Asia could be because people of Mongoloid race have strong genetic resistance to the virus. Till now nobody has wanted to say that could be so, because of fear of being accused of racism. However now I see that the New York Times, in an article about Thailand’s amazing success fighting Covid-19, suggests there could indeed be a genetic component in the immune systems of Thais and other peoples of the Mekong River region. Thailand has experienced only 58 deaths from the virus; Vietnam none at all; China’s southwestern province of Yunnan fewer than 190 cases.

There is an alternative interpretation of the fact that cases in Yunnan, Cambodia, Laos, Thailand, Myanmar and Vietnam has been so low. What if these populations already had herd immunity because they have been exposed to similar diseases in the past?

How will data be used by central banks and how will the central bank reassure people about the privacy of their data?

The data you are going to collect, there are two sides to it. On one side, the data that they're going to collect, given they are going to be able to engage the complete economic activity of a country in realtime, that data will be recorded on a blockchain-type network, distributed ledger, we don't know exactly. So the government will have access to all of that. On the [other] hand, it will enable the central bank to do their job more effectively. Because rather than having a lag in economic data, they're monitoring all the spending, the transactions, money supply, inflation implications, all in realtime... Tracking where people go in the world, because CBDC will be available to Chinese as they do business in other countries. It's almost a sort of a way to track an individual. So there are big alarming questions that need to be properly considered when it comes to privacy and anonymity.

The technology is there to enforce anonymity, but it's a question of are they going to implement it? Is that something that they're going to build into their currency? Time will only tell if different central banks come up with their versions of digital currency, as they say there is no one-size-fits-all, they're all going to be different and likely to reflect the values and culture of their citizens. Are we just going to accept that all governments get to have this data like we've kind of accepted with tech giants like Facebook? No one has really done anything about it.

A classic blockchain is a public ledger. There is a clear record of all transactions, but not who participated in them.

It would be comparatively easy for a state to create a digital currency that attaches identity to the ledger.

That will allow governments to track every transaction in even greater detail than they do already.

Kōno said Japan would welcome an invitation to join the Five Eyes grouping.

He warned the growth of the Chinese economy has allowed China to purchase foreign tech companies, adding: “This is a development we must monitor closely. Tech-partnerships with countries like the UK will be critical to countering China, pooling our investments and encouraging our people to study the skill sets needed for our high-tech sectors to grow.”

He added China was attempting to become independent of the US dollar economy through fast money-sending services, the introduction of their own internet, launching a digital renminbi and introducing a Chinese international order.

Kōno in his remarks stressed he was not seeking a military conflict with China, and was instead hoping to provide the Chinese Communist party with the space to cut defence spending, allowing democratic nations to take parallel steps.

Urging caution about economic decoupling, Pascal Lamy, the former World Trade Organization director general, predicted a more autonomous and closed China was likely to prove more dangerous. But he warned: “The west cannot coexist in a free trade relationship with a country that subsidies 30% of its economy. If China is not willing to accept global disciplines on state aid then we have to review a number of trade commitments – whether it is on public procurement or in specific sectors.”

The coronavirus crisis has been an accelerant for just about every trend. That is particularly true of the Anglosphere’s awakening to the threat posed by China’s increasingly ambitious program of global domination. There is no getting around the fact that many countries are heavily reliant on Chinese suppliers for essential components and products to fuel their economies, and are also reliant on Chinese demand to absorb their exports. Therefore, the process of decoupling was never going to be a simple process but it is underway and is likely to persist.

Tencent Holdings Ltd.’s proposal to privatize search engine Sogou Inc. means eight Chinese companies
have either abandoned or plan to quit U.S. markets in deals worth more than $12 billion. Should investors be anticipating more deals?

Tencent’s $977 million proposed Sogou deal follows the $6.5 billion private equity-led privatization of 58.com Inc. and a $1.6 billion acquisition of Sina Corp. The backdrop is strained U.S.-China diplomatic ties, with this month’s closing of consulates in Houston and Chengdu. In May, the U.S. Holding Foreign Companies Accountable Act raised the prospect of delisting should a Chinese company be found to have broken tougher rules.

While the CEO’s of the USA’s tech companies are grilled in Washington, China’s tech CEOs face no threat of antitrust measures. In a command economy, a company either fulfils a need in supporting the rule and glory of the Party or it does not. To the extent its assists in supporting the government’s ambition size and scope are encouraged. In fact, complete market dominance is the ambition.

The escalation in tensions comes at a particularly volatile time for China’s stocks, with the government taking steps to manage a debt-fueled frenzy that had pushed equities to their highest since 2015. Bullish traders have pushed leverage to an almost five-year high.

“Worries over China-U.S. relations will dominate the market,” said Raymond Chen, a portfolio manager with Keywise Capital Management (HK) Ltd. “People will be closely watching how the U.S. reacts to the closure of Chengdu consulate. I expect more panic selling in the near term.”

China’s yuan fell as much as 0.28% to 7.0238 versus the greenback, the weakest since July 8. China’s government bonds extended gains, with futures contracts on 10-year notes climbing as much as 0.36% to the highest since July 3. The yield on debt due in a decade dropped 5 basis points to 2.86%, the lowest since July 1.

Overseas investors sold 16.4 billion yuan of China stocks Friday, the most since a record 17.4 billion yuan was dumped on July 14. Turnover rose to 1.3 trillion yuan, the 17th session over the 1 trillion yuan mark.

The Chinese government has been trying its best to paper over the cracks in the economy. The boom in IPOs and the efforts to repatriate foreign listings of its tech champions are all aimed at creating a façade of capital market strength and stability. It fulfills the secondary purpose of trying to protect Hong Kong’s status as a major financial hub despite the destruction of its legal freedoms.

Ant Group is seeking a valuation of more than $200 billion as it goes public, and could raise more than Saudi Aramco’s record $29 billion if market conditions are favorable, according to a person familiar with the matter. The Hong Kong portion could raise about $10 billion, according to people familiar with the matter, which would make it the sixth-largest initial public offering in the city.

The listing is a boost to exchanges in Hong Kong and Shanghai, while dealing a blow to U.S. bourses as more Chinese firms look to raise money closer to home amid rising U.S.-China tensions. Hong Kong-listed Semiconductor Manufacturing International Corp. raised $7.5 billion from a Shanghai share sale in July, while Chinese internet firms JD.com Inc. and NetEase Inc. added secondary listings in Hong Kong this year.

Ant’s IPO is also a major lift for the city of Hong Kong, which is facing mounting challenges from a sharp recession, political turmoil from year-long protests and a new national security law that has prompted concerns about an exodus from the financial hub.

“Ant Group’s listing in Hong Kong will be a vote of confidence in the city,” according to Bruce Pang, head of macro research at China Renaissance Securities Hong Kong.

Western media has been filled with coverage of the negative ramifications of the Hong Kong security law and with good reason. The reality on the ground is that personal freedoms are being curtailed and that represents a significant decision point for many companies. If China’s approach to gaining tighter control of Hong Kong might be considered in terms of carrot and stick leverage, then the security law is the stick and listing of some of the country’s most prized companies on the domestic Hong Kong market is the carrot.

Like Germany, Japan was also hit exceptionally hard by the depression and became more autocratic in response to it.  Japan was especially vulnerable to the depression because, as an island nation without adequate natural resources, it relied on exports for income to import necessities.  When its exports fell by around 50% between 1929 and 1931, it was economically devastated.  In 1931, the depression in Japan was so severe that the country went broke—i.e., it was forced to draw down its gold reserves, abandon the gold standard, and float its currency, which depreciated it so greatly that Japan ran out of buying power.  These terrible conditions and large wealth gaps led to fighting between the left and the right.  In 1932 that led to a massive upsurge in right-wing nationalism and militarism to forcefully restore order and bring back economic stability.  To that end, Japan’s military took control and pursued military options to get Japan the resources it needed by taking them away from other countries.  Japan invaded Manchuria in 1931 and later expanded through China and Asia to obtain natural resources (e.g., oil, iron, coal, and rubber) and human resources (i.e., slave labor).  As in the German case, it could be argued that this path of military aggression to get needed resources was the best path for the Japanese because relying on classic trading and economic practices wouldn’t have gotten them what they needed.   

Shifting to more autocratic, populist, and nationalist leaders and policies during times of extreme economic stress is typical, as people want strong leadership to bring order to the chaos and to deal strongly with the outside enemy.  In 1934, there was severe famine in parts of Japan, causing even more political turbulence and reinforcing the right-wing, militaristic, nationalistic, and expansionistic movement.  

In the years that followed, this movement in Japan, like that in Germany, became increasingly strong with its top-down fascist command economy, building a military-industrial complex with the military mobilized to protect its existing bases in East Asia and northern China and its expansion into other territories.  As was also the case in Germany, during this time, while most Japanese companies remained outside government ownership, their production was controlled by the government.

It makes sense that no one would enter a war under the assumption they are going to lose more than they gain. Therefore, it is reasonable to conclude the increasing competition between China and the USA will not result in a war until one side clearly believes they can win. Nuclear weapons obviously complicate the calculus.

Your excellent piece today focusing on the China question arrived at the same time as an interesting counter-narrative to the "China-supreme argument". From the Telegraph. If correct, China's is not going to have it all its own way. Here is a section:

"The Huawei saga has exposed just much the country still lags, a surprise to some who have bought into the media narrative of Chinese hi-tech ascendancy. China is not yet capable of making the advanced semiconductor chips used for telecommunications or for FGPA circuits that can be programmed.

Nor has it mastered the electronic design automation needed for circuit design. It lacks the critical raw material needed to sustain its ambitions for global dominance of G5 mobile and the coming “internet of things”.

The Centre for Strategic and International Studies estimates that China has yet to crack the materials science that goes into the latest microscopic chips, despite hurling money at the challenge in successive programmes, the latest one commanding more than $20bn. Its high-end chip industry is ten years behind, but in ten years the infrastructure of global cyber dominance will already be in place.  

In short, the US controls the world’s semiconductor ecosystem, working tightly with Japan, Korea, and Taiwan. All Washington had to do in late May was to flick its fingers and Taiwan’s TCMS instantly cut off chip supplies to Huawei, dooming the company’s G5 global quest at a stroke."

Thank you for your kind words and this article which I’m sure will be of interest to the Collective. The significant investment China is making in its domestic semiconductor industry will need to be long-term and ongoing in nature to achieve the level of sophistication currently available to other countries. By some accounts they have sunk $20 billion into the project so far and it may take recurring investments of at least that much to develop the tools required to achieve technological superiority over coming decades.

Yet the book that has done the most to educate me about how China views America and the world today is, as I said, not a political text, but a work of science fiction. "The Dark Forest" was Liu Cixin’s 2008 sequel to the hugely successful "Three-Body Problem." It would be hard to overstate Liu’s influence in contemporary China: He is revered by the Shenzhen and Hangzhou tech companies, and was officially endorsed as one of the faces of 21st-century Chinese creativity by none other than … Wang Huning.

"The Dark Forest," which continues the story of the invasion of Earth by the ruthless and technologically superior Trisolarans, introduces Liu’s three axioms of “cosmic sociology.”

First, “Survival is the primary need of civilization.” Second, “Civilization continuously grows and expands, but the total matter in the universe remains constant.” Third, “chains of suspicion” and the risk of a “technological explosion” in another civilization mean that in space there can only be the law of the jungle. In the words of the book’s hero, Luo Ji: The universe is a dark forest. Every civilization is an armed hunter stalking through the trees like a ghost … trying to tread without sound … The hunter has to be careful, because everywhere in the forest are stealthy hunters like him. If he finds other life — another hunter, an angel or a demon, a delicate infant or a tottering old man, a fairy or a demigod — there’s only one thing he can do: open fire and eliminate them.

In this forest, hell is other people … any life that exposes its own existence will be swiftly wiped out. Kissinger is often thought of (in my view, wrongly) as the supreme American exponent of Realpolitik. But this is something much harsher than realism. This is intergalactic Darwinism.

Of course, you may say, it’s just sci-fi. Yes, but "The Dark Forest" gives us an insight into something we think too little about: how Xi’s China thinks. It’s not up to us whether or not we have a Cold War with China, if China has already declared Cold War on us. 

The Three Body Problem is an excellent read and The Dark Forest follows on well from where it left off. The third book in the series, Death’s End, was too meandering for me and I did not finish reading it. For a non-Chinese reader, the names can be a bit of an obstacle but the story is compelling.

A front-page editorial in China Securities Journal said fostering a “healthy bull market” is important given China’s increasingly complicated international relations, intense financial and technological competition, and the challenge of controlling internal financial risks.

Steven Leung, executive director of institutional sales at UOB Kay Hian in Hong Kong, said the editorial had bolstered investor confidence. He said some mainland investors were also buying shares anticipating that coming changes, such as an overhaul of the Shanghai Composite, would attract more global investment.

“China’s bull markets are state sponsored” has been my short hand for analysing the Chinese market for much of the last decade.

The primary indices have inconsistent trends, where large surges have been followed by collapses and volatile ranging. The defining characteristic of broad advances has been overt government support for prices.

“Hong Kong should be able to continue to enjoy the freedom of speech, freedom of press, of publications, protest, assembly and so on,” Chief Executive Carrie Lam told reporters after it took effect, adding international agreements on civil rights allowed restrictions to ensure national security. “Where it is for the protection of national security, then sometimes some of these rights could be restrained in accordance with the law.”

The Hong Kong Bar Association said this week it was “gravely concerned” about the law and its broadly defined criminal offenses.

“These are widely drawn and absent a clear and comprehensive array of publicly accessible guidelines and basic safeguards as to legal certainty and fair treatment, are capable of being applied in a manner that is arbitrary, and that disproportionately interferes with fundamental rights,” the group said in a statement. “Lawyers, judges, police and Hong Kong residents were given no opportunity to familiarize themselves with the contents of the new law, including the serious criminal offenses it creates before it came into force.”

China’s nine dashed line in the South China Sea, border clashes with India, overriding of the Hong Kong handover agreement and increasingly strident statements towards reuniting with Taiwan, all points towards an expansionist foreign policy. 

India has auctioned 41 coal mines with 17 billion tons of geological coal reserves to enable private companies to commence commercial extraction. All of these mines are largely fully-explored, enabling them to come into production quickly. Four of the mines will be dedicating their coal for use by steel-making plants. The 41 mines represent both large and small mines with peak-rated capacities (PRC) of 0.5 to 40.0 million tons annually (mmt/y). These mines will provide a total PRC of 225 mmt/y when in operation. Given the sizes and locational challenges of some of the mines, we can expect to see more pictures of women hauling baskets of lump coal from the mine to shipment points. This is one way to help the nation’s employment situation.

The increased use of coal is designed to help India deal with its economic challenges, of which employment is one aspect. However, lowering, or at least keeping stable, the cost of energy is also crucial for political peace. The impact on India’s climate goals remains an open question. The long-term outlook for India’s energy mix suggests that fossil fuels will remain the dominant supplier. Even if coal, which accounted for 56% of India’s energy in 2017, were to fall below 50%, and all of that decline went to renewables, it would only triple its contribution – rising from 3% to 9%. Making further gains in reducing carbon emissions will become a huge challenge for government policymakers.

The China story has become more interesting, given that it has become the largest emitter of carbon dioxide and other pollutants, while still paying lip-service to its environmental commitments to the 2015 Paris Climate Accord. China still consumes more than half the world’s coal, and that seems likely to remain the condition for a while, despite the large push for renewable power.

China recently approved two new coal mines with a combined output of 3.6 mmt/y, at a cost of $566 million (4 billion yuan). Those two new mines will have nearly as much output as China’s current coal production, which in 2019 was 3.75 mmt/y. Behind approving the new mines is the government’s plan for shutting down small and outdated mines in favor of larger ones located in coal-rich provinces.

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Energy security is a major consideration for every consuming nation. Neither India not China have any hope of achieving energy independence any time soon. The virtue signalling China, in particular, engages in at climate conferences contrasts starkly with the reality on the ground. China is building more coal fired power stations all over the world than ever.

The plan “has strategic importance, reinforcing Hong Kong’s position as a wealth management hub,” Sally Wong, chief executive officer of Hong Kong Investment Funds Association, said by phone. “It provides important investment channels for mainland investors to achieve diversification.”

As Beijing seeks to quash a year of unrest in Hong Kong with the introduction of a new security law, authorities have also sought to tamp down concern over the city’s status as an international finance hub. Mainland investors have boosted stock purchases through the stock connect link over the past weeks and a string of high-profile Chinese companies have listed shares in the city.

Local authorities have also sought to reassure investors that Hong Kong will remain a stable place to invest, with Chief Executive Carrie Lam lobbying for more financial integration to build the city’s presence as a global hub for private wealth and make it a more prominent offshore renminbi center. While there has been no sign of an exodus of cash, Hong Kong’s rich are increasingly hedging their bets amid the worst economic and political crises since the handover.

The U.S. overnight escalated pressure on China over its crackdown on Hong Kong by making it harder to export sensitive technology to the city as Beijing is poised on Tuesday to pass the security law. The Commerce Department said it’s suspending regulations allowing special treatment to Hong Kong over things including export license exceptions.

As China attempts to draw a line under the protests that have plagued Hong Kong over much of the last couple of years, they are likely to continue to meet with resistance on the streets. The new security law is an affront to the one country, two systems agreement. It presages an acceleration of trend of absorption with the mainland than was envisaged by the framers of the handover.

The secret service, best known as ASIO, confirmed in a statement that “search warrant activity occurred in Sydney on Friday as part of an ongoing investigation,” but would not comment on Moselmane or its involvement.

Less than two weeks ago, Morrison said that a “sophisticated state-based cyber actor” was targeting Australia in an escalating cyber campaign that was threatening all levels of government, businesses, essential services and critical infrastructure.

Most analysts said Morrison was referring to China, but the prime minister would not name the country.

Already high tensions between Australia and China have been raised by the pandemic.

China in recent weeks has banned beef exports from Australia’s largest abattoirs, ended trade in Australian barley with a tariff wall and warned its citizens against visiting Australia. The measures have been interpreted by many as punishment for Australia’s advocacy of an independent probe into the origins and spread of the coronavirus.

Australia’s foreign minister has accused China of using the anxiety around the pandemic to undermine Western democracies by spreading disinformation online, prompting China to accuse Australia of disinformation.

Australia depends on China’s demand for many of its exports. That’s represents a difficulty for the country in attempting to assert independence from China. For its part, China has a clear interest in securing its supply chains. That means ensuring Australia is at least amenable if not fully subservient to its wishes.

China A has been notorious for various practical hurdles for active managers to effectively implement their investment strategies, one of which is suspension. Historically, Chinese-listed companies tend to suspend the trading of their stocks to avoid unfavourable price moves, sometimes even arbitrarily. In Figure 13, we plot the time-series of the suspension ratio of the China A-share market. The suspensions peaked in late 2015 and early 2016 amidst the market turmoil and a brief introduction of circuit break mechanism. Since then, the suspension issue has improved, driven by efforts from domestic regulators as well as pressure from leading index providers. When the market opened down 8% following the extended lunar New Year holiday and coronavirus outbreak in early February 2020, we were pleased to see no suspensions.

Conclusion
With the abundance of breadth, inefficiency, local information and increasingly fewer implementation hurdles, we believe investing in the China A-share market can potentially benefit active managers looking to explore new alpha sources or diversify their existing strategies. In the meantime, the unique market dynamic, retail dominant investor base and the language barrier for leveraging local information pose significant challenges. As such, we believe investors should view China A-shares as a separate asset class, requiring dedicated research resources and allocation.

The question of governance is always relevant, but particularly so when the topic is return of your capital versus return on your capital. China is a difficult place to do business and there is a clear government effort to control the market narrative. That can have capricious consequences for investors in A-Share market. However, it is uncorrelated with other markets and that means modern portfolio theory practitioners will be drawn towards it as a diversifier for balanced portfolios.

The costs of imposing an across-the-board shutdown are too high as Beijing’s population is much larger than that of Wuhan, said Yanzhong Huang, professor at the Center for Global Health Studies of Seton Hall University.

“A city-wide lockdown in Beijing would not only reverse the process of economic and social reopening, a key policy objective of the party, but also undermine considerably the government’s own narrative on the success of its anti Covid-19 campaign,” Huang said. “The social, economic, and political pain might be way too high to justify a city-wide lockdown.”

Beijing on Tuesday closed another food market located near the financial district after a case linked to the original cluster was discovered. Eleven other food markets have been shuttered and almost 300 others sanitized, while nearly 30 housing compounds have been put under lockdown, local officials said.

China learned quicker than everyone else that the cost of lockdowns far outweighs the benefit of containment. It is very unlikely the whole country will be locked down again regardless of how bad the infection rate gets. The emerging reality is the mortality rate is about double that of the seasonal flu. Even if the transmissibility trend tends to pressure healthcare systems that is a cost which countries will simply have to bear. Meanwhile new high potency treatment options are emerging all the time.

Assuming you don’t get government support to advance research in hydrogen production and carbon capture and storage, what will you have to do to make those viable?

Stay with the program a little bit longer. That’s exactly what we’re doing. You could take a negative view and say we knew that hydrogen was a good thing and we knew that CCS [carbon capture and storage] was needed, but it hasn’t happened. I’m not signing up for that approach. We need a lot of hydrogen in the mix. We need significant CCS. My prediction is that in the next few years you will see CCS projects come off the ground. You will see very large-scale hydrogen projects come off the ground as well. And I hope we will be associated and involved in each and every one of them.

Hydrogen is where traditional oil companies see their future. It does not produce emissions. That ticks a lot of boxes for companies long associated with being among the world’s biggest polluters in their own right while also facilitating emissions growth wherever there are internal combustion engines.

Jeremy Hunt, a Conservative lawmaker and former foreign minister, opened a new front on Thursday with an op-ed in the Times of London warning that Taiwan, the separately ruled island that China regards as part of its territory, “should worry us more.”

“In its willingness to abandon Hong Kong’s ‘one country, two systems’, China may also be signalling that it has given up hope of a peaceful reunification with Taiwan in favour of a military solution,” Hunt wrote. “Were that to be the case the implications for western democracies would be extraordinarily dangerous.”

One potential bonus for Johnson in escalating tensions with China lies with the U.S., where the Trump administration has been prodding allies globally to adopt a more skeptical stance to Beijing. That includes shunning technological advances such as the 5G capabilities offered by Huawei, which Washington says are a security risk.

The world is quickly realising that decisions need to be made on how close a relationship we want with China. Passing the security law in Hong Kong on the 29th anniversary of the squelching of Tiananmen Square democracy protest movement sends a none too subtle signal China is not about to back down from imposing its will on Hong Kong.  

While the U.S. President Donald Trump’s speech Friday was heated in rhetoric, it lacked specifics around measures that would directly impact the city. He announced the U.S. would begin the process of stripping some of Hong Kong’s privileged trade status without detailing how quickly any changes would take effect and how many exemptions would apply.

“Trump’s comments gave no immediate measures on Hong Kong and leave room for negotiations with Beijing,” said Castor Pang, head of research at Core Pacific-Yamaichi International. “Trump’s comments have eased investors’ concern about the impact of potential sanctions on the Hong Kong economy.”

With significant domestic challenges the Trump administration has probably concluded that now is not the best time to further escalate tensions with China to the point where they are irredeemable. That has helped to support the Chinese markets.

Under the U.S.-Hong Kong Policy Act of 1992, Washington agreed to treat Hong Kong as fully autonomous for trade and economic matters even after China took control. That meant Hong Kong was exempt from Trump’s punitive tariffs on China, can import certain sensitive technologies and enjoys U.S. support for its participation in international bodies like the World Trade Organization.

But the law enacted last year gives the administration broad authority to impose sanctions or other punishments. The administration can also revoke Hong Kong’s special trading status if it chooses.

Such a decision, however, would have far-reaching consequences and jeopardize Hong Kong’s role as one of the world’s leading trade and banking hubs, so the Trump administration may start with smaller steps targeting Chinese Communist Party officials rather than moves that would have far-reaching economic consequences, particularly during the coronavirus pandemic.

 

Is Hong Kong fated to become just another Chinese city or can it survive as a centre for commerce in the 21st century. That question is more relevant today than it has been since the handover in 1997. Xi Jinping’s administration is intent on pushing the one-country, two systems solution to its limits and that is going to have significant repercussions for how international finance is conducted.

With more than $500 billion in infrastructure bonds to be issued this year and more monetary easing on the horizon, China is trying to cement a fragile domestic recovery without indulging in the kind of debt blowouts seen in the U.S. and Europe. The world’s largest exporter is therefore still reliant on other countries reining in the pandemic and on a reboot of global trade.

“We have not set a specific target for economic growth this year,” Li said, speaking in the Great Hall of the People. “This is because our country will face some factors that are difficult to predict in its development due to the great uncertainty regarding the Covid-19 pandemic and the world economic and trade environment.”

Shifting away from a hard target for output growth breaks with decades of Communist Party planning habits and is an admission of the deep rupture the pandemic has caused. Economists surveyed by Bloomberg expect China’s economy to expand just 1.8% this year, its worst performance since the 1970s.

At the same time, Li gave a precise figure for the targeted budget deficit, widening it to more than 3.6% of gross domestic product. Including the issuance of special bonds, that brings a broader measure of the deficit to more than 8%, according to Bloomberg Economics.

China’s growth rate has been decelerating for much of the last decade. At the same time the growth which has been achieved has been funded by increasing the debt load. From that perspective abandoning the growth target makes sense and not least because of the current recession.

In the masterplan backed by President Xi Jinping himself, China will invest an estimated $1.4 trillion over six years to 2025, calling on urban governments and private tech giants like Huawei Technologies Co. to lay fifth generation wireless networks, install cameras and sensors, and develop AI software that will underpin autonomous driving to automated factories and mass surveillance.

The new infrastructure initiative is expected to drive mainly local giants from Alibaba and Huawei
to SenseTime Group Ltd. at the expense of U.S. companies. As tech nationalism mounts, the investment drive will reduce China’s dependence on foreign technology, echoing objectives set forth previously in the Made in China 2025 program. Such initiatives have already drawn fierce criticism from the Trump administration, resulting in moves to block the rise of Chinese tech companies such as Huawei.

China is deadly serious about becoming the global hegemon. The rest of the world has been happy to play along to get along for the last twenty years because forced technology transfer was deemed an acceptable price for the promise of benefitting from the world’s largest consumer market. The freezing out of technology companies from the Chinese market more than a decade ago should have raised red flags. Fortunately, the world is finally waking up to the fact it is dealing with a dictatorial regime intent on turning us into a series of vassal states.

In brief, after the creation of a new set of rules establishes the new world order, there is typically a peaceful and prosperous period.  As people get used to this they increasingly bet on the prosperity continuing, and they increasingly borrow money to do that, which eventually leads to a bubble.  As the prosperity increases the wealth gap grows.  Eventually the debt bubble bursts, which leads to the printing of money and credit and increased internal conflict, which leads to some sort of wealth redistribution revolution that can be peaceful or violent.  Typically, at that time late in the cycle the leading empire that won the last economic and geopolitical war is less powerful relative to rival powers that prospered during the prosperous period, and with the bad economic conditions and the disagreements between powers there is typically some kind of war.  Out of these debt, economic, domestic, and world-order breakdowns that take the forms of revolutions and wars come new winners and losers.  Then the winners get together to create the new domestic and world orders.  

That is what has repeatedly happened through time.  The lines in the chart signify the relative powers of the 11 most powerful empires over the last 500 years.  In the chart below you can see where the US and China are currently in their cycles.  As you can see the United States is now the most powerful empire by not much, it is in relative decline, Chinese power is rapidly rising, and no other powers come close.  

There is a clear message here. Empires rise and fall. Empires rise because of a competitive advantage. Success breeds hubris which sows the seeds of decay. Success also breeds decadence with societies spending beyond their means. All the while competitors learn to emulate the competitive advantage and iterate upon it. As a result, they gain strength, confidence and a willingness to challenge the status quo.

Xi’s China is thus not the inevitable culmination of prior Chinese history. When he was elevated to head of the Party in 2012, many Chinese elites hoped that he would deal with mounting corruption—which he did, in a highly authoritarian fashion—but also lay the ground for a more liberal China that would permit more freedom to talk, think, interact, and even criticize their government. They were bitterly disappointed when he moved in the opposite direction, placing priority above all not on the welfare of the nation as a whole, but on the survival of the Chinese Communist Party. Why he did this was the result of his personal quirks and history; another leader may have gone in a very different direction. There was no historical inevitability to the present outcome.

The dangers of a regime that seeks totalitarian control were laid bare in the early days of the COVID-19 crisis, when speaking honestly about the unfolding epidemic, as Dr. Li Wenliang did, was severely punished. For all we know, the flow of misinformation is continuing today. It is wrong to hold up the CCP’s totalitarian approach in dealing with the virus as a model to be emulated by other countries. Nearby South Korea and Taiwan, both healthy liberal democracies, achieved even better results in the pandemic without the draconian methods used by China. One of the great dangers today is that the world looks to Xi’s totalitarian model, rather than a broader East Asian model that combines strong state capacity with technocratic competence, as the winning formula in facing future crises.

How then should the United States and other Western democracies deal with Xi’s China? The starting point is to recognize that we are dealing with an aspiring totalitarian country like the mid-20th century Soviet Union, and not with some kind of generic “authoritarian capitalist” regime. There is no true private sector in China. Although there are quasi-property rights and ambitious entrepreneurs there, the state can reach into and control any one of its supposedly “private sector” firms like Tencent or Alibaba at any point. Although the Trump administration’s campaign against Huawei has been clumsy and in many respects self-defeating, the goal is essentially correct: It would be crazy for any liberal democracy to allow this firm to build its basic information infrastructure, given the way it can be controlled by the Chinese state.

That word, resiliency, just popped up again. The one lesson we have learned from the coronavirus is how fragile the global supply chain. The simple fact is we are wholly dependent on an increasing antagonistic country for essential products. That is something that is going to change in the coming few years as the theatres of great power competition expand significantly. 

First, while we learned in 2016 that technology was inseparable from domestic politics, the lesson in 2020 should be that technology is inseparable from geopolitics. It is chips that gave Silicon Valley its name, and everything about this chip decision is about geopolitics, not economics.

Second, at some point every tech company is going to have to make a choice between the U.S. and China. It is tempting to blame the tension between the two countries on Trump, but the truth is that China, particularly under Xi Jinping, has been significantly hardening its rhetoric and actions since before Trump was elected, and has been committed to not just catching but surpassing the U.S. in technology for years. There is a fundamental clash of values between the West and China, and it is clear that China is interested in exporting theirs. At some point everyone will be stuck in the middle, like TSMC, and Switzerland won’t be an option.

Third, Intel, much like Compaq, is an allegory for where the U.S. seems to have lost its way. Locked in an endless pursuit of efficiency and shareholder value, the U.S. gave up its flexibility and resiliency in favor of top-end performance. Intel is one of the most advanced chip makers in the world, but it turns out that capability is far too constrained to its own needs to be of general applicability. Worse, to the extent Intel was willing to become a contract manufacturer, it wanted the federal government to pay for it, the better to satisfy shareholders. The government, rightly, in my mind, chose an operator that was actually used to operating in the world as it is, not once was.

At the same time, TSMC’s justifiable carefulness in building a U.S. fab gives Intel an opportunity. Back in 2013, in one of the first Stratechery articles, I urged the company to embrace manufacturing and give up its integration, margins be damned. Intel specifically, and the U.S. generally, would be in far better shape had they acted then. As the saying goes, though, the second best time to start is now — and that applies not only to Intel, which should spend the money to get into contract manufacturing on its own, but also to the U.S. The world has changed, and it’s time to act accordingly.

Resiliency is likely to be the buzz word of the 2020s. Rising geopolitical tensions have been a factor for a few years already but did not have a great deal of urgency attached to them. The lockdowns and collapse of global supply chains highlighted the fragility of the global trade network, Meanwhile, the increasingly ambivalent tone of US/China relations are unlikely to get better any time soon.

Now, imagine that, rather than shoring up markets solely via guarantees, the Fed could push most short-term interest rates across the economy to near or below zero. Europe and Japan already have tiptoed into negative rate territory. Suppose central banks pushed back against today’s flight into government debt by going further, cutting short-term policy rates to, say -3% or lower…

,,,A number of important steps are required to make deep negative rates feasible and effective. The most important, which no central bank (including the ECB) has yet taken, is to preclude large-scale hoarding of cash by financial firms, pension funds, and insurance companies. Various combinations of regulation, a time-varying fee for large-scale re-deposits of cash at the central bank, and phasing out large-denomination banknotes should do the trick.

This is the economic equivalent of “use it, or lose it” when applied to money. The idea of forcing banks, pensions and insurance companies to invest is fine on paper but takes no account of the credit worthiness of the assets being purchased. The time to institute this kind of policy is after a major decline when bankruptcies have washed away high leverage and investors need an incentive to speculate. At today’s valuations, where asset prices have already been rising for 12 years, forcing speculation is a recipe for an asset bubble of epic proportions.

The Party is using the system to win back some of the control it lost when China opened up to the world in the 1980s and rapid development followed.

It’s a way to silence dissent and ensure the Party’s absolute dominance.

Already, about 10 million people have been punished in the trial areas of social credit.

Liu Hu is just one of them.

Hu lost his social credit when he was charged with a speech crime and now finds himself locked out of society due to his low score.

In 2015, Hu lost a defamation case after he accused an official of extortion.

He was made to publish an apology and pay a fine but when the court demanded an additional fee, he refused.

Last year, the 43-year-old found himself blacklisted as “dishonest” under a pilot social credit scheme.

“There are a lot of people who are on the blacklist wrongly, but they can’t get off it,” says Hu.

It’s destroyed his career and isolated him, and he now fears for his family’s future.

The social credit system has closed down his travel options and kept him under effective house arrest in his hometown of Chongqing.

In an apartment above the streets of Chongqing city, Hu tries to use a phone app to book train tickets to Xi’an. The attempt is rejected.

“[The app] says it fails to make a booking and my access to high-speed rail is legally restricted,” he explains.

Hu’s social media accounts, where he published much of his investigative journalism, have also been shut down.

Hu claims his combined Wechat and Weibo accounts had two million followers at their peak but are now censored.

Safety and stability are bywords for control. Personal prestige as a means of improving one’s living standards is the tool used to ensure compliance. The confluence of social media primping is hardly a coincidence. That is not something China has a monopoly on. The difference, however, is democracy and rule of law ensures a check on the overarching ambitions of governments to exert control over their citizens.

Providing land with power, water and road access may help attract new investments to an economy that was slowing even before the virus hit, and is now staring at a rare contraction as a nationwide lockdown hit consumption.

The government has hand-picked 10 sectors -- electrical, pharmaceuticals, medical devices, electronics, heavy engineering, solar equipment, food processing, chemicals and textiles -- as focus areas for promoting manufacturing. It has asked embassies abroad to identify companies scouting for options. Invest India, the government’s investment agency, has received inquiries mainly from Japan, the U.S., South Korea and China, expressing interest in relocating to the Asia’s third-largest economy, the people said.

The four countries are among India’s top 12 trading partners, accounting for total bilateral trade of $179.27 billion. The foreign direct investments by the four nations between April 2000 and December 2019 stands at over $68 billion, government data shows.

Making unused land available in special economic zones, which already have robust infrastructure in place, is also being examined. A detailed scheme for attracting foreign investments is expected to be finalized by end of the month, the people said.

India has the most favourable demographics of any large population country in the world. May people speak English and it has a democratic imperative to deliver on improving standards of living. The missing link has always been the corrupt bureaucracy which stands in the way of infrastructure development and industrialisation. If that is finally starting to change companies will have the benefit of lower labour costs to lure them away from China.

In Xiangcheng, a district in the eastern city of Suzhou, the government will start paying civil servants half of their transport subsidy in the digital currency next month as part of the city’s test run, according to a government worker with direct knowledge of the matter.

Government workers were told to begin installing an app on their smartphones this month into which the digital currency would be transferred, the worker said.

Civil servants were told that the new currency could be transferred into their existing bank accounts, or used directly for transactions at some designated merchants, the person said.

China is ahead of many other countries in preparing the launch of an official digital currency. In recent years, the use of traditional paper bills and cash has declined sharply, and smartphone payments have become so ubiquitous that many Chinese people, particularly younger urban dwellers, no longer carry their wallets or cash for shopping. Instead, they use Tencent Holdings Ltd. ’s WeChat Pay and Alipay, operated by Ant Financial Services Group, an affiliate of Alibaba Group Holding Ltd.

Parallel currencies are an oddity which highlight a government’s desire to fully control the ability of consumers to spend their own cash. The ultimate aim of these kinds of moves is to separate the use case for money so different units can be used for different purposes. The façade of wishing to curtail money laundering or terror financing is ubiquitous to all governments and this is a trend which has global appeal for heavily indebted countries.

Much depends now on whether consumers regain a willingness to spend amid nervousness that the virus can stage a comeback as controls are relaxed. Evidence from the epicenter of the virus, Wuhan, suggests progress will be slow.

While factories around Wuhan are working around the clock to get back up to speed, the recovery of consumer-focused businesses won’t be straightforward. People are cautiously taking to the streets again, but they remain subject to curbs on their movements aimed at keeping the virus at bay.

The nation’s per capita disposable income declined by 3.9% in real terms in the first quarter from a year ago, the first contraction since the data was available in 2014.

Consumer caution “continues to restrain demand, and thus activity more broadly,” said Frederic Neumann, co-head of Asia economic research at HSBC Holdings Plc in Hong Kong. “This is reminder also for other economies of the arduous path to full recovery even after full lockdowns are removed. All this points to the need for a more determined policy push on both the monetary and fiscal fronts to ‘shock the system’ and get activity back up to its earlier vitality.”

Personal consumption is going to take a hit because if Chinese consumers have learned anything from the six-week lockdown it is they are on their own when to comes to survival. Western countries are boosting the provision of cash to citizens to help them make it through the loss of income phase. Those kinds of support do not exist in China and therefore the key lesson is to boost savings.

A link to the full report is posted in the Subscriber's Area.

The virus scare has highlighted how susceptible China is to the export market. They have worked extremely hard to get factories back to full capacity but, having succeeded in that objective, they now find there are no orders.

One of the biggest challenges of buying Chinese corporate debt is working out the borrower’s ties to the government, says Soo Cheon Lee, chief investment officer at SC Lowy, a credit-focused banking and investment firm. “China is not about the financials, it’s about relationships,” Lee says. “That’s driving a lot of the liquidity available to a company. You really need to understand the local landscape, and it’s difficult for foreign players to understand who has that connection or support from the state.”

Sometimes a Chinese company will appear to be in dire straits, only to come up with the cash for a debt payment at the last minute, Lee says. “For most of the companies in Asia, we know two weeks before whether they have financing or if they are going to restructure,” he says. “I think it’s very unique for China to not be able to predict a default.”

Some firms are not what they appear to be, Lee says. “If you are truly a state-owned enterprise,” he says, “you will continue to get support from the government or state-owned banks. But when we look at companies that claim to be SOEs but aren’t really SOEs, we see they’re having some difficulties.”

I think a handy rule of thumb for anyone thinking of dipping a toe in China’s distressed debt markets is “state support is a precondition, not a nice to have”. $1.5 trillion in defaulted debt is a juicy target provided covenants can be enforced. The extent to which that is possible in an autocracy is to ascertain how much the ruling families might be inconvenienced by a default.

Copper climbed as a strong rebound in Chinese manufacturing bolstered the outlook for demand, trimming the industrial metal’s biggest quarterly drop since 2011.

China’s official purchasing managers’ index rose this month, up from a record low in February, signaling the world’s second-largest economy is restarting. While the outlook remains uncertain as the country faces a growing threat from slumping external demand, production cuts at major mines around the world are shoring up sentiment for copper.

The metal extended gains after President Donald Trump called on Congress to provide $2 trillion for infrastructure spending in the U.S.

On a day when Wall Street pulled back on book squaring at the end of the quarter copper prices were quite firm. China’s reported economic activity has been strengthening as the economy starts back up and commodity investors are expecting significant infrastructure development as some of the more traditional levers of growth are leaned on.

He "will visit and express regards to medical workers, military officers and soldiers, community workers, police officers, officials and volunteers who have been fighting the epidemic on the front line, as well as patients and residents during the inspection," Xinhua reported.

That Xi can visit the city suggests the government has supreme confidence in his safety and epidemic controls put in place there. The closest he previously came to the frontlines of the outbreak was visiting virus treatment centers in the capital Beijing, which has far fewer cases than Wuhan.

Senior government officials, including Vice Premier Sun Chunlan and Premier Li Keqiang, have visited Wuhan, but it was assumed until now that the risk to Xi, even if slight, was not worth the potential cost. Since taking office in 2011, Xi has centralized authority massively, becoming China's most powerful leader since Mao Zedong, and were the 66-year-old to fall ill, that could seriously destabilize the political system.

Xi’s visit to a heavily sanitised sites in Wuhan is clearly aimed at signaling China is over the worst of the epidemic. What is less reported on is they have simply stopped counting. The majority of regions outside Hubei are only counting serious cases and ignore people with mild symptoms or those who are asymptomatic.

A link to the full report is posted in the Subscriber's Area. 

The Credit Suisse team do an excellent job of highlighting where the risks are and provide a handy list of instruments to monitor to get an idea of how liquidity flows are functioning.

The repo market illiquidity in September was a signal to everyone that the tightening program had gone too far. There was nowhere near enough available capital in the system to allow the global money market to function. The Fed stepped in with a large swift injection of liquidity; inflating its balance sheet by $400 billion in four months.

Over the last five years, Baric, working closely with Vanderbilt University infectious-disease specialist Mark Denison, tested almost 200,000 drugs against SARS, MERS and other bat coronavirus strains.  He found at least two dozen that appeared to hinder the virus.

Among the most promising was Gilead’s remdesivir, a drug that fared poorly when used against a recent Ebola outbreak in Africa. In the lab, it worked against numerous coronavirus strains, including SARS and other bat coronaviruses that are similar to the new strain. Every coronavirus it was tested on, “it had high potency and efficacy,” Denison says.

That work was fortuitous. In early January, Baric got an urgent call from an infectious-disease colleague to send his unpublished data on remdesivir to colleagues in China who were dealing with a then-mysterious outbreak. Baric says he “was shocked” to see how fast the coronavirus was spreading.

Since then, work at his lab has been virtually nonstop. Each scientist puts in from one to six hours inside two different clean rooms equipped to handle the virus. The lab’s workday begins at 6 a.m. and often goes until 11 p.m. Individual sessions are short for safety and practical reasons — researchers aren’t permitted to eat, drink or visit the bathroom once inside the lab. Everyone has to pass an FBI background check and undergo months of safety training.

The WHO has stated remdesivir is their best bet for a suitable treatment for coronaviruses. It’s another question whether Gilead will make money form that evolving market since it will be under extreme pressure to provide an affordable range of treatments ahead of a vaccine being developed over the next year. 

Eighty-four percent of Chinese cases, 97% of critical cases and more than 96% of deaths are within the province, which was placed under mass quarantine by the government on Jan. 23 to slow the virus’ spread to the rest of the country. The ongoing lockdown of the region of 60 million people has led to widespread suffering and scores of preventable deaths as the local medical system collapsed under the strain.

The lockdown also meant that China’s fatalities from the pathogen have been confined almost entirely to the province. As of Wednesday, 4.3% of people who were confirmed to have the virus in Hubei have died, while that rate is 0.8% in China outside Hubei.

Over the past three weeks, China’s number of recovered patients has surged both in Hubei and the rest of the country, with the government sending in thousands of health-care workers to help in Hubei. Almost 65% of those who’ve been officially diagnosed with the disease are now better and out of hospital, according to the data from the National Health Commission on Thursday.

Loosening restrictions comes with a significant number of risks because the viral infection rate has capacity to ramp up again as people get back to work and particularly in the cramped conditions of factories. The bigger question is whether China is willing to tolerate community spread on the assumption most workers will recover in a relatively short period of time. I believe that is the most likely scenario considering the continued risk from domestic or imported infections.

A link to the full memo is posted in the Subscriber's Area.

There is no doubting we saw evidence of contagion selling last week with everything selling off as quantitative strategies headed for the exits en masse and ditched ETF positions in the process. The growth of passive investing and the ease with which positions can be exited is contributing factor in the speed with which declines take place in today’s market.

Though the Fed met Wall Street’s hopes for aggressive action with its half-point reduction, Chairman Jerome Powell seemed to unnerve markets by saying it’s unclear how long the virus’s impact will last. Traders were already pricing in another rate cut later this month, with more to come in June.

“The market is trading right now on a lot of fear and uncertainty,” said Gary Pollack, head of fixed income at DWS Investment Management. “The Fed certainly didn’t bring calm, and the virus continues. The Fed’s relatively large move also made people wonder what they know that we don’t.”

The central bank’s decision came a few hours after Group-of-Seven finance chiefs issued a coordinated statement saying they were ready to act to shield their economies from the virus. Policy makers faced pressure to act after the OECD warned the world economy faces its “greatest danger” since the 2008 financial crisis.

The market is pricing in the assumption the US economy is going to lock up in exactly the same fashion as the Italian or Chinese economies did as coronavirus concern/paranoia spreads. There is no doubt the virus is dangerous for at-risk groups, but the bigger question is whether its effects will persist beyond the first quarter or perhaps second quarter, not least because warmer weather will likely curtail its spread as temperatures rise.

A more urgent consideration is today is Super Tuesday. The biggest issue investors are worried about is the potential Bernie Sanders is going to be the next President of the USA. The range of proposals he has tabled include breaking up the banks, financial services taxes, capping interest rates, breaking up internet and cable companies, Medicare negotiations for drug pricing, importing foreign drugs, capping prices, end health insurance, banning fracking, insist on 100% renewable utilities and railroads, cars and manufacturing. It’s very unlikely any of these will become law without the Democrats retaining the control of the House and also winning the Senate. However, President Trump has demonstrated just how much power the executive branch has and therefore there are grounds for worry.

After a week characterised by selling across the board, a great deal of profit taking has taken place and many overextensions relative to the trend mean have been unwound. The question I believe many people will be concerned with is whether the coronavirus is going to be the catalyst for an economic contraction? I thought it would therefore be worth monitoring the kinds of instruments that offer a lead indicator for that kind of concern.

A link to the full report is posted in the Subscriber's Area. 

The graphic of mortality versus contagion included in the appendix of the report is the best one yet comparing COVID-19 with other killers.

The proximity of the Spanish flu to the range of potential outcomes from the new virus is obviously a topic of conversation. The Spanish flu came in three waves, in Spring 1918, Autumn 1918 and Winter 1919 and disproportionately killed young people. COVID-19 on the other hand tends to most kill people with compromised lung function and older people.

A 61-year-old Brazilian man who lives in Sao Paulo was infected during a recent trip to Northern Italy and tested positive upon returning to the country, Health Minister Luiz Henrique Mandetta said Wednesday at a news conference in Brasilia. The patient, who traveled via France on the way back to Brazil, is doing well and is at home, a Sao Paulo state official said.

“We’ll have to see how the virus reacts in a tropical country in the middle of summer,” Mandetta said. “We still can’t say how lethal this virus will be.”

Maybe they should ask how Singapore has successfully contained the spread of the virus? The stock market lost now time pricing in the fear of a wider spread with the iBovespa dropped nearly 8% to test the region of the trend mean and the four-year sequence of higher reaction lows.

Remdesivir is the “one drug right now that we think may have efficacy,” Bruce Aylward, an assistant director-general at the World Health Organization, said at a briefing in Beijing. WHO officials and international scientists are in the country assessing the outbreak.

The spread of the coronavirus accelerated internationally over the weekend with exponential growth in South Korea and Italy. Right now, there are no cures for the ailment and therefore any whiff of a successful treatment is likely to be rewarded with investor interest.

Masahiro Kami, an infectious diseases expert, said he was skeptical that the suspension of some public events would have a significant impact on the spread of the virus. “Commuting on a packed train, for instance, is way worse than taking part in the Tokyo marathon,” he said.

Dr. Kami, who heads a nonprofit organization called the Medical Governance Research Institute, said a media focus on the few cases of serious illness from coronavirus infection in Japan had created a panic over the need to cancel events.

While Japan initially had a handful of cases involving people who had come from Wuhan, the center of the epidemic in China, or had direct contact with someone from Wuhan, a surge of cases in the past week included many whose path of infection wasn’t clear. The cases span from Hokkaido in the north to Okinawa in the far south.

More than 1,000 people disembarked from the Diamond Princess cruise ship between Wednesday and Friday, and they entered Japan without restrictions on their movements. All of those passengers tested negative for the virus, but in some cases people have tested positive after a negative test—including two cases reported Friday in Australia, which sent a flight to Japan to repatriate citizens who had been on the ship.

The coronavirus popping up in unrelated areas in Japan is not exactly good news. Additionally, the lax quarantine imposed on the passengers of the Diamond Princess cruise liner greatly increases the potential for the virus to spread even further. At a minimum the potential is for much tighter measures to contain the spread across Japan and other countries. This is also going to create a headache for Abe’s government.

China’s top leaders have kept their official deficit target below 3%, partly through belt-tightening, as a gesture to deter excessive borrowing as the nation fights debt on multiple fronts. Yet it has also given way to all types of off-balance sheet borrowing, a problem S&P Global Ratings said may re-emerge this year.

Signs of more proactive fiscal policy have already appeared. The Ministry of Finance allowed local governments to sell more than 1.8 trillion yuan ($258 billion) of debt before the annual budget has been approved. The ministry has also announced targeted tax cuts to help companies and households hit by the virus, partially waived social security premiums or delayed taxes.

“Fiscal policy ought to be counter-cyclical, and the tension between revenue and expenditure shouldn’t be a reason to constrain it,” said Xu Gao, chief economist at BOCI Securities Ltd. in Beijing. “The government should increase the fiscal deficit to cope with the virus, and ease spending pressure by selling more debt.”

 

Economic activity in much of China has ground to a halt. Factories are struggling to get back to full capacity, where they can open at all, and consumer confidence has taken a significant hit so discretionary spending is cratering. That is particularly true in the leisure and travel sectors. There was news today that casinos in Macau are now allowed to open again but it will be a while before consumers have the confidence to go back. We were at lunch with another expat Asian couple yesterday and they are going to skip visiting Asia this year. That’s a pretty common reaction to the evolving scenario. Most people’s conclusion is why take the risk?

Output in the world’s largest auto market could be cut by more than 1.7 million cars should the spreading virus resulted in more shutdowns of manufacturing facilities across China, lasting into mid-March, according to an IHS Markit estimate last month.

The auto industry accounts for more than 80% of demand for the precious metal, according to a Johnson Matthey report released Wednesday. That makes it difficult for the market to ignore the shutdowns in China.

“The effects on the wider, global supply-chain are also starting to show,” refiner Heraeus Holding GmbH said in a research note. “Plants across Europe and the wider Asia region are also at risk now because of problems sourcing Chinese-made parts.”

The palladium market is another area where investors and traders are paying scant regard to the risk of a Chinese slowdown despite the fact prices are at elevated levels.