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>>> A Week of Shock and Awe Ignites China’s Stock Markets
The Wall Street Journal
by Rebecca Feng, Jason Douglas
9-30-24
https://www.msn.com/en-us/money/markets/a-week-of-shock-and-awe-ignites-china-s-stock-markets/ar-AA1rr3gi?cvid=dfdee113fba5454bde0c227ee27e33a1&ei=72
It is too early to tell if China’s weeklong blizzard of stimulus will reignite flickering growth. But its impact is already unmistakable in one corner of the economy: Red-hot stock markets.
Some $143 billion worth of stocks changed hands in 35 minutes of fevered trading in Shanghai, Shenzhen and Beijing on Monday—the shortest-ever span of time in which stock trading hit the one-trillion yuan mark in the country’s history.
China’s benchmark CSI 300 index has soared 25% since the country’s central bank unleashed the first wave of easing measures on Tuesday last week, erasing the previous nearly 14 months’ losses in the span of five trading sessions. In the southern Chinese city of Shenzhen, the technology-focused ChiNext index rocketed up 15.4% on Monday, its largest single-day rise since the index came into existence in 2010.
The stock-market frenzy follows an extraordinary week for the Chinese economy. After months of drip-feeding tiny doses of policy support into an ailing economy crying out for major surgery, China’s top leadership relented. Volley after volley of growth-friendly pledges were announced in a daily staccato, with officials pledging more to come if needed. The blast of stimulus—and the epic rally it set off—came on the eve of a seven-day holiday marking the 75th anniversary of the founding of the People’s Republic.
Yet the big question is whether stock investors’ euphoria will be matched by a durable turnaround in China’s struggling economy. Official and private surveys of economic activity released Monday underscored the challenge: Manufacturers reported a fifth straight month of shrinking activity, adding to a run of downbeat data that economists say explains the government’s sudden jolt into action.
“Policy has moved into an emergency mode,” said Larry Hu, chief China economist at Macquarie.
Uncertainty over whether the stock-market rally will be followed by a similarly impressive economic revival springs from still-unanswered questions about just how much support Beijing is preparing to pump into the economy.
Though officials pledged more fiscal spending, they haven’t yet put a number on it, or offered much in the way of specifics. They promised to stabilize the property sector, but analysts say the details announced so far don’t come close to achieving that.
The larger worry, some economists say, is that authorities do enough to lift growth toward their official growth target of around 5% for this year—but not enough to drive a lasting recovery and see off the threat of persistent deflation.
“There is a danger that hope rather than facts are leading the market,” said Nick Borst, director of China research at Seafarer Capital Partners, a California asset manager focused on emerging markets.
In the blizzard of policy moves announced in China in the past week, the biggest slice of the action so far came from the People’s Bank of China. The central bank’s governor, Pan Gongsheng, on Tuesday last week announced plans to cut a bevy of interest rates and shove billions of yuan into the stock market—with pledges of billions more to come, if necessary.
On Thursday, the readout of a meeting of the Communist Party’s top decision-making body, chaired by leader Xi Jinping, showed that officials unexpectedly devoted their September meeting to scrutinizing the economy. Economics is typically discussed during its April, July and December meetings, providing a hint of the seriousness with which officials are now looking upon the economic malaise. The readout from the meeting was short on detail, but pledged more fiscal and monetary support for the economy and more action to stabilize the property sector, in crisis since 2021.
The measures kept coming. On Sunday evening, the government said it would lower down payments for second homes and allow existing homeowners to refinance their mortgages at lower interest rates, which although common in the U.S. is difficult in China.
Some big cities followed up with their own real-estate measures. The southern manufacturing hub of Guangzhou said Sunday that it would remove all remaining restrictions on home purchases, while Shanghai and Shenzhen, two of China’s biggest and wealthiest cities, said they would allow more people to buy homes and relax quotas on purchases in suburban areas.
The result of this policy blitz: Trading in stocks exploded, again, on Monday, while in Shenzhen, the local housing bureau pointed to apartments in a new affordable-housing project selling out in eight hours.
By the end of the day Monday, the value of stocks traded in China’s domestic stock market had reached $372 billion, the highest single-day total ever.
Of the five major stock-market rallies in China in the past quarter-century, three were powered by stimulus. Stocks during those episodes notched trough-to-peak gains of between 50% and 100%, suggesting this rally could have much further to run if policymakers follow through with meaningful stimulus and property-market support, Thomas Gatley, China strategist at Gavekal Dragonomics, wrote in a report Monday.
A surging stock market could help perk up consumers and stimulate growth, said Tommy Xie, OCBC Bank’s head of Greater China research and strategy. “What has excited markets even more is China’s recognition of the interconnectedness between capital markets and economic recovery,” he said.
Property stocks were some of the biggest gainers. Hong Kong-listed shares of Kaisa Group, Sunac China Holdings, and Fantasia Holdings, all of which have defaulted on their debts, surged 83%, 55% and 38%, respectively. More than a dozen other defaulted developers also saw their shares climb by 10% or more, according to data provider Wind.
The euphoria around bank stocks was much more restrained, as fresh policies such as lowering mortgage rates and cutting interest rates threaten to further erode profit margins. Shanghai-listed shares of the country’s largest four banks edged up by between 2% and 4%.
Then, there are the remaining concerns around China’s economic fundamentals. In addition to the fifth straight month of manufacturing-sector contraction, the official purchasing managers index also showed export orders weakening and surveyed firms signaling continued caution on hiring.
A parallel measure of activity in the services sector slid into contraction in September, offering another sign of faltering consumer sentiment. Recent data had shown slowing growth in retail sales.
Economists say Beijing needs to offer more details on its fiscal policy plans to assess whether stimulus plans will amount to much. Interest-rate cuts are welcome, they say, but data and surveys suggest many households and businesses are still reluctant to borrow, muffling the intended effects of central bank easing measures.
Robin Xing, chief China economist at Morgan Stanley, told clients in a note Sunday that he expects officials to announce a supplementary budget in October, in which he expects Beijing will pencil in another 1 trillion to 2 trillion yuan, equivalent to $143 billion to $285 billion, worth of spending focused on supporting consumption and local governments’ stretched finances.
But Xing added that officials face “a long drawn-out battle” to get inflation up and growth back on a sustainable path.
Beijing’s main response to the slowdown so far has been to funnel investment into factories. The resulting pickup in production has hammered prices and profits and fueled trade tensions overseas, where many countries are growing alarmed at a wave of cut-price Chinese imports squeezing homegrown industries.
And even after the latest announcements on real estate, the sector remains a severe drag on China’s economy. Economists say Beijing still needs to do more to clear a backlog of unfinished homes that have already been paid for if consumer confidence is to return.
“Amid all the euphoria, the structural issues are still there,” said Rory Green, chief China economist at GlobalData TS Lombard in London.
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>>> US approves tariff hikes on Chinese goods, including a 100% duty on EVs
Semafor
by Marta Biino
September 13, 2024
https://www.yahoo.com/news/us-greenlights-tariff-hikes-chinese-142156503.html
The US ratified sharp increases in tariffs on Chinese products Friday including a 100% duty on electric vehicles, in ongoing efforts to protect domestic industries from a flood of cheap Chinese goods.
The tariffs, which include a 50% levy on solar cells and 25% on steel, aluminum, EV batteries and key minerals, will go into effect at the end of September, Reuters reported.
Top White House economic adviser Lael Brainard told the outlet that the decision was a way to “ensure that the US EV industry diversifies away from China’s dominant supply chain.”
Tariff stance on China is a key topic ahead of US election
The steep tariffs come as the US’ two presidential candidates — Kamala Harris and Donald Trump — have projected tough-on-China stances ahead of November’s election. Harris will likely adopt a similar policy position to that of the Biden administration, while Trump’s vowed to once again become a ”tariff man,” threatening even higher levies on Chinese goods if he is reelected, marks a “protectionist escalation” in rhetoric that is rattling Republicans, Semafor’s Burgess Everett reported. But overall, the difference in approach toward Beijing between the two candidates seem to have “less to do with direction and more to do with degree,” Time noted.
Global curbs on China EVs haven’t slowed sales
Along with the US, the EU and Canada have also introduced curbs on Chinese EVs — but they have had little effect on sales, Euronews reported. In August, delivery numbers for most major Chinese EV makers actually increased, signaling “a rebound in demand for the vehicles internationally and suggesting that Chinese EV makers may be able to withstand regulatory challenges posed by new tariffs,” the outlet noted. Beijing-backed electric vehicle makers are also looking for creative ways around the efforts to limit their sales, with BYD, the country’s biggest, investing in manufacturing facilities across the world to more easily sidestep the tariffs.
Tariffs an ‘irrational’ move in light of global green transition
From a climate perspective, tariffs on electric vehicles — such as those imposed by the EU — are “irrational,” the director of the Institute for European Policy-Making at Bocconi University in Milan argued in Project Syndicate. The race to develop electric cars should be seen as “desirable,” he wrote, given the bloc’s effort to position itself as leading the fight against climate change. And while an ongoing trade war between some Western countries and Beijing may justify some of the EU’s concerns, the tariffs will undoubtedly make reaching the bloc’s net-zero targets more expensive, if not jeopardize them altogether, an environment research associate wrote for Britain’s Chatham House think tank.
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>>> China’s deflationary spiral is now entering dangerous new stage
Bloomberg News
Sep 9, 2024
https://finance.yahoo.com/news/china-deflationary-spiral-now-entering-103006274.html
(Bloomberg) — Deflation stalking China since last year is now showing signs of spiraling, threatening to worsen the outlook for the world’s second-largest economy and raising calls for immediate policy action.
Data released Monday confirmed that apart from food costs, consumer price growth barely registered in large swathes of the economy at a time when incomes are sagging.
A broader measure of economy-wide prices known as the gross domestic product deflator will likely extend its current five-quarter drop into 2025, according to Bloomberg Economics and analysts at banks including BNP Paribas SA. That would amount to China’s longest streak of deflation since data began in 1993.
“We are definitely in deflation and probably going through the second stage of deflation,” said Robin Xing, chief China economist at Morgan Stanley, citing evidence from wage decreases. “Experience from Japan suggests that the longer deflation drags on, the more stimulus China will eventually need to break the debt-deflation challenge.”
The danger for China is deflation could snowball by encouraging households reeling from falling paychecks to cut back on spending, or delay purchases because they expect prices to fall further. Corporate revenues will suffer, stifling investment and leading to further salary cuts and layoffs, bankrupting families and firms.
Private surveys show that’s already starting to happen. In sectors of the economy favored by the government — such as electric vehicle-manufacturing and renewables — entry-level salaries declined by almost 10% in August from a peak in 2022, according to findings by Caixin Insight Group and Business Big Data Co.
A survey of 300 company executives by the Cheung Kong Graduate School of Business showed growth in labor costs last month was the weakest since April 2020, when China’s initial Covid lockdowns began to ease.
Separate data from Zhaopin Ltd. shows average hiring salaries in 38 major cities barely changed in the second quarter, in contrast to the 5% growth seen in the two years before the pandemic.
It’s a cycle the world has seen before in Japan starting in the 1990s during a period that came to be known as its “lost decades” — when a grinding stagnation followed a burst bubble in real estate and financial markets.
While Chinese officials have sought to stifle discussion about deflation, warning analysts to avoid using the term, it’s beginning to enter public dialogue. Former central bank Governor Yi Gang last week said rooting out deflation has to take priority for policymakers, a rare admission by a prominent figure in China that falling prices are threatening the outlook.
Yi called for “proactive fiscal policy and accommodative monetary policy” and said officials “should focus on fighting deflationary pressure,” at a panel discussion at the Bund Summit in Shanghai on Friday. China’s immediate goal should be to turn its GDP deflator positive in the coming quarters, he said.
So far, officials have given no sign of any significant shift from their cure-all of encouraging production rather than addressing weak demand with steps such as greater government spending on public services and consumer subsidies.
In a sign price pressures are becoming even more subdued, China’s core inflation — which strips out volatile items such as food and energy — cooled in August to the weakest in more than three years. Expectations for deflation are spilling into markets, stoking a bond rally that’s sent yields to record lows and stoked official concerns that banks have become too exposed to interest-rate risks.
The weak price pressures are evident in the growth pace of China’s nominal GDP, which expanded just 4% in the second quarter — well under the nation’s real economic growth goal of around 5% this year.
At times of weak price gains, nominal expansion is a more useful indicator because it better reflects changes in wages, profits and government revenue, Luo Zhiheng, chief economist at Yuekai Securities Co., wrote in a note earlier this month.
For Jack Liu, a 37-year-old sales engineer of aluminum products in southern China, the impact hit home after realizing he no longer ordered extra eggs at breakfasts.
Plummeting market demand forced his company to cut prices and sell at a loss last year. That slashed his income to less than a 10th of what once exceeded 1 million yuan ($141,000), making mortgage payments a struggle.
“The country doesn’t admit there’s deflation,” said Liu, who lives in Foshan in Guangdong province. He has a modest following of 1,100 people on the Instagram-like Xiaohongshu, where he warns regularly about the danger of deflation.
The speed of the deterioration in China’s price outlook has taken the market by surprise.
Inflation was weaker than forecast in three of the past four months, growing just 0.6% in August — an increase due largely to a 2.8% pickup in food prices. Core inflation last month rose just 0.3% to remain below 1% for an 18th month.
Underscoring the drag on inflation, producer prices have been falling since late 2022. Manufacturers’ raw material and selling prices both contracted for the second month in August, official data shows, while charges by services and construction companies shrank at the fastest pace since April 2020.
The dilemma is that even monetary expansion in China could be deflationary by being mainly directed at the supply side of the economy, Michael Pettis, a senior fellow at the Carnegie Endowment for International Peace, wrote in an article last month.
Meanwhile, the deflationary mindset is starting to take hold. Consumer confidence is hovering at a record low, and households report a growing willingness to save instead of spending or buying homes.
For Liu, the aluminum industry worker, as the pain deepens, the solution lies with policymakers in Beijing. “The government needs to at least take some concrete measures,” he said, “to lift consumption and improve people’s expectations.”
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>>> Sino-French satellite launched into orbit, China's CCTV says
by Reuters
6-22-24
https://www.msn.com/en-us/news/world/sino-french-satellite-launched-into-orbit-china-s-cctv-says/ar-BB1oHazN?OCID=ansmsnnews11
SHANGHAI/BEIJING (Reuters) - A satellite developed by China and France, the most powerful yet for studying the farthest explosion of stars, was launched into orbit on Saturday, Chinese state broadcaster CCTV reported.
The satellite to study phenomena including gamma-ray bursts was lifted into orbit by a Chinese carrier rocket launched from the Xichang Satellite Launch Center in the southwestern province of Sichuan, CCTV said.
The launch of the Space Variable Objects Monitor will play an important role in astronomical discoveries, the broadcaster said, citing the China National Space Administration.
It is the first astronomy satellite developed by China and France, although they developed the China-France Oceanography Satellite, launched in 2018, China Daily reported in April.
China's advances in space and lunar exploration are rapidly outpacing those of the United States, attracting partners from European and Asian countries as a result.
China's Chang'e-6 lunar probe this month carried to the far side of the moon payloads from the European Space Agency, as well as from Pakistani, French and Italian research institutes.
China is working with countries including Brazil, Egypt and Thailand to develop and launch satellites.
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>>> Yuan Devaluation Debate Surfaces as Traders Weigh Next FX Shock
Bloomberg
4-28-24
https://www.bloomberg.com/news/articles/2024-04-29/yuan-devaluation-debate-surfaces-as-traders-mull-next-fx-shock
Supporters say sharp currency drop can help China’s economy
But such a move is controversial as it can trigger outflows..
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NetEase - >>> ‘Warcraft’ Returns to China as Blizzard and NetEase Settle Spat
Bloomberg
by Sabrina Mao and Zheping Huang
April 9, 2024
https://finance.yahoo.com/news/warcraft-returns-china-blizzard-netease-010000423.html
(Bloomberg) -- NetEase Inc. reached a new agreement to distribute games in China for Microsoft Corp.’s Blizzard Entertainment, salvaging a 15-year relationship and reviving titles like World of Warcraft for the world’s biggest gaming market.
With the deal, famed franchises like StarCraft, Diablo, Hearthstone and Overwatch will once again be live for players in China. The Hangzhou-based publishing giant and Microsoft’s Activision Blizzard subsidiary halted a longtime partnership in January of last year after failing to agree on an extension, causing a 15% plunge in NetEase shares in Hong Kong.
Separately, Microsoft’s gaming division and NetEase have agreed to explore bringing new NetEase titles to Xbox consoles and other platforms, the companies said in a statement.
“We are thrilled to embark on the next chapter, built on trust and mutual respect, to serve our users in this unique community that we’ve built together,” NetEase Chief Executive Officer William Ding said in the statement. The expiration of the previous deal descended into acrimony when the two sides alleged bad-faith negotiations for a renewal of the terms.
Blizzard suspended most online game services and sales in mainland China when the prior pact expired more than a year ago, cutting off a lucrative collaboration for both parties. Its major release in June 2023 — Diablo IV, which got off to a hot start internationally — hasn’t been officially available in China. The companies now say Blizzard games “will return to the market sequentially” starting in the summer, with further details to be provided at a later date.
Activision Blizzard was acquired in October by Microsoft in a $69 billion deal that set a record for takeovers in the video-game industry. The combined entity ranks No. 3 among global games publishers, behind Tencent Holdings Ltd. and Sony Group Corp., and was expected to seek a rapprochement with NetEase.
First signed in 2008 and renewed in 2019, the NetEase-Blizzard distribution accord has benefited both companies, feeding NetEase with globally recognized hits and giving its US partner a gateway into the world’s biggest PC and mobile gaming arena.
Before NetEase, Blizzard distributed World of Warcraft in China through Shanghai venture The9 from its release in 2004 through 2008. But that partnership ended in a rift, with Chinese players unable to access the game for more than a month. China’s No. 2 gaming giant swooped in as Blizzard sought to find a new local publisher, first signing a deal to run StarCraft II and Warcraft III, then taking over World of Warcraft, which at the time was the most popular online game in China.
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>>> Global X ETFs To Liquidate 19 ETFs
PR Newswire
January 19, 2024
https://finance.yahoo.com/news/global-x-etfs-liquidate-19-213000999.html
NEW YORK, Jan. 19, 2024 /PRNewswire/ -- Global X ETFs, the New York-based provider of exchange-traded funds, today announced the scheduled liquidation of the following ETFs (the "Funds"), based on an ongoing review process of its product lineup to ensure it meets the evolving needs of its clients. The Funds scheduled for liquidation include:
Global X Cannabis ETF
Global X Carbon Credits Strategy ETF
Global X China Biotech Innovation ETF
Global X Green Building ETF
Global X Health & Wellness ETF
Global X Metaverse ETF
Global X MSCI China Communication Services ETF
Global X MSCI China Consumer Staples ETF
Global X MSCI China Energy ETF
Global X MSCI China Financials ETF
Global X MSCI China Health Care ETF
Global X MSCI China Industrials ETF
Global X MSCI China Information Technology ETF
Global X MSCI China Materials ETF
Global X MSCI China Real Estate ETF
Global X MSCI China Utilities ETF
Global X MSCI Next Emerging & Frontier ETF
Global X MSCI Pakistan ETF
Global X MSCI Portugal ETF
Based upon the recommendation of Global X Management Company LLC, the Global X Funds' adviser, the Board of Trustees determined on January 19, 2024 that it was in the best interests of the Funds and their shareholders to liquidate each of the Funds. The Funds represent less than 1% of the assets of Global X ETFs.
Shareholders may sell their holdings in the Funds prior to the end of the trading day on Friday, February 16, 2024, and customary brokerage charges may apply to these transactions. The Funds will cease trading at the end of the trading day on Friday, February 16, 2024. The Funds are expected to liquidate on or around Friday, February 23, 2024. Any person holding shares in the Funds as of the liquidation date will receive a cash distribution equal to the net asset value of their shares as of that date. Global X Management Company LLC will bear all fees and expenses that may be incurred in connection with the liquidation of the Funds and the distribution of cash proceeds to investors, other than brokerage fees and other related expenses.
About Global X ETFs
Global X ETFs was founded in 2008. For more than a decade, our mission has been empowering investors with unexplored and intelligent solutions. Our product lineup features over $40 billion in assets under management.i While we are widely recognized for our Thematic Growth, Income, Commodity and International Access ETFs, we also offer Core, Risk Management, and other solutions to suit a range of investment objectives. Explore our ETFs, research and insights, and more at www.globalxetfs.com.
Global X is a member of Mirae Asset Financial Group, a global leader in financial services, with more than $550 billion in assets under management worldwide.ii Mirae Asset has an extensive global ETF platform ranging across the US, Australia, Brazil, Canada, Colombia, Europe, Hong Kong, India, Japan, Korea, and Vietnam with over $80bn in assets under management.iii
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>>> Everything China is Doing to Rescue Its Battered Stock Market
Bloomberg News
Feb 7, 2024
https://finance.yahoo.com/news/everything-china-doing-rescue-battered-083645073.html
(Bloomberg) -- Chinese stocks have staged a nascent recovery from a $7 trillion rout, thanks to intensifying rescue efforts as authorities seek to prevent the market from slumping for a fourth straight year.
The benchmark CSI 300 Index has gained 5.2% so far this week. The rebound came after a quickening drumbeat of policy support, which included replacing the market regulator and wider trading curbs as well as state buying of major bank stocks. News that regulators planned to brief President Xi Jinping on markets also fueled optimism.
Chinese leaders are under mounting pressure to act more resolutely to end a stock-market meltdown that risks undermining financial and social stability, at a time when the economy is mired in worsening housing woes and persistent deflationary pressures. Authorities also appear keen to prevent a weak market from further dampening already anemic consumption as China enters the Lunar New Year holiday week.
Here’s a list of measures that have either been announced or reported on to start the year as China seeks to aid the economy and calm investors.
Feb. 7:
In a surprise move after markets had closed for the day, Beijing replaced the head of its securities regulator. Wu Qing, a banking and regulation veteran who earned the reputation as “the broker butcher” when he led a crackdown on traders in the mid-2000s, is replacing Yi Huiman as chairman and party chief of the China Securities Regulatory Commission, according to the official Xinhua News Agency.
Feb. 6:
Funding Support for Developers
China’s financial regulator calls for further, prompt implementation of a financing coordination mechanism to support developers at a meeting, according to a statement.
Regulators Plan to Brief Xi
Regulators plan to brief President Xi Jinping on the market as soon as Tuesday, Bloomberg News reported. While it’s unclear whether any new support measures will come out of the Xi meeting, traders are hoping this time will be different.
Sovereign Wealth Fund Pledges Support
Central Huijin Investment Ltd., the unit that holds Chinese government stakes in big financial institutions, said it will buy more exchange-traded funds. The securities regulator vowed in a follow-up comment to maintain stable market operations, adding that authorities will continue to guide various institutional investors and funds to enter the market with greater efforts.
M&A and Restructuring Support
China will strongly support listed companies to enhance their investment value through mergers, acquisitions and restructuring, the China Securities Regulatory Commission said in a statement.
‘National Team’ Buying Shares
The so-called national team has bought roughly 70 billion yuan ($9.7 billion) of onshore Chinese shares in the past month, according to estimates by Goldman Sachs, adding that 200 billion yuan or ~0.8% of free float market capitalization is needed to stabilize the market.
The national team refers to a group of Chinese state funds tasked to support markets. Meantime, overseas investors, which may include offshore proxies for such state funds, bought another 1.7 billion yuan of mainland stocks via trading links with Hong Kong Wednesday, marking the seventh consecutive session of inflows.
Read more: China’s Small-Cap Crash Shows What Happens Without Market Rescue
Restricting Sales
China is tightening trading restrictions on domestic institutional investors as well as some offshore units as authorities fight to stem a deepening stock rout, according to people familiar with the matter.
Officials this week imposed caps on some brokerages’ cross-border total return swaps with clients, limiting a channel that can be used by China-based investors to short Hong Kong stocks, said the people, asking not to be identified discussing a private matter. At the same time, some Chinese brokers that use the channel to buy mainland shares for their offshore units were told not to reduce their positions, the people said.
Read more: China Widens Stock Trading Curbs on Quants, Offshore Units
Feb. 5:
Monetary Stimulus
Beijing added about 1 trillion yuan into markets Monday with the previously announced cut to banks’ reserve requirement ratio taking effect. That has helped keep cash ample, with money markets showing few signs of stress.
Regulators Check in With Listed Firms
China’s regulatory officials visited listed companies in 20 provinces and municipalities from Jan. 29-Feb. 4, according to a statement from China Securities Regulatory Commission. Regulators are accelerating their process to solve issues raised by listed companies on taxation policy, financing, land, imports and exports, as well as intellectual property right protection.
Help for Home Builders
Cash-strapped Chinese property developers said a range of their housing projects have been listed as eligible for funding under the latest program to support the ailing sector. The flurry of activity comes just three weeks after Beijing urged local authorities to draft a list of projects eligible for funding. Policymakers want risk-averse banks to step up lending to the real estate sector, which saw credit growth slow to the weakest in more than a year last quarter, undermining developers’ ability to complete homes.
Promise to Deal with Margin Call Risks
China stock traders are unwinding their margin debt rapidly, underscoring how a prolonged selloff may be leading to some forced share liquidation. In response, the securities regulator said it will guide brokerages to adjust their margin call levels and maintain “flexible” liquidation lines in an effort to reduce pressure from forced selling of pledged shares.
Feb. 4:
Regulator Vows to Prevent ‘Abnormal Fluctuations’
The China Securities Regulatory Commission vowed on Sunday to prevent abnormal fluctuations, saying it would guide more medium- and long-term funds into the market and crack down on illegal activities including malicious short selling and insider trading.
Feb. 1:
PBOC Supports Housing and Infrastructure
The People’s Bank of China provided 150 billion yuan worth of low-cost funds for lending to housing and infrastructure projects last month, stepping up support for the economy.
Share Buybacks
Firms listed in mainland China and Hong Kong spent 14 billion yuan and HK$21 billion ($2.6 billion) repurchasing shares last month, respectively, each marking a record since 2021 when Bloomberg began compiling the data.
Jan. 28: Securities Lending Restriction
Securities regulators said they will halt the lending of certain shares for short selling, the latest attempt to put a floor under the stock market rout. Strategic investors, which typically refers to holders with restricted shares, won’t be allowed to lend out the stock during agreed lock-up periods.
Read More: China Tightens Securities Lending Rule to Support Stock Market
Jan. 27: Real Estate Easing
Guangzhou, one of China’s biggest cities, further loosened home-buying curbs in a bid to stem falling prices. Beijing, Shanghai and Shenzhen have lowered down-payment requirements since November.
Read More: China’s Guangzhou Eases Property Curbs Further as Prices Fall
Jan. 26: Aid for Developers
The Ministry of Housing and Urban-Rural Development said it will provide a list of housing projects eligible for funding support by the end of the month, the latest attempt to boost lending for real estate to slow the sector’s slump.
Read More: China to List Property Projects Eligible for Funding
The same day, the National Financial Regulatory Administration urged banks to support requests by qualified developers including extending existing loans and adjusting repayment arrangements.
Read More: China Property Developers Rise After Guangzhou Easing, Supports
Jan. 24: RRR Cut, Property Loans, More
People’s Bank of China Governor Pan Gongsheng said the central bank will lower the reserve requirement ratio — the amount of cash lenders must keep in reserve — by 0.5 percentage points on Feb. 5 to release 1 trillion yuan ($139 billion) in long-term liquidity to the market. The announcement, coming after official data showed the nation’s economy was still grappling with major challenges, marked the biggest RRR cut since 2021.
Read More: China Ramps Up Stimulus, Market Rescue With Sudden RRR Cut
Hours later, regulators unveiled more measures, including broadening the use of commercial property loans for developers to help them repay other debt.
Read More: China Adds Support for Developer Funding By Easing Loan Uses
The same day, authorities in China and Hong Kong announced steps to deepen financial ties, including facilitating real estate purchases and expanding a program that allows for personal investments in the Greater Bay Area, a region of 70 million people that includes Hong Kong and megacities in the southern mainland such as Shenzhen and Guangzhou.
Read More: China and Hong Kong Broaden Investment and Financing Links
Jan. 23: Stock Rescue Package
Policymakers are considering using about 2 trillion yuan, mainly from the offshore accounts of Chinese state-owned enterprises, as part of a stabilization fund to buy shares onshore through the Hong Kong exchange link, Bloomberg reported. They have also earmarked at least 300 billion yuan of local funds to invest in onshore shares through China Securities Finance Corp. or Central Huijin Investment Ltd. A day earlier, Premier Li Qiang asked authorities to take more “forceful” measures to stabilize the stock market and investor confidence. His request came after the CSI 300 Index touched a five-year low.
Read More: China Eyes Stock Rescue Package Backed by $278 Billion
Jan. 19: Signs of State Buying
The aggregate turnover in some of the country’s top exchange-traded funds — commonly watched for signs of state-led buying — reached the third-largest weekly total ever. It was the most since July 2015, when the so-called “national team” tried to offset selling momentum amid an epic bubble bursting.
Read More: Record Turnover in China ETFs Fuels State Buying Speculation
Jan. 16: Special Bonds
China is considering 1 trillion yuan of new debt issuance under a so-called special sovereign bond plan, Bloomberg News reported. The proposal discussed by senior policymakers would involve the sale of ultra-long sovereign bonds to fund projects related to food, energy, supply chains and urbanization.
Read More: China Weighs More Stimulus With $139 Billion of Special Bonds
Jan. 5: Rental Housing
The PBOC and the NFRA published guidelines on financial support for the development of the market for rental housing. That included a policy to encourage banks to provide loans for developers, industrial zones, certain rural organizations and companies to build new homes for long-term renting or renovating existing facilities for that purpose.
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>>> Leaders from emerging economies are visiting China for the 'Belt and Road' forum
Associated Press
10-15-23
https://www.msn.com/en-us/money/companies/leaders-from-emerging-economies-are-visiting-china-for-the-belt-and-road-forum/ar-AA1igDcm?OCID=ansmsnnews11
BEIJING (AP) — Leaders of emerging market countries are arriving in Beijing for a meeting organized by the Chinese government that will mark the 10th anniversary of its Belt and Road Initiative.
More than a dozen leaders from Africa, Asia and the Mideast were flying into Beijing on Monday, following the arrivals of Chilean President Gabriel Boric and Hungarian Prime Minister Viktor Orbán on Sunday. Others are coming on Tuesday.
Under the Belt and Road Initiative, a signature policy of President Xi Jinping, Chinese companies have built ports, roads, railways, power plants and other infrastructure around the world in a bid to boost trade and economic growth.
But the massive Chinese development loans that funded the projects have also burdened some poorer countries with heavy debts.
A flurry of diplomacy is expected on the sidelines of the third Belt and Road Forum, whose main events are on Wednesday. Orbán met with Xi and Premier Li Qiang, Hungary's state news agency MTI said. The forums also were held in 2017 and 2019.
Kenyan President William Ruto will be seeking additional loans for stalled road projects despite the country's already high public debt, and an easing of the repayment of a Chinese loan for a railway project that has not proven commercially viable.
Russian President Vladimir Putin is expected to attend the forum, as are representatives of the Taliban government in Afghanistan.
Putin downplayed the idea that China, through its Belt and Road projects in Central Asia, is competing for influence in a region that Russia has long considered its backyard.
"Our own ideas on the development of the Eurasian Economic Union, for example, on the construction of a Greater Eurasia, fully coincide with the Chinese ideas proposed within the framework of the Belt and Road Initiative,” he told Chinese state broadcaster CCTV, according to a transcript posted on the Kremlin website.
The leaders who arrived on Monday included Ethiopian Prime Minister Abiy Ahmed, Sri Lankan President Ranil Wickremesinghe, Republic of Congo President Denis Sassou Nguesso, Papua New Guinean Prime Minister James Marape and Cambodian Prime Minister Hun Manet.
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Rickards on China - >>> Paper Tiger
BY JAMES RICKARDS
SEPTEMBER 11, 2023
https://dailyreckoning.com/paper-tiger/
Paper Tiger
The story of China’s explosive growth from 1978 to 2008 is well-known.
China’s GDP surged from less than $150 billion in 1978 to over $3 trillion by 2008. China’s average annual growth rate exceeded 10% from 1978 to 2005. During this period, over 600 million people escaped poverty to obtain at least a stable if low-income standard of living.
Between 2000 and 2008, China became the factory to the world providing everything from simple assembly to textiles to world-class automobiles and laptop computers.
In the 1960s and 1970s, development economists believed that moving an economy from low-income to middle income was a huge challenge, but once middle-income status was reached the path to high-income was just a matter of time.
This was called the “takeoff ” theory based on the view that it was hard to get a plane off the ground, but once airborne it could soar to almost any feasible altitude in time.
It turns out that theory was completely wrong.
In fact, it’s relatively easy to move an economy from low-income to middle-income. All that is required is cheap and plentiful labor, urban infrastructure, basic education, and foreign capital. With those ingredients, an economy can turn itself into a manufacturing powerhouse.
The catch is that this manufacturing is mostly assembly-based. Investors may know that China is the source for about 90% of all iPhones. They may not know that Chinese value-added to the iPhone is only 6% of the sale price.
The other 94% of value added comes from the U.S. (invention and patents), Japan (gorilla glass), South Korea (semiconductors), and 26 other countries that supply critical parts.
China assembles the phones, but they did not invent them, and they did not create the high-tech inputs.
A low-income country is considered to have about $5,000 annual income per capita. The middle-income countries begin at about $10,000. The high-income countries begin around $20,000 annual per capita income but have no ceiling.
China is often touted as the “second largest economy in the world,” which it is on an aggregate basis. But when calculated on a per capita basis, it drops from number 2 to number 77 in global rankings, between Equatorial Guinea and Botswana. On a per capita basis, U.S. income is six times greater than China.
So much for China taking over the world.
Therefore, the challenge for China is how to break out of the middle-income trap and reach high-income status. This is extremely difficult to do. The only countries that have made the leap are Japan, South Korea, Hong Kong, Taiwan and Singapore.
The list of countries stuck in the middle-income trap along with China is a long one — Malaysia, India, Turkey, Thailand, Brazil, Mexico, Argentina, Russia, Chile and others.
China Is Trapped
By Jim Rickards
The way out of the middle-income trap is to develop your own high-technology intellectual property that you can then apply yourself and license to others. The middle-income countries basically pay others licensing fees for the technology they need to grow.
It’s only when you develop your own technology that you can move to higher value-added in your manufacturing and earn fees from others. The key to forecasting Chinese growth in the years ahead is therefore technology.
Can China develop its own technology ahead of advanced economy competitors and create the high-value-added industries that come with it? The outlook here is not good for China. They have shown little or no capacity to invent or produce in areas such as advanced semiconductors, high-capacity aircraft, medical diagnostics, nuclear reactors, 3D printing, AI, water purification, and virtual reality.
The projects that China does have on display that are advanced (such as their bullet trains that run quietly at 310 kph) are done with technology licensed from Germany or France or with stolen technology. China has produced major technological advances, but it has done so in non-sustainable ways including excessive debt and theft of intellectual property.
China has done little innovation on its own. The stolen technology channel is being shut down by bans on advanced semiconductor exports to China, and sanctions on the use of 5G systems from Huawei. Even China’s ability to import high-tech semiconductor manufacturing equipment as a path to developing their own semiconductors has been cut off through export bans from the U.S. and Netherlands.
The second hurdle to growth in China is its overreliance on investment to drive GDP. A country’s GDP account consists of consumption + investment + government spending + (exports–imports).
Investment can be a good way to drive an economy forward assuming the investment is carefully chosen and the returns on investment exceed any financing costs. That has not been the case in China.
Most developed economies (Germany is an exception) have consumption at about 50% to 70% of total growth with investment around 25%. In China, consumption is only 25% of GDP while investment is 45%. (Net exports are a large percentage).
China’s problem is that much of its investment is wasted. It consists of large white elephant infrastructure projects (such as the Nanjing South train station which I have visited; it has high marble walls and 128 escalators mostly empty). I’ve also visited the construction sites of the “ghost cities” one after the other almost to the horizon, also mostly empty.
This infrastructure binge is financed with debt that is now both unpayable and acts as a drag on real growth in other sectors of the economy. China has consistently failed to pivot its economy from investment to consumption with the result that the waste continues and the debt pile grows larger. China is trapped in an infrastructure and debt dead-end with no way out.
There are many other headwinds to Chinese growth in addition to the middle-income trap and the debt trap. These include declining demographics, geopolitics, corruption, extreme income inequality, and the rise of Xi Jinping as the new Mao Zedong.
But I want to widen the aperture and look at new challenges to China beyond those I’ve covered in the past. These new challenges include the risk of financial panic and new corporate failures that make the notorious Evergrande collapse look like small beer.
China is not only slowing but it may be on the brink of a financial and economic collapse that will reverberate around the world. That’s because what happens in China doesn’t stay in China. It’s critical to understand that what’s happening in China today is more than a slowdown and more than a credit crunch. It’s much closer to a full scale financial collapse.
It is possible that the Chinese government can intervene with massive fiscal stimulus. Of course, that simply increases the already colossal debt burden and kicks the problem into the tall grass for the time being.
That said, it’s not clear that the Chinese government wants to intervene in this manner. Chairman Xi may just let the chips fall where they will, knowing that most of the losses will actually fall on U.S. investors and Japanese banks.
If Xi takes that approach, the damage will not be confined to China. In fact, the financial contagion could resemble the virus contagion that began in China. It starts in China, but spreads quickly to Europe, Japan, and the United States. The damage here may be greater than the damage there; a strange kind of net benefit to China.
This comes at a time when the U.S., Europe, and Japan are facing their own headwinds (in terms of reduced commercial lending, declining manufacturing, and contracting world trade despite consumers remaining somewhat strong for the moment).
So, a Chinese collapse would be a force multiplier that might throw the world into a global financial panic.
In fact, China is facing a new financial crisis that may leave the rest in the shade. This involves the collapse of a shadow bank called Zhongrong International Trust. Zhongrong is not a pure play property developer like Evergrande nor is it a bank. Instead, it is a shadow bank (offering notes and investing the proceeds) with some property development activities, but many other investment schemes as well.
For years, Zhongrong relied on its reputation as one of the top financial groups in China. Yet, it’s now been revealed that assets taken in as wealth management products were transferred to corporate headquarters and used for various speculations not connected to any specific wealth management goal.
In this respect, Zhongrong resembles the notorious FTX crypto fraud in which billions of dollars of customer funds were diverted to proprietary speculation and spending sprees by the principals. Above all, Zhongrong is non-transparent and lightly regulated, which has resulted in a complete lack of accountability. As the firm fails it has become impossible for regulators to respond appropriately since they really have no idea what is going on inside the company.
Chinese authorities have established a task force to study possible contagion. Of course, the contagion has already started, which shows how behind the curve regulators are. I can’t say with certainty how large the losses from the Zhongrong will be although a total loss of $500 billion taking into account shareholder equity, wealth management products, and direct accounts seems likely.
Of course, that will just be the tip of the iceberg as contagion takes hold and the panic spreads.
My expectation is that Chairman Xi and the CCP will not resort to fiscal stimulus this time, but will let the rotten edifice of bad debt and fraud collapse of its own weight. Chinese stock markets will fall 50% or more as a result. This will give China a chance to clean out the deadwood (with lots of fraud trials and jail terms) and reset the system.
Of course, a collapse of that size will not be confined to China. In fact, the CCP may be betting that much of the economic fallout will land in the United States. Investors in the U.S. should expect a U.S. stock market collapse along with bank failures and a wave of bad debts beginning late this year.
It’s not too late to prepare accordingly. Yet, this may be the last warning.
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>>> Chip Leaders Head to Washington to Lobby for China Rules Relief
Bloomberg
by Jenny Leonard and Ian King
July 14, 2023
https://finance.yahoo.com/news/chip-leaders-head-washington-lobby-001528633.html
(Bloomberg) -- America’s largest semiconductor companies are embarking on a last-ditch effort to head off new curbs on their sales to China, with senior executives traveling to Washington next week for talks with administration officials and lawmakers.
The chief executive officers of Intel Corp., Qualcomm Inc. and Nvidia Corp. are planning to lobby against extending restrictions on the sale to China of certain chips and the equipment to manufacture the semiconductors that the Biden administration is set to roll out in the coming weeks, people familiar with the matter said.
While they don’t expect to stave off all the actions, the companies are sensing a window of opportunity to convince the Biden team that an escalation would hurt the current diplomatic efforts by the White House to engage Chinese officials and establish a more productive relationship, according to the people, who asked not to be identified because the trip isn’t yet public.
Chip companies are at the center of what has been an escalating row between Beijing and Washington. The US, where the majority of the technology originates, believes that restricting China’s access to it will bolster national security and hold back the Asian nation’s efforts to advance its military capabilities.
The companies have argued that being cut off from their largest market will harm their ability to spend on advancing their technology and ultimately undermine US leadership.
Representatives for the three companies declined to comment.
Qualcomm CEO Cristiano Amon gets more than 60% of his company’s revenue from the China region by supplying components to smartphone makers such as Xiaomi Corp. Intel’s Pat Gelsinger, who visited Beijing earlier this month to show off his company’s latest artificial intelligence chips, counts the nation as his biggest sales region. The country provides about a quarter of Intel’s sales. And for Nvidia, run by co-founder and CEO Jensen Huang, China provides about a fifth of revenue.
The Commerce Department in October issued rules that bar semiconductor equipment makers from selling certain tools to China, as well as prohibit the export of some chips used in artificial intelligence applications — an announcement that roiled the industry last October.
So far, chip equipment makers such as Applied Materials Inc. have taken the biggest hits to revenue, being forced to knock billions of dollars off their projections. But the restrictions, which companies fear will be extended to other classes of chips, are also affecting some makers of devices. Nvidia’s ability to ship its industry-leading artificial intelligence accelerators to China has been curbed by an approval process, costing it sales.
“I’m alarmed that some American CEOs continue to advocate for weaker export controls on sensitive technology,” Representative Mike Gallagher, a Wisconsin Republican and chairman of a House committee on competition with China, said in a statement on Friday. “The Biden administration needs to tighten our export controls on advanced chips”
The administration is planning to update and finalize the measures by strengthening what’s already been announced. Earlier this week, Bloomberg reported that the US is using some of its powers to influence overseas companies to further cut off China’s access. ASML Holding NV, one of the biggest providers of chipmaking equipment, is facing tighter restrictions from its home government in the Netherlands and new restrictions from the US, because some of its components are made in America.
In general, the US new rules will also reflect the outcome of negotiations with Japan and the Netherlands, people briefed on the plans said.
Reuters previously reported on the plan for some of the CEOs to meet with US officials.
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Re-post - >>> More on multinational companies seeking to ringfence China:
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=172208444
https://www.wsj.com/articles/companies-try-new-strategy-to-stay-in-china-siloing-61c88721
Russia’s war in Ukraine has pushed many boardrooms to discuss contingency plans for a potential China-Taiwan war, business advisers say. In a worst-case scenario, some executives fear they may have to write down or hive off their China business, as was the case with Russia.
Russia was relatively easy to relinquish in that it comprised a minuscule portion of sales and profits of most multinational companies (excluding the oil and gas industry). China is a different story, however; there are many multinational companies in various sectors of the economy who derive more than 10% of sales in China.
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Re-post w/chart - >>> This is the model China uses for every industry they want to enter. In the early 2000s we bought solar panels primarily from Japan and South Korea. We never sold a Chinese solar panel. By the time I left the industry in the mid-2010s it was difficult to compete without selling Chinese panels. Today they own the market and most of the non-Chinese brand panels are manufactured in China.
Customers would ask about Canadian Solar as a non-Chinese brand. Their sales office is in Ontario. Everything else is owned and operated in China.
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=172189022
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Re-post - >>> TSLA—The “KFC Call” redux:
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=172184649
https://www.wsj.com/articles/its-getting-riskier-to-do-business-in-china-taiwan-capital-control-yuan-tesla-d3dc88f6
By sharing its technology with China, Tesla jump-started an entire domestic industry. Now, as that industry is beginning to show signs of maturity, Tesla faces increasingly tough domestic competition from Chinese companies.
…China’s population is shrinking and getting older. The official count is in dispute, but demographer Yi Fuxian predicts China’s population will decline to one billion by 2050.
…As China’s economy contracts, the Communist Party will protect the profits of state-owned enterprises, further limiting opportunities for foreign companies.
Soon Beijing won’t need Tesla, and Mr. Musk will face regulatory hurdles and other difficulties....
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>>> AZN considering separating China business, according to sources:
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=172174660
https://www.fiercepharma.com/pharma/misinformation-astrazenecas-china-head-refutes-spinoff-report
AstraZeneca, the largest multinational pharma company in China, has reportedly made plans to separate its local business there in case geopolitical tensions worsen.
With the help of bankers, the British drugmaker has worked out a plan to potentially spin its China business into a separate entity listed in Hong Kong while retaining control, the Financial Times reports, citing people familiar with the discussions.
…“Every multinational with a strong China business” seems to have considered a similar move, one senior Asia-based banker told the FT. “Even if it’s just the option to give you flexibility in the future, it’s worth thinking about.”
…AZ is the largest Western pharma in China by sales and has the most business exposure to the country. Despite mounting pricing pressure, the China outfit generated $1.6 billion in sales for AZ in the first quarter, representing 15% of the company’s total revenue during the period....
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>>> Billionaire investor Mark Mobius says he cannot take money out of China - FOX Business
Reuters
March 5, 2023
https://www.reuters.com/markets/billionaire-investor-mark-mobius-says-he-cannot-take-money-out-china-fox-2023-03-05/
SHANGHAI, March 5 (Reuters) - Billionaire investor Mark Mobius told FOX Business he cannot take his money out of China due to the country's capital controls, cautioning investors to be "very, very careful" about investing in an economy under a tight government grip.
"I have an account with HSBC in Shanghai. I can't take my money out. The government is restricting flow of money out of the country," Mobius, founder of Mobius Capital Partners, told FOX Business in an interview published on March 2.
"I can't get an explanation of why they're doing this ... They're putting all kinds of barriers. They don't say: No, you can't get your money out. But they say: give us all the records from 20 years of how you made this money ... This is crazy."
Mobius' comments were circulated on Chinese social media site WeChat at the weekend.
Mobius led emerging market investment at Franklin Templeton Investments for three decades and is known for his bullish view on China. Now, though, he said, he "would be very, very careful" investing in the country.
"The bottom line is that China is moving in a completely different direction than what Deng Xiaoping instituted when they started the big reform program," he said, referring to the former Chinese leader.
"Now you have a government which is taking golden shares in companies all over China. That means they're going to try to control all of these companies ... So I don't think it's a very good picture when you see the government becoming more and more control-oriented in the economy."
Mobius, who calls himself "the Indiana Jones of Emerging Market investing", told FOX Business he's increasing exposure to alternative markets such as India and Brazil.
Mobius and HSBC could not be reached at the weekend.
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>>> US unprepared in electric car fight against China, says Ford boss
The Telegraph
Howard Mustoe
June 19, 2023
https://finance.yahoo.com/news/us-unprepared-electric-car-fight-105515836.html
The US is unprepared in the battle to compete with China on electric cars, the boss of Ford has warned.
Bill Ford, chairman, said the Chinese electric car market had developed at a rapid pace and that the company was now taking “an all hands on deck” approach to prepare for a flood of foreign imports.
Mr Ford, who is the great grandson of the company’s founder Henry Ford, said: “They’re [China] not here but they’ll come here, we think, at some point, we need to be ready, and we’re getting ready.
“They developed very quickly, and they developed them in large scale. And now they’re exporting them.”
China is poised to overtake Germany as the biggest car exporter in the world with overseas shipments of cars made in China tripling since 2020 to reach more than 2.5 million last year.
Ford is investing $3.5bn (£2.7bn) in building a gigafactory battery plant in Michigan in a deal with Chinese firm CATL.
However, the deal is under scrutiny from Senator Marco Rubio, the top Republican on the Senate Intelligence Committee, who says it risks making the US more reliant on China.
In common with the UK and European nations, the US is braced for an influx of Chinese-made cars.
Chinese-made electric cars are already available in the UK, made under the MG brand owned by SAIC. Another major Chinese manufacturer with an interest in exports is Geely, which owns Volvo, Lotus and has a stake in Aston Martin.
MGs have gained in popularity in part because they are cheaper than other EVs made by the likes of Tesla, and the firm has said it plans an expansion in sales in the UK. For instance, the MG ZS starts at £30,500, while the Tesla Model 3 starts at £38,800.
Chinese brands including BYD; Funky Cat, which is owned by the giant Great Wall Motor; and Chery; are all planning to bring their vehicles to the UK.
China has cheap labour, cheap raw materials such as steel and a vast headstart when it comes to building battery plants, with more than 100 built and 200 on the way, while Europe and the US each have fewer than a dozen.
As the biggest car market in the world, it is looking to export and capitalise on this advantage.
Their plans in the UK may be foiled if public charging is not expanded quickly and cheaply enough to tempt car buyers who don’t have access to home charging, however. Cars which cost more than their petrol equivalents combined with expensive electricity offer a poor deal.
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>>> Chip wars with China risk ‘enormous damage’ to US tech, says Nvidia chief
Jensen Huang tells lawmakers to be ‘thoughtful’ about imposing more export controls on Beijing
Financial Times
5-24-23
https://www.ft.com/content/ffbb39a8-2eb5-4239-a70e-2e73b9d15f3e?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev
The chief executive of Nvidia, the world’s most valuable semiconductor company, has warned that the US tech industry is at risk of “enormous damage” from the escalating battle over chips between Washington and Beijing.
Speaking to the Financial Times, Jensen Huang said US export controls introduced by the Biden administration to slow Chinese semiconductor manufacturing had left the Silicon Valley group with “our hands tied behind our back” and unable to sell advanced chips in one of the company’s biggest markets.
At the same time, he added, Chinese companies were starting to build their own chips to rival Nvidia’s market-leading processors for gaming, graphics and artificial intelligence.
“If [China] can’t buy from?.?.?.?the United States, they’ll just build it themselves,” he said. “So the US has to be careful. China is a very important market for the technology industry.”
The US’s efforts to prevent China buying or developing advanced chips has become the most aggressive front in a new cold war between the two powers.
Huang’s comments came just days before Chinese authorities announced a ban on US memory chipmaker Micron’s products from critical infrastructure, a move seen as the first significant retaliation against Washington’s export controls.
The Taiwanese-American executive warned US lawmakers to be “thoughtful” about imposing further rules restricting trade with China.
“If we are deprived of the Chinese market, we don’t have a contingency for that. There is no other China, there is only one China,” Huang said, adding that there would be “??enormous damage to American companies” if they were unable to trade with Beijing.
Huang added that blocking the US tech industry’s access to China would “cut the Chips Act off at the knee”, referring to the Biden administration’s $52bn funding package to encourage construction of more semiconductor manufacturing facilities — known as “fabs” — in the US.
“If the American tech industry requires one-third less capacity [due to the loss of the Chinese market], no one is going to need American fabs, we will be swimming in fabs,” he said. “If they’re not thoughtful on regulations, they will hurt the tech industry.”
Nvidia has embedded itself at the centre of a global race to develop a new generation of AI tools, becoming the primary source of chips that are used to train the “large language models” that power chatbots such as OpenAI’s ChatGPT.
As excitement has grown around AI, Nvidia’s market capitalisation has more than doubled so far this year to about $770bn, ahead of its latest earnings report on Wednesday. Its valuation now dwarfs US rivals such as Intel and Qualcomm, each worth close to $120bn. Despite a rally among some chip stocks, Nvidia is still far larger than its next nearest rival, Taiwanese chipmaker TSMC, which is worth about $450bn.
However, the California-based company has been blocked from selling its most advanced chips — the H100 and A100 series — to Chinese customers since August when the US imposed export controls on technology used for AI. Nvidia has been forced to reconfigure some of its chips to comply with US rules limiting the performance of products sold in China.
Huang said China made up roughly one-third of the US tech industry’s market, and would be impossible to replace as both a source of components and an end market for its products.
Most of the world’s advanced chips — including Nvidia’s — are made in Taiwan, which Beijing claims as part of its territory. President Joe Biden has said the US would intervene if China took unprovoked military action against Taiwan. Analysts fear such a conflict would lead to severe global disruption in production of everything from cars to computers.
“We can theoretically build chips outside of Taiwan, it’s possible [but] the China market cannot be replaced. That’s impossible,” Huang said. “So you’ve got to ask yourself which way do you want to push it.”
China, including Hong Kong, accounted for more than a fifth of Nvidia’s sales in its latest financial year ending January 2023, according to its annual report, while Taiwan represented more than a quarter.
The figures reflect the “billing location” of its customers, which could include contract manufacturers who then sell on to “end customers” in other markets. Based on last year’s figures, more than $12bn in Nvidia’s annual revenues — almost half its total — might be exposed to any potential conflict in the region.
Huang also reflected on his failed takeover of UK-based chip business Arm due to regulatory hurdles, saying he had been “deeply hurt” and it was no longer “easy for us to invest” in the UK. “I built the first implementation of the AI supercomputer in England, the Cambridge-1. I’m not going to build another,” he said. “I’m done.”
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>>> Business dangers loom as the U.S. and EU converge on ‘de-risking’ from China
Fortune
by Peter Vanham, Chloe Taylor
May 26, 2023
https://finance.yahoo.com/news/business-dangers-loom-u-eu-101911864.html
Good morning, Peter Vanham here in Geneva, filling in for Alan.
It’s the chronicle of a death foretold: Germany, Europe’s largest economy, entered a recession yesterday. The recession was widely expected, but beneath its surface lies a major dilemma for the German economy: to “de-risk” or depend on China, that’s the question.
The question became acute because Germany’s engine sputtered partially due to faltering exports to China. German companies saw an 11.3% drop in their exports to the world’s second-largest economy so far, whereas most other European economies exported more. What happened?
Part of it can be brought back to conventional factors. Cars typically represent a large share of German exports, but Chinese consumers are increasingly buying Chinese brands, and government subsidies which pushed German car sales higher last year, ended.
Since a few months, though, there is another major factor, and it is one that represents a seismic shift: German politicians are steering their companies away from China.
The country’s political leaders won’t go as far as some in the U.S. have, pursuing a policy of “decoupling”. But Europe’s largest economy is increasingly aligning with the U.S., anyway.
“The U.S. and the European Union have converged on using the term 'de-risking' [from China], and Germany’s chancellor Olaf Scholz emphasized the term in his [G7] speech as well,” Costanze Stelzenmueller, director of the Center on the United States and Europe at Brookings told me.
A few months ago, leaked documents also indicated “Germany’s foreign ministry wants to take a tougher line on China and push companies to reduce their dependency on Beijing”, Politico reported.
It means German executives still depending on China, and wanting to expand their market share there, such as Siemens, are facing an uphill battle. “I will defend my market share, and if I can, I will expand it,” Siemens CEO Roland Busch told the Financial Times this week.
Back in the U.S., Nvidia chief Jensen Huang also warned about the consequences of the G7’s desire to de-risk from China. “There is no other China, there is only one China,” he said this week, warning of “enormous damage to American companies” if the trade in chips stopped.
But if exports falter, and the notion of “economic dependency” becomes a political problem on both sides of the Atlantic, it’s hard to see how this wouldn’t have any long-term effects.
CEO Daily is off on Monday for Memorial Day. We'll see you back here Tuesday. More news below.
Peter Vanham
Executive Editor
peter.vanham@fortune.com
@petervanham
This story was originally featured on Fortune.com
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>>> Iran's embassy in Riyadh opens gates for first time in years
Reuters
4-12-23
By Aziz El Yaakoubi
https://www.reuters.com/world/middle-east/iranian-delegation-arrives-saudi-arabia-prepare-embassy-reopening-statement-2023-04-12/
RIYADH, April 12 (Reuters) - Iran's embassy in Saudi Arabia reopened its gates on Wednesday for the first time in seven years, a Reuters witness said, under a deal to re-establish ties that could ease a long-standing rivalry that has helped fuel conflicts around the Middle East.
The heavy gates of the Iranian embassy's compound were open in Riyadh with a team inspecting its premises, a Reuters reporter said. A white truck was seen arriving at the gate.
The diplomatic mission opened hours after the Iranian foreign ministry said a technical delegation arrived in the kingdom.
"The Iranian delegation will take the necessary measures in Riyadh and Jeddah to set up the embassy and consulate general," Iranian foreign ministry spokesman, Nasser Kanaani, said in a statement.
The mission had been closed since Saudi Arabia cut ties with Iran in 2016, after its embassy in Tehran was stormed during a dispute between the two countries over Riyadh's execution of a Shi'ite cleric. The kingdom subsequently asked Iranian diplomats to leave within 48 hours while it evacuated its embassy staff from Tehran.
The relationship had begun worsening a year earlier, after Saudi Arabia and the United Arab Emirates intervened in Yemen's war, where the Iran-aligned Houthi movement had ousted a Saudi-backed government and taken over the capital Sanaa.
Riyadh accused Iran of arming the Houthis, who went on to attack Saudi cities with armed drones and ballistic missiles. In 2019, the kingdom blamed an attack on Aramco oil facilities, which knocked out half of its oil output, directly on the Islamic Republic.
Iran denied those accusations.
The hostility between the two regional arch-rivals and major oil producers helped to fuel strife around the region. Last month, they agreed to end their diplomatic rift and reopen their diplomatic missions in a deal brokered by China.
Both countries' foreign ministers met in Beijing earlier this month for the first formal gathering of their top diplomats.
Saudi officials also arrived in Iran to discuss procedures for reopening Riyadh's embassy in Tehran and consulate in Mashhad, the Saudi foreign ministry said on Saturday.
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>>> U.S. and China wage war beneath the waves – over internet cables
Subsea cables, which carry the world's data, are now central to the U.S.-China tech war. Washington, fearful of Beijing's spies, has thwarted Chinese projects abroad and choked Big Tech's cable routes to Hong Kong, Reuters has learned.
Reuters
By JOE BROCK
March 24, 2023
https://www.reuters.com/investigates/special-report/us-china-tech-cables/
It started out as strictly business: a huge private contract for one of the world’s most advanced undersea fiber-optic cables. It became a trophy in a growing proxy war between the United States and China over technologies that could determine who achieves economic and military dominance for decades to come.
In February, American subsea cable company SubCom LLC began laying a $600-million cable to transport data from Asia to Europe, via Africa and the Middle East, at super-fast speeds over 12,000 miles of fiber running along the seafloor.
That cable is known as South East Asia–Middle East–Western Europe 6, or SeaMeWe-6 for short. It will connect a dozen countries as it snakes its way from Singapore to France, crossing three seas and the Indian Ocean on the way. It is slated to be finished in 2025.
It was a project that slipped through China’s fingers.
A Chinese company that has quickly emerged as a force in the subsea cable-building industry – HMN Technologies Co Ltd – was on the brink of snagging that contract three years ago. The client for the cable was a consortium of more than a dozen global firms. Three of China’s state-owned carriers – China Telecommunications Corporation (China Telecom), China Mobile Limited and China United Network Communications Group Co Ltd (China Unicom) – had committed funding as members of the consortium, which also included U.S.-based Microsoft Corp and French telecom firm Orange SA, according to six people involved in the deal.
HMN Tech, whose predecessor company was majority-owned by Chinese telecom giant Huawei Technologies Co Ltd, was selected in early 2020 to manufacture and lay the cable, the people said, due in part to hefty subsidies from Beijing that lowered the cost. HMN Tech’s bid of $500 million was roughly a third cheaper than the initial proposal submitted to the cable consortium by New Jersey-based SubCom, the people said.
The Singapore-to-France cable would have been HMN Tech’s biggest such project to date, cementing it as the world’s fastest-rising subsea cable builder, and extending the global reach of the three Chinese telecom firms that had intended to invest in it.
But the U.S. government, concerned about the potential for Chinese spying on these sensitive communications cables, ran a successful campaign to flip the contract to SubCom through incentives and pressure on consortium members.
Reuters has detailed that effort here for the first time. It’s one of at least six private undersea cable deals in the Asia-Pacific region over the past four years where the U.S. government either intervened to keep HMN Tech from winning that business, or forced the rerouting or abandonment of cables that would have directly linked U.S. and Chinese territories. The story of those interventions by Washington hasn’t been previously reported.
SubCom had no comment on the SeaMeWe-6 battle, and HMN Tech did not respond to requests for comment. In a statement last year about infrastructure projects, the White House briefly noted that the U.S. government helped SubCom to win the Singapore-to-France cable contract, without giving details. China’s foreign ministry did not respond to requests for comment. China Telecom, China Mobile, China Unicom and Orange did not respond to requests for comment. Microsoft declined to comment.
Undersea cables are central to U.S.-China technology competition.
Across the globe, there are more than 400 cables running along the seafloor, carrying over 95% of all international internet traffic, according to TeleGeography, a Washington-based telecommunications research firm. These data conduits, which transmit everything from emails and banking transactions to military secrets, are vulnerable to sabotage attacks and espionage, a U.S. government official and two security analysts told Reuters.
The potential for undersea cables to be drawn into a conflict between China and self-ruled Taiwan was thrown into sharp relief last month. Two communications cables were cut that connected Taiwan with its Matsu islands, which sit close to the Chinese coast. The islands’ 14,000 residents were disconnected from the internet.
Taiwanese authorities said they suspected a Chinese fishing vessel and a Chinese freighter caused the disruption. However, they stopped short of calling it a deliberate act and said there was no direct evidence showing the Chinese ships were to blame. China, which considers Taiwan a breakaway province, has ratcheted up military and political efforts to force the island to accept its dominion.
Eavesdropping is a worry too. Spy agencies can readily tap into cables landing on their territory. Justin Sherman, a fellow at the Cyber Statecraft Initiative of the Atlantic Council, a Washington-based think tank, told Reuters that undersea cables were “a surveillance gold mine” for the world’s intelligence agencies.
“When we talk about U.S.-China tech competition, when we talk about espionage and the capture of data, submarine cables are involved in every aspect of those rising geopolitical tensions,” Sherman said.
Two of the projects upended by the U.S. government involved cables that had already been manufactured and laid thousands of miles across the Pacific Ocean. U.S. tech behemoths Google LLC, Meta Platforms Inc and Amazon.com Inc were major investors in at least one, or in Meta’s case both, of those cables, according to public announcements made about the projects. The delays and rerouting of the cables cost each of those companies tens of millions of dollars in lost revenue and additional costs, four sources who worked on the projects said.
Amazon, Meta and Google declined to comment about these projects or the cable wars.
SubCom’s cable coup is part of a wider effort in Washington aimed at reining in China as Beijing strives to become the world's dominant producer of advanced technologies, be it submarines, semiconductor chips, artificial intelligence or drones. China is bulking up its military arsenal with sophisticated armaments. And Beijing has become increasingly assertive about countering U.S. influence worldwide through trade, weapons and infrastructure deals that are drawing wide swaths of the globe into its orbit.
The U.S. cable effort has been anchored by a three-year-old interagency task force informally known as Team Telecom.
To oust the Chinese builder from the Singapore-to-France cable, the United States proffered sweeteners – and warnings – to the project’s investors.
On the sweetener side, the U.S. Trade and Development Agency (USTDA) told Reuters it offered training grants valued at a total of $3.8 million to five telecom companies in countries on the cable’s route in return for them choosing SubCom as the supplier. Telecom Egypt and Network i2i Limited, a company owned by India’s Bharti Airtel Limited, got $1 million apiece, USTDA said. Djibouti Telecom, Sri Lanka Telecom and Dhivehi Raajjeyge Gulhun of the Maldives each received $600,000. None of the five responded to questions from Reuters.
Chinese Foreign Minister Qin Gang has warned that “conflict and confrontation” lie ahead unless Washington abandons its policy of “containment and suppression” towards China. REUTERS/Thomas Peter
Meanwhile, American diplomats cautioned participating foreign telecom carriers that Washington planned to impose crippling sanctions on HMN Tech, a development that could put their investment in the cable project at risk. The U.S. Commerce Department made good on that threat in December 2021, citing HMN Tech’s intention to acquire American technology to help modernize China’s People’s Liberation Army.
A senior U.S. State Department official confirmed that the department had advocated through its embassies to help SubCom win the contract, including warning other countries about the security risks posed by HMN Tech. Though the cable won’t come ashore in Chinese territory, the U.S. government believed HMN Tech could insert remote surveillance equipment inside the cable, the official said without providing evidence. The Commerce Department declined to comment.
Two months later, in February 2022, SubCom announced that the cable consortium had awarded it the contract to build the SeaMeWe-6 cable. China Telecom and China Mobile, which were due to own a combined 20% of the cable, pulled out because the Chinese government wouldn’t approve their involvement in the project with SubCom as the cable contractor, three people with knowledge of the matter told Reuters. China Unicom remained.
China’s foreign ministry and its defense ministry, which handles questions for the People’s Liberation Army, did not respond to Reuters’ questions.
On June 26, 2022, the White House published a fact sheet citing various upcoming infrastructure projects, including the SubCom undersea cable deal. The document said the U.S. government had “collectively helped secure” the award of that contract for SubCom.
The White House did not respond to a request for further comment.
Tensions rising
U.S.-China relations are at the lowest they’ve been in decades. The two countries have clashed on a host of issues, including China’s tacit support for Russia’s invasion of democratic Ukraine, its crackdown on Hong Kong, and the future of Taiwan, which Chinese President Xi Jinping has pledged to bring under Beijing’s control. In February, the United States shot down a Chinese spy balloon that floated into American airspace. China has claimed it was a weather balloon that got blown off course and accused the Americans of overreacting.
President Joe Biden’s policies are increasingly isolating China’s high-tech sector with the aim of bringing some technology manufacturing back to America while keeping cutting-edge U.S. innovation out of Chinese hands.
Over the last year, the Biden administration has pushed through a landmark bill to provide $52.7 billion in subsidies for U.S. semiconductor production and research. The Commerce Department in December added dozens of Chinese firms producing technology such as drones and artificial intelligence chips to its so-called Entity List, which severely restricts their access to U.S. technology.
Chinese Foreign Minister Qin Gang, speaking in Beijing this month, said the two superpowers are destined for “conflict and confrontation” unless Washington abandons its policy of “containment and suppression” towards China.
Three companies have dominated the construction and laying of fiber-optic subsea cables for decades: America’s SubCom, Japan’s NEC Corporation and France’s Alcatel Submarine Networks, Inc.
But a seismic shift occurred in 2008 when Huawei Marine Networks Co Ltd entered the fray. Owned by Chinese telecom Huawei Technologies, the Tianjin-based company initially built small cable systems in underserved markets such as Papua New Guinea and the Caribbean.
Fast-forward 15 years and the firm, now known as HMN Tech, has become the world’s fastest-growing manufacturer and layer of subsea cables, according to TeleGeography data.
But the company’s short history has been shaped by deteriorating U.S.-China relations.
In 2019, Huawei Technologies came under fire from the administration of then-U.S. President Donald Trump. The Commerce Department banned Huawei and 70 affiliates from buying parts and components from U.S. companies without government approval.
That move was part of a global campaign by Washington and its allies to stop Huawei Technologies from building fifth-generation, or 5G, communications networks around the world due to concerns that host nations would be vulnerable to Chinese eavesdropping or cyberattacks, the details of which were revealed in a previous Reuters investigation.
Huawei Technologies said at the time that it was a private company that is not controlled by the Chinese government. Contacted for this story, Huawei Technologies said it fully divested its stake in Huawei Marine in 2020 and is no longer connected with the cable-laying company, which rebranded as HMN Tech under new Chinese ownership.
HMN Tech expanded its ambitions with the PEACE cable, which came online last year and connects Asia, Africa and Europe. The firm was poised to make another great leap with the Singapore-to-France project before SubCom snatched it away.
The following account of how that deal fell apart for the Chinese players is based on interviews with six people directly involved in the SeaMeWe-6 contract. They all asked not to be named as they were not authorized to discuss potential trade secrets or matters of national security.
Backroom brawl
Large undersea cables cost several hundreds of millions of dollars. They are usually paid for by a consortium of tech or telecom companies that can spread the cost and risks, as well as take responsibility for any cable landing that ends up in their countries.
In the case of SeaMeWe-6, there were more than a dozen companies funding the cable, and there was immediately a split in the group, which would need to reach a consensus to select a contractor for the project, the people said.
China Telecom, China Mobile and China Unicom were resolutely behind HMN Tech, which had come in with a bid of around $500 million. Microsoft, Orange and India’s Bharti Airtel expressed concerns about the risk of potential U.S. pushback on HMN Tech’s involvement. Still, it was hard to argue with the price. SubCom’s bid was closer to $750 million.
On a series of video calls in mid-2020, the consortium members verbally agreed that HMN Tech would build the cable. SubCom would be the reserve in case the Chinese firm pulled out or failed to deliver on the terms of its proposal.
But behind the scenes, SubCom and the U.S. government were sowing seeds of doubt about whether HMN Tech was the best company for the job.
SubCom had already successfully applied for loans from the federal Export-Import Bank of the United States to support its bid. It also secured advocacy assistance from the Department of Commerce, which quickly mobilized U.S. embassies around the world to lean on consortium members in their host nations.
U.S. ambassadors in at least six of those countries, including Singapore, Bangladesh and Sri Lanka, wrote letters to local telecom carriers participating in the deal, according to people involved. One of these letters, seen by Reuters, said picking SubCom is “an important opportunity to enhance commercial and security cooperation with the United States.”
Separately, ambassadors and senior diplomats met with executives at foreign telecom companies in at least five countries. The message: HMN Tech could be subject to U.S. sanctions in the near future. That in turn would make it difficult for the telecoms to sell bandwidth because their biggest likely customers – U.S. tech firms – wouldn’t be allowed to use the cable.
One senior Asian telecom executive recalled a meeting in mid-2020 with a top U.S. diplomat and an American digital trade attaché. The U.S. officials explained how sanctions on HMN Tech would render the cable virtually worthless, providing him a printed spreadsheet with an economic analysis showing just that.
“They said we’d go bankrupt. It was a persuasive argument,” the executive told Reuters.
Two other Asian telecom executives in the consortium told Reuters they met with both Chinese and U.S. diplomats, who urged them to back HMN Tech and SubCom, respectively.
By the end of 2020, several consortium members, including Bangladesh Submarine Cable Company Limited, India’s Bharti Airtel, Sri Lanka Telecom, France’s Orange and Telecom Egypt, told their partners they were having second thoughts about choosing HMN Tech as a supplier, mostly over the fear of sanctions.
None of these companies responded to requests for comment.
China’s HMN Tech was the low bidder for a contract to lay an undersea cable known as the SeaMeWe-6. But pressure from Washington on the project’s investors swung the deal to U.S.-based SubCom. REUTERS/Dado Ruvic/Illustration
In February 2021, with the consortium partners at loggerheads, SubCom and HMN Tech were given a chance by the group to submit a “best and final offer.” SubCom lowered its bid to close to $600 million. But HMN Tech was now offering to build the cable for $475 million.
Several consortium members, including Microsoft, Singapore Telecommunications Limited (Singtel) and Orange, argued to the other participants that when the risk of sanctions was factored into the bids, SubCom was offering a better deal. The three state-owned Chinese companies strongly disagreed. The companies all declined comment.
On a tense final video call in late 2021, an executive from Singtel, the chair on the cable committee, urged the companies to vote on a final decision before the whole deal collapsed, two people who were on that call told Reuters.
China Telecom and China Mobile threatened to walk off the project, taking tens of millions of dollars of investment with them. But the majority of the consortium picked SubCom, and the two Chinese state-owned firms departed. Two new investors – Telekom Malaysia Berhad and PT Telekomunikasi Indonesia International (Telin) – joined the deal, and some of the original members raised their stakes to make up the shortfall, the people said.
Telekom Malaysia and Telin did not respond to requests for comment.
In addition to the successful campaign to freeze out HMT Tech from the Singapore-to-France cable, teams across the U.S. state and commerce departments and the Office of the U.S. Trade Representative once again coordinated with the White House to use diplomatic pressure to boot the Chinese firm from a project. This time it was a cable connecting the three Pacific island nations of Nauru, the Federated States of Micronesia and Kiribati, according to two sources involved in that deal.
The United States, Australia and Japan announced in December 2021 that they would jointly fund a cable on the same route, known as the East Micronesia Cable. In a joint statement this month, the three said they had met on March 8 to help “push forward” on this cable, without giving a time frame.
The U.S.-China backroom brawling over undersea cables is threatening to overwhelm the subsea cable industry, which has always relied on careful diplomatic collaboration to survive, said Paul McCann, a Sydney-based subsea cable consultant.
“I've never seen such geopolitical influence over subsea cables in the 40-odd years I’ve been involved in the business,” McCann told Reuters. “It's unprecedented.”
Team Telecom
At the heart of Washington’s newly aggressive strategy is Team Telecom. That’s the informal name for an interagency committee set up through an Executive Order signed by Trump in April 2020. The mission: safeguarding U.S. telecommunication networks from spies and cyberattacks.
Team Telecom is run by the National Security Division of the Department of Justice (DOJ). That division is headed by Assistant Attorney General Matthew Olsen. Nominated to that position by Biden in May 2021, Olsen has worked in a string of intel posts. He served as director of the National Counterterrorism Center under former President Barack Obama from 2011 to 2014, and before that as general counsel for the National Security Agency, the U.S. spy nerve center.
While the State Department and its partners have helped to prevent China from obtaining new subsea contracts in foreign places of U.S. strategic interest, Team Telecom has focused on a purely domestic concern: stopping any cable from directly connecting U.S. territory with mainland China or Hong Kong due to worries about Chinese espionage.
To that end, the team makes cable licensing recommendations to the U.S. telecom regulator, the Federal Communications Commission (FCC). Since 2020, the team has been instrumental in the cancellation of four cables whose backers had wanted to link the United States with Hong Kong, Devin DeBacker, a DOJ official and senior member of Team Telecom, told Reuters in an interview.
Hong Kong, a former British colony that transitioned to self-rule and is dubbed a “special administrative region” by China, has long been the investment gateway to the communist mainland because of its well-developed financial sector, open economy and highly-educated workforce.
However, in 2019, Beijing launched a security crackdown and increased surveillance in Hong Kong, prompting mass demonstrations. As China tightened its grip, Washington became concerned that Chinese spy agencies would intercept data on the planned undersea cables if that equipment ultimately came ashore in Hong Kong, said DeBacker, the chief of the Foreign Investment Review Section of the DOJ’s National Security Division.
“That provides a physical access point in what is effectively Chinese territory,” DeBacker said. “Because of the way that China has eroded Hong Kong's autonomy, that enabled the Chinese government to have a direct, all-access path, effectively a collection platform on U.S. persons’ data and communications.”
“The risk is real. It has materialized in the past, and what we're trying to do is prevent it from materializing in the future”
Washington’s decision to nix any Hong Kong terminus for the four planned subsea cable deals upended the plans of Google, Meta and Amazon. These tech titans have been among the biggest investors in new cables over the last decade as they seek to link up a network of data centers in the United States and Asia that underpin their fast-growing Cloud computing businesses, according to TeleGeography.
The first, a project owned by Google and Meta known as the Pacific Light Cable Network, will now only transmit data from the United States to Taiwan and the Philippines, after Team Telecom recommended that the FCC reject the Hong Kong leg. The section of the cable going to Hong Kong, spanning hundreds of miles, is currently lying abandoned on the ocean floor, two people involved in the deal said.
In an unsuccessful appeal to the FCC, Google and Meta said Team Telecom’s argument that China might intercept data on the cable was “unsupported and speculative,” and that its decision was “a referendum on China, rather than the assertion of any real specific concern,” according to an Aug. 20, 2020, submission by the companies that is available on the FCC website.
Similarly, the Bay to Bay Express Cable System, developed by Amazon, Meta and China Mobile, will not run as planned from Singapore to Hong Kong to California. As part of a deal struck between Amazon, Meta and Team Telecom, China Mobile left the consortium and the cable was rebranded as CAP-1, with a new route from Grover Beach, California, to the Philippines, three people involved said. The cable had already been almost entirely laid along the original route, and the section to Hong Kong now sits unused in the depths, the people said.
Google, Meta and Amazon declined to comment. China Mobile did not respond to requests for comment.
A pro-China supporter in Hong Kong holds a Chinese flag on July 1, 2021, the 24th anniversary of the former British colony’s return to Chinese rule. Beijing’s crackdown on the once-autonomous territory prompted Washington to forbid any subsea communications cables directly connecting the United States to Hong Kong over concerns about Chinese spying. REUTERS/Tyrone Siu
There is evidence the U.S. campaign has slowed China’s subsea cable juggernaut.
HMN Tech supplied 18% of the subsea cables to have come online in the last four years, but the Chinese firm is only due to build 7% of cables currently under development worldwide, according to TeleGeography. These figures are based on the total length of cable laid, not the number of projects.
In a tit-for-tat maneuver, China has thrown up a roadblock on a cable in which Meta is an investor, according to two cable consultants with direct knowledge of the project.
That cable, known as the Southeast Asia-Japan 2 cable, was planned to run from Singapore through Southeast Asia and touch down in Hong Kong and mainland China before going on to South Korea and Japan. China has delayed giving a license for the cable to pass through the South China Sea, citing concerns about the potential for the cable manufacturer – Japan’s NEC – to insert spy equipment on the line, the consultants said.
In response to Reuters’ questions, an NEC spokesperson said it does not comment on individual projects, but said that it does not insert surveillance equipment into its cables.
Meta and China’s foreign ministry did not respond to requests for comment.
In recent years, the U.S. government has blocked American firms from using telecom gear from Chinese firms that Washington has deemed to be national security threats, and it has banned several Chinese state-owned telecom companies from operating in U.S. territory.
Among them is China Telecom, which had previously won authorization to provide services in the United States. The FCC revoked that authorization in 2021, saying China Telecom’s America’s unit “is subject to exploitation, influence and control by the Chinese government.” The agency cited examples of the company using its access to U.S networks to misroute international traffic back to Chinese servers.
China Telecom failed to convince a U.S. court to reverse that decision.
The Chinese Embassy in Washington last year said the FCC has “abused state power and maliciously attacked Chinese telecom operators” without any factual basis.
Team Telecom’s DeBacker said China uses similar tactics on undersea cables, declining to give specific examples.
“The risk is real,” DeBacker said. “It has materialized in the past, and what we're trying to do is prevent it from materializing in the future.”
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>>> Biden administration adds 14 Chinese firms to red flag list
Reuters
3-23-23
https://www.msn.com/en-us/money/topstories/biden-administration-adds-14-chinese-firms-to-red-flag-list/ar-AA190n3q?OCID=ansmsnnews11
WASHINGTON (Reuters) -The Biden administration on Thursday added 14 Chinese companies to a red flag list, forcing U.S. exporters to conduct greater due diligence before shipping goods to them because U.S. officials have been unable to inspect the listed entities.
Being added to the list can potentially start a 60-day clock that could trigger much tougher penalties.
"Enforcing our export controls is a crucial part of protecting American national security," U.S. Deputy Secretary of Commerce Don Graves said in a statement following the announcement. "We are committed to using all of the tools at our disposal to establish how advanced US technology is being used around the globe."
ECOM International and HK P&W Industry Co Ltd were among those added to the list and did not respond to requests for comment. A spokesperson for the Chinese Embassy in Washington said "China strongly deplores and firmly opposes" moves by the United States to "abuse export control measures" and use "state power to suppress and contain foreign companies."
"The U.S. side should immediately stop its wrong practices. China will take necessary measures to resolutely safeguard the legitimate rights and interests of Chinese companies," the spokesperson added.
The United States has used restrictions on exports of U.S. goods as a key tool to thwart Beijing's technological advances, ratcheting up tensions between the two countries.
The Commerce department, which oversees U.S. export controls, also added 18 other entities to the list from Turkey, the United Arab Emirates, Germany, Bulgaria, Canada, Indonesia, Israel, Malaysia, Saudi Arabia and Singapore.
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>>> Honduras' decision to open ties with China about 'pragmatism, not ideology,' minister says
Reuters
by Isabel Woodford and Gustavo Palencia
March 2023
https://www.msn.com/en-us/news/world/honduras-decision-to-open-ties-with-china-about-pragmatism-not-ideology-minister-says/ar-AA18FzsE
TEGUCIGALPA (Reuters) - Honduran Foreign Minister Eduardo Enrique Reina said Wednesday the country's decision to seek official relations with China and cut them with Taiwan was about "pragmatism, not ideology".
Speaking on local television, Reina said Honduras, which is "up to its neck" in financial problems and debt, owed Taiwan some $600 million and that the issue of debt partly motivated Honduras' decision to open relations with China.
He said Honduran officials were likely to meet their Chinese counterparts in the next few days to formalize the relationship.
"The global situation is complicated, we need to open up," Reina said.
The decision was not taken lightly and involved conversations with the United States and allies in Asia, Reina added.
However, the move is likely to harm Honduras' relationship with the United States', Honduras' top trade partner, Honduran lawmaker Tomas Zambrano said on local television. The U.S. State Department did not respond to a Reuters request for comment.
The decision from Honduras puts pressure on Taiwan ahead of a visit by Taiwan President Tsai Ing-wen to the United States and Central America.
China does not allow countries to hold diplomatic ties with itself and Taiwan. China claims Taiwan as its own territory with no right to state-to-state ties, which Taiwan disputes.
Honduran President Xiomara Castro had floated the idea of cutting ties with Taiwan and opening them with China during her presidential campaign, but said last year she hoped to maintain ties with Taiwan.
The decision to move away from Taiwan, announced by Castro on Tuesday evening, will leave the island with just a handful of diplomatic allies.
Honduras intends to keep trade ties with Taiwan, however, Reina added. The country is also looking to strengthen ties with Brazil, Mexico, the United States and others.
"We need investment, cooperation, and Honduras needs to be aggressive," Reina said.
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>>> Iran-Saudi Pact Is Brokered by China, Leaving U.S. on Sidelines
The New York Times
by Peter Baker
3-11-23
https://www.msn.com/en-us/news/world/iran-saudi-pact-is-brokered-by-china-leaving-u-s-on-sidelines/ar-AA18usRG?ocid=hpmsn&cvid=38b4998f073c43059e3262dc01deed54&ei=17
WASHINGTON — Finally, there is a peace deal of sorts in the Middle East. Not between Israel and the Arabs, but between Saudi Arabia and Iran, which have been at each other’s throats for decades. And brokered not by the United States but by China.
This is among the topsiest and turviest of developments anyone could have imagined, a shift that left heads spinning in capitals around the globe. Alliances and rivalries that have governed diplomacy for generations have, for the moment at least, been upended.
The Americans, who have been the central actors in the Middle East for the past three-quarters of a century, almost always the ones in the room where it happened, now find themselves on the sidelines during a moment of significant change. The Chinese, who for years played only a secondary role in the region, have suddenly transformed themselves into the new power player. And the Israelis, who have been courting the Saudis against their mutual adversaries in Tehran, now wonder where it leaves them.
“There is no way around it — this is a big deal,” said Amy Hawthorne, deputy director for research at the Project on Middle East Democracy, a nonprofit group in Washington. “Yes, the United States could not have brokered such a deal right now with Iran specifically, since we have no relations. But in a larger sense, China’s prestigious accomplishment vaults it into a new league diplomatically and outshines anything the U.S. has been able to achieve in the region since Biden came to office.”
President Biden’s White House has publicly welcomed the re-establishment of diplomatic relations between Saudi Arabia and Iran and expressed no overt concern about Beijing’s part in bringing the two back together. Privately, Mr. Biden’s aides suggested too much was being made of the breakthrough, scoffing at suggestions that it indicated any erosion in American influence in the region.
And it remained unclear, independent analysts said, how far the rapprochement between Saudi Arabia and Iran would actually go. After decades of sometimes violent competition for leadership in the Middle East and the broader Islamic world, the decision to reopen embassies that were closed in 2016 represents only a first step.
It does not mean that the Sunnis of Riyadh and the Shiites of Tehran have put aside all of their deep and visceral differences. Indeed, it is conceivable that this new agreement to exchange ambassadors may not even be carried out in the end, given that it was put on a cautious two-month timetable to work out details.
The key to the agreement, according to what the Saudis told the Americans, was a commitment by Iran to stop further attacks on Saudi Arabia and curtail support for militant groups that have targeted the kingdom. Iran and Saudi Arabia have effectively fought a devastating proxy war in Yemen, where Houthi rebels aligned with Tehran battled Saudi forces for eight years. A truce negotiated with the support of the United Nations and the Biden administration last year largely halted hostilities.
The U.N. estimated early last year that more than 377,000 people had died during the war from violence, starvation or disease. At the same time, the Houthis have fired hundreds of missiles and armed drones at Saudi Arabia.
Saudi Arabia had sought a suspension of hostilities with Iran for years, first through talks held in Baghdad that eventually went nowhere. Biden administration officials said the Saudis briefed them about the discussions in Beijing, but the Americans expressed skepticism that Iran will live up to its new commitments.
Crown Prince Mohammed bin Salman, the de facto leader of Saudi Arabia who had strong ties with President Donald J. Trump and has helped secure $2 billion in financing for the investment firm set up by Jared Kushner, the former president’s son-in-law, has been playing an intricate diplomatic game since Mr. Biden came to office.
Mr. Biden once vowed to make Saudi Arabia a “pariah” state for orchestrating the assassination of Jamal Khashoggi, a Saudi columnist for The Washington Post living in the United States. But he reluctantly agreed to visit the kingdom last year as he was seeking to lower gas prices that had been elevated in part by Russia’s invasion of Ukraine.
In trying to smooth over relations with the Saudis, Mr. Biden endured blistering criticism for a much-publicized fist bump with the crown prince, who was determined by the C.I.A. to be responsible for Mr. Khashoggi’s murder and dismemberment.
But Mr. Biden and his team were infuriated when, in their view, the Saudis later breached the unannounced agreement reached during that visit and curbed oil production last fall to keep the price of gas elevated. In that instance, the U.S. officials believed Prince Mohammed was siding with President Vladimir V. Putin of Russia, and Mr. Biden threatened unspecified “consequences,” only to back off without imposing any.
Now the crown prince is turning to the Chinese. “Some folks in the gulf clearly see this as the Chinese century,” said Steven A. Cook, a senior fellow for Middle East studies at the Council on Foreign Relations. “The Saudis have expressed interest in joining the Shanghai Cooperation Organization and a good deal of their oil goes to China.”
Mr. Cook compared the gambit by Prince Mohammed, known by his initials M.B.S., to the approach of President Gamal Abdel Nasser of Egypt, who during the Cold War tried to play the United States and Soviet Union off each other. “It actually did not work out as well as Nasser hoped,” Mr. Cook said. “It could backfire on M.B.S.”
Daniel C. Kurtzer, a former ambassador to Israel and Egypt now at Princeton University, said the shifting dynamics represented by the Chinese-brokered pact still pose a challenge to the Biden administration when it would prefer to focus elsewhere.
“It’s a sign of Chinese agility to take advantage of some anger directed at the United States by Saudi Arabia and a little bit of a vacuum there,” he said. “And it’s a reflection of the fact that the Saudis and Iranians have been talking for some time. And it’s an unfortunate indictment of U.S. policy.”
China brought Saudi Arabia together with Iran at a time when Israel has hoped that the United States would bring it together with Saudi Arabia. Having established diplomatic relations with other Gulf States, the United Arab Emirates and Bahrain, during the latter days of the Trump administration in what were called the Abraham Accords, Israel anxiously wants to do so with Saudi Arabia as well. Such a move would mark a fundamental change in Israel’s status in its long-hostile neighborhood, effectively the end of generations of isolation by the Arab world.
But the Saudis have requested more than Washington is ready to give. In exchange for opening formal ties with Israel, the Saudis have asked the United States for security guarantees, help developing a civilian nuclear program and fewer restrictions on U.S. arms sales.
Administration officials consider the requests excessive but see them as an opening bid that could down the road lead to normalization. In the meantime, the Biden team has helped make progress between the two nations, such as opening Saudi airspace to all Israeli civilian airplanes.
While its diplomatic efforts helped calm hostilities in Yemen, the Biden administration has failed to revive a nuclear agreement with Iran negotiated in 2015 by President Barack Obama and later abandoned by Mr. Trump. Two years of diplomacy have stalled and the U.N. watchdog agency says Iran now has enough highly enriched uranium to build several nuclear weapons if it chooses to, although it has not perfected a warhead yet.
Hampered by American sanctions, Iran has moved to deepen its relations with Russia and now China. Tehran has provided badly needed drones for Russia to use in its war in Ukraine, making it a more critical partner for Mr. Putin’s Moscow than ever before.
In turning to Beijing to mediate with the Saudis, Iran is elevating China in the region and seeking to escape the isolation imposed by Washington. And Israel finds its hopes for an anti-Iranian coalition with Saudi Arabia evidently dashed.
Biden administration officials say Iran is under real pressure and suffering from deep economic distress because of American sanctions. But that does not mean China, one of the signatories to the original nuclear deal, wants Iran to have a nuclear weapon either. If Beijing has new sway in Tehran, American officials hope perhaps it could use it to curb Iran’s nuclear ambitions.
Nonetheless, it is disconcerting for many veteran American policymakers to see China playing such an outsize role in a region after years of making inroads.
“This is the latest reminder that the competition is on a global stage,” said Mara Rudman, executive vice president for policy at the Center for American Progress and a former Middle East envoy under Mr. Obama. “It is by no means limited to the Indo-Pacific, just as it is not limited to solely to economics, or security, or diplomatic engagement.”
The United States still holds key cards in the Middle East, with extensive trade, military and intelligence ties to most of the critical players in the region. After the end of the Cold War and the collapse of the Soviet Union, America was essentially the only important outside actor in the area. But Russia returned in force in 2015 when it sent military units to rescue the embattled regime of President Bashar al-Assad in Syria’s civil war.
China has been seeking military bases of its own in the region as it pursues energy resources and influence beyond Asia. The decision to involve itself in the Saudi-Iranian rift makes clear that there is another player to be reckoned with.
“I think it reflects the way U.S. partners have leaned into their growing ties with China,” said Mr. Kurtzer. “Is it a direct threat to the United States? That is debatable. But the regional order is changing.”
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>>> U.S. secures deal with Netherlands, Japan on China chip export limit- Bloomberg
Jan 2023
Reuters
https://www.msn.com/en-us/news/world/u-s-secures-deal-with-netherlands-japan-on-china-chip-export-limit-bloomberg/ar-AA16PkbL?OCID=ansmsnnews11
WASHINGTON (Reuters) -The United States has secured a deal with the Netherlands and Japan to restrict exports of some advanced chip-making machinery to China in talks that concluded on Friday, Bloomberg reported, citing people familiar with the matter.
The agreement would extend some export controls the United States adopted in October to companies based in the two allied nations, including ASML Holding NV, Nikon Corp and Tokyo Electron Ltd, the report said.
Officials from the Netherlands and Japan were in Washington discussing a wide range of issues in talks led by White House national security adviser Jake Sullivan.
John Kirby, the White House national security spokesperson, earlier said the officials were talking about issues that are "important to all three of us."
"And certainly the safety and security of emerging technologies is going to be on that agenda," he told reporters.
A source familiar with the talks said restricting exports of semiconductor manufacturing equipment to China was among the topics.
Getting the Netherlands and Japan to impose tighter export controls on China would be a major diplomatic win for President Joe Biden's administration, which in October announced sweeping restrictions on Beijing's access to U.S. chipmaking technology to slow its technological and military advances.
When asked about the Bloomberg report, the White House declined to comment beyond Kirby's earlier remarks.
The Dutch foreign ministry and a spokesperson at Japan's Ministry of Economy, Trade and Industry declined to comment.
A spokesperson at Nikon declined to comment, saying the company could not speak about something that had not been officially announced. Officials at Tokyo Electron were unavailable for comment when Reuters contacted them outside regular business hours.
The Netherlands' prime minister, Mark Rutte, earlier said that it was not clear whether his government would disclose the result of talks with the United States over new export restrictions for the semiconductor industry.
Japanese firms would still be able to sell non-advanced products to China under the regulation, and any dip in shipments to Chna could be covered in the medium-to-long term by increasing output to regions such as the United States, Germany and India, said Akira Minamikawa, analyst at research company Omdia.
But the Japanese government and firms may object to the restriction if it includes measures such as a ban on sending engineers to their equipment customers, Minamikawa said, adding: "That would bring too large an impact on their businesses."
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>>> China suspends issuing visas in Japan, S.Korea to retaliate for COVID curbs
Reuters
By Martin Quin Pollard and Eduardo Baptista
https://www.msn.com/en-us/news/world/china-suspends-issuing-visas-in-japan-skorea-to-retaliate-for-covid-curbs/ar-AA16aRWA
BEIJING (Reuters) - China suspended issuing short-term visas in South Korea and Japan on Tuesday, after announcing it would retaliate against countries that required negative COVID-19 tests from Chinese travelers.
China has ditched mandatory quarantines for arrivals and allowed travel to resume across its border with Hong Kong since Sunday, removing the last major restrictions under the "zero-COVID" regime which it abruptly began dismantling in early December after historic protests against the curbs.
But the virus is spreading unchecked among its 1.4 billion people and worries over the scale and impact of its outbreak have prompted Japan, South Korea, the United States and other countries to require negative COVID tests from travellers from China.
Although China imposes similar testing requirements for all arrivals, foreign ministry spokesperson Wang Wenbin told reporters on Tuesday entry curbs for Chinese travellers were "discriminatory" and China would take "reciprocal measures".
In the first retaliatory move, the Chinese embassy in South Korea suspended issuing short-term visas for South Korean visitors. It would adjust the policy subject to the lifting of South Korea's "discriminatory entry restrictions" against China, the embassy said on its official WeChat account.
The Chinese embassy in Japan later announced a similar move, saying that the mission and its consulates had suspended the issuing of visas from Tuesday. The embassy statement did not say when they would resume.
The move came soon after Japan toughened COVID-19 rules for travellers coming directly from China, prescribing a negative result of a PCR test taken less than 72 hours before departure, as well as a negative test on arrival in Japan.
With the virus let loose, China has stopped publishing daily infection tallies. It has been reporting five or fewer deaths a day since the policy U-turn, figures that have been disputed by the World Health Organization and are inconsistent with funeral providers reporting surging demand.
Some governments have raised concerns about Beijing's data transparency as international experts predict at least 1 million deaths in China this year. Washington has also raised concerns about future potential mutations of the virus.
China dismisses criticism over its data as politically-motivated attempts to smear its "success" in handling the pandemic and said any future mutations are likely to be more infectious but less harmful.
"Since the outbreak, China has had an open and transparent attitude," the foreign ministry's Wang said.
Incoming Travelers to China Surge After Quarantine Requirement Lifted - TaiwanPlus News
But as infections surge across China's vast rural hinterland, many, including elderly victims, are simply not bothering to get tested.
PAST THE PEAK
State media downplayed the severity of the outbreak.
An article in Health Times, a publication managed by People's Daily, the ruling Communist Party's official newspaper, quoted several officials as saying infections have been declining in the capital Beijing and several Chinese provinces.
Officials in the southern technology powerhouse Shenzhen announced on Tuesday that the city had also passed its peak.
Kan Quan, director of the Office of the Henan Provincial Epidemic Prevention and Control, said nearly 90% of people in the central province of 100 million people had been infected as of Jan. 6.
In the eastern province of Jiangsu, the peak was reached on Dec. 22, while in neighbouring Zheijiang province "the first wave of infections has passed smoothly," officials said.
Financial markets looked through the latest border curbs as mere inconvenience, with the yuan hitting a nearly five-month high.
Although daily flights in and out of China are still at a tenth of pre-COVID levels, businesses across Asia, from South Korean and Japanese shop owners to Thai tour bus operators and K-pop groups celebrated the prospect of more Chinese tourists.
In a further sign of opening, Beijing's Daxing International Airport will resume taking international flights for the first time in nearly three years from January 17, along with Beijing Capital International Airport.
Chinese shoppers spent $250 billion a year overseas before COVID.
PFIZER CRITICISM
The border rules were not the only COVID conflict brewing in China.
State media lashed out at Pfizer Inc over the price for its COVID treatment Paxlovid.
"It is not a secret that U.S. capital forces have already accumulated quite a fortune from the world via selling vaccines and drugs, and the U.S. government has been coordinating all along," nationalist tabloid Global Times said in an editorial.
Pfizer's Chief Executive Albert Bourla said on Monday the company was in discussions with Chinese authorities about a price for Paxlovid, but not over licensing a generic version in China.
China's abrupt change of course in COVID policies has caught many hospitals ill-equipped, while smaller cities were left scrambling to secure basic anti-fever drugs.
Yu Weishi, chairman of Youcare Pharmaceutical Group, told Reuters his firm boosted output of its anti-fever drugs five-fold to one million boxes a day in the past month.
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>>> China: Death of a Dream
BY JAMES RICKARDS
JANUARY 9, 2023
https://dailyreckoning.com/china-death-of-a-dream/
China: Death of a Dream
China is reopening.
The China reopening story is the most powerful market narrative going on today. At least for now, it’s more powerful than any Fed analysis, the prospect of a recession, and even lower energy prices in terms of what’s driving investor behavior.
Of course, the key word is “narrative.”
It’s a powerful story but that does not mean the story is true. If it affects investor behavior, then investors have to pay attention to avoid getting run over by bull market sentiment. It can take time, but whenever a narrative diverges from reality, the reality always wins.
That will prove true with China.
“You Can’t Lock People Down Forever”
Yes, China has reopened its borders with the outside world. Tourists, family members, and businesspeople are flocking in and out after being mostly shut out for several years. At the same time, China has ended its failed Zero-COVID policy.
That policy consisted of extreme lockdowns, massive testing programs (several times per week for most people), transportation shutdowns, and quarantine concentration camps. It would not tolerate any spread of the virus at all.
These extreme policies could delay the spread of the virus in certain localities for a while, but ultimately the virus is going to go where it’s going to go. They nonetheless came at an enormous economic cost, and were socially unsustainable. You can’t lock people down forever.
That was demonstrated in November when riots broke out throughout China in opposition to the program. China is now letting the virus rip through society and trying to reboot its economy at the same time.
But despite the reopening cheerleading on Wall Street, China’s new policy will fail. There are several reasons for this.
The Downside to Letting It Rip
First off, due to the severe lockdowns many Chinese lack immunity. Suddenly, they’re all being exposed at once.
Letting the virus rip in a population of 1.4 billion, with an assumed infection rate of 30% (probably low) and a fatality rate of 0.25% (higher for some vulnerable groups), means 420,000,000 pandemic patients and over 1 million dead. China could actually be looking at over 450,000,000 million infections and perhaps as many as 2 million deaths from COVID.
This will overwhelm China’s healthcare system at best and give rise to a new wave of social unrest. One concern is that a new variant could emerge because of high population density and the sheer volume of cases.
In other words, China may have a different and worse experience if the virus mutates and recombines in ways that make it more lethal or contagious.
Finally, the most important point to grasp regarding the Chinese economy is that it’s failing with or without the Zero-COVID policy. The problems run much deeper than that.
China, Paper Dragon
The Chinese economy is failing because of excessive debt, the collapse of the real estate sector, decoupling from the U.S., the cut-off of high-tech imports to China, and a demographic collapse worse than the Black Death.
So don’t be fooled — the new decision to let the virus rip through the population will not end China’s economic malaise.
China’s economy may already be in a recession, which is a shock for the world’s second-largest economy and the “factory of the world.”
The narrative surrounding the China reopening rally may continue for a while, despite these fundamental weaknesses.
But in the end, the reality of a weak economy and a global recession will have its way. Don’t look for any economic growth coming from China for 2023.
Now take a step back for a minute and contrast the present reality of China with the widespread optimism of the past few decades.
The Death of a Dream
Since the mid-1990s, liberals and many free-market conservatives have maintained the view that China’s human rights abuses should be ignored because the Chinese economy was evolving in the direction of U.S.-style capitalism.
The view was that the Chinese just “needed time” to catch up, but sooner than later they would be “just like us.” This view was bolstered by the fact that many Chinese elites attended U.S. universities like Stanford, MIT and Harvard where they sat side-by-side with U.S. peers on their way to jobs at McKinsey or Goldman Sachs.
Once they got back to China, they would steer their less educated colleagues toward the neo-Keynesian outlook that their Western classmates espoused. I always thought this view was nonsense.
It’s true that Chinese students swarmed to top U.S. schools for the latest technical training. It is also true that China adopted many market mechanisms in order to grow its economy and build hard currency reserves. Still, the resemblance stopped there.
The Chinese were always loyal Communists, and they were merely acquiring Western intellectual tools so they could beat us at our own game. The “just like us” theory was made of whole cloth and bound to be disappointed. That time has now come.
Who’s Really Boss in China
For example, Jack Ma was one of the most successful entrepreneurs in history. Ma actually did personify the type of Western-oriented capitalist hoped for by the liberal elite. He founded the Alibaba Group, which is a Chinese e-commerce giant (similar to Amazon) and owns part of the Ant Group, which is a financial affiliate of Alibaba.
Ant operates a payments system called Alipay, which is one of the world’s largest payment apps with over 1 billion users. About two years ago, Ant Group was headed for a $37 billion IPO, which would have been the world’s largest at the time.
Instead, Ma was placed under house arrest by Communist Party officials, the IPO was canceled, and Ma was forced to give up his control of Ant. It is expected that Ant will pay a $1 billion fine for various regulatory violations. This is not just another case of corporate wrongdoing. In fact, there’s no evidence that Alibaba and Ant did anything wrong at all.
Instead, the Chinese Communist Party (CCP) is flexing its muscle and showing entrepreneurs who’s really in charge. The fact that this behavior has economic costs is also irrelevant.
Nothing is more important in the minds of Communist Party officials than party supremacy and the elimination of ideological, financial or technological competition.
China doesn’t mind if some Chinese businesses achieve multi-billion-dollar valuations or use Western business techniques to achieve massive scale. They do mind if private capital starts to rival the CCP in power and influence. Once that happens, the hammer drops and the CCP takes over.
In China, Communist ideology always comes first. And the fantasies about China opening up to become more like the U.S. are dead.
Unfortunately, with the growing levels of censorship and other forms of social control emerging in the U.S., we’re becoming more like China.
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>>> Qatar seals 27-year LNG deal with China as competition heats up
Reuters
Nov 21, 2022
By Andrew Mills and Maha El Dahan
https://www.reuters.com/business/energy/qatarenergy-signs-27-year-lng-deal-with-chinas-sinopec-2022-11-21/
Talks with other Chinese, European buyers ongoing -Kaabi
Says buyers may take up to a 5% stake in expansion
Says deal signals importance of secure long-term supply
DOHA, Nov 21 (Reuters) - QatarEnergy has signed a 27-year deal to supply China's Sinopec with liquefied natural gas in the longest such LNG agreement to date as volatility drives buyers to seek long-term supplies.
Since Russia's invasion of Ukraine in February, competition for LNG has become intense, with Europe in particular needing vast amounts to help replace Russian pipeline gas that used to make up almost 40% of the continent's imports.
European companies looking to buy LNG needed to look at how Asian buyers were approaching their own negotiations and were willing to lock into long-term deals, QatarEnergy chief Saad al-Kaabi told Reuters, shortly before signing the Sinopec deal.
"Today is an important milestone for the first sales and purchase agreement (SPA) for North Field East project, it is 4 million tonnes for 27 years to Sinopec of China," Kaabi said.
"It signifies long-term deals are here and important for both seller and buyer," he said in an interview in Doha, adding that the deal was the LNG sector's largest single sales and purchase agreement on record.
The North Field is part of the world's biggest gas field that Qatar shares with Iran, which calls its share South Pars.
QatarEnergy earlier this year signed five deals for North Field East (NFE), the first and larger of the two-phase North Field expansion plan, which includes six LNG trains that will ramp up Qatar's liquefaction capacity to 126 million tonnes per year by 2027 from 77 million.
It later signed contracts with three partners for North Field South (NFS), the second phase of the expansion.
Monday's deal, confirmed by Sinopec (600028.SS), is the first supply deal to be announced for NFE.
"This takes our relationship to new heights as we have an SPA that will last into the 2050s," Kaabi said.
"It sends a message that a lot of Asian buyers are actually approaching us to have a long term deal because they see the volumes of gas that are coming in the future are less and less."
LONG-TERM SUPPLY
Kaabi said negotiations with other buyers in China and Europe that want to have security of supply were ongoing.
Qatar is already the world's top LNG exporter and its North Field expansion project will boost that position and help guarantee long-term supplies of gas to Europe as the continent seeks alternatives to Russian flows.
"The recent volatility has driven buyers to understand the importance of having long-term supply that is fixed and that's reasonably priced for the long term"," Kaabi said.
"There aren't many projects that are taking final investment decision and the next two big chunks of LNG capacity that are coming into the market is Golden Pass LNG that we partnered with ExxonMobil in Texas and the next big chunk if you will is North Field East and North Field South."
Kaabi also said there was more realisation globally that gas should be an essential part of any energy transition.
"The wind doesn't blow all the time and the sun doesn't shine all the time," he said, adding that Qatari LNG is "a solution that has the least carbon intensity".
The pricing of the Sinopec deal will be similar to others in the past that were linked to crude oil.
"The way we're pricing our deals with Asia is crude linked. We've done it this way in the past and that's the mechanism we're using going forward."
The deal was signed on an ex-ship basis, meaning QatarEnergy will provide the shipping and delivery of the LNG.
Kaabi added negotiations for an equity stake in the Gulf country's expansion project were ongoing with several entities.
The supply contract is a key component for an integrated partnership in the NFE, Sinopec said in a statement, indicating it could be involved in stake negotiations.
QatarEnergy has maintained a 75% stake overall in the expansion and could give up to a 5% stake from its holding to some buyers, Kaabi said.
"Important buyers that want to commit for the long term on a substantial volume want to see part of the benefits of the upstream business... so I think it's an important win if you will and it makes the partnership even more solid."
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>>> Zoltan Pozsar: G7 Investors Should Worry About Gold-Backed Renminbi Eclipsing Dollars, Commodity Encumbrance
The Deep Dive
December 29, 2022
https://thedeepdive.ca/zoltan-pozsar-g7-investors-should-worry-about-gold-backed-renminbi-eclipsing-dollars-commodity-encumbrance/
Credit Suisse contributor Zoltan Pozsar has continued his ongoing series about Bretton Woods III where commodities will dictate the new world order. For his last dispatch of the year, he described how the world is now shifting to a multipolar order “being built not by G7 heads of state but by the ‘G7 of the East’ (the BRICS heads of state).”
BRICS stands for the group of five nations: Brazil, Russia, India, China, and South Africa. But Pozsar said that with the poised expansion via rumored applications for Saudi Arabia, Turkey, or Egypt, he took the liberty to round up the current “G5.”
The author focused on Chinese President Xi Jinping’s speech at the recent summit in the Arab states, which for Pozsar is very telling on how Beijing plans to outmaneuver the West in global economy.
“Fixed income investors should care – not just because the invoicing of oil in renminbi will hurt the dollar’s might, but also because commodity encumbrance means more inflation for the West,” Pozsar said.
In the next three to five years, China is ready to work with GCC [Gulf Cooperation Council] countries in the following priority areas: first, setting up a new paradigm of all-dimensional energy cooperation, where China will continue to import large quantities of crude oil on a long-term basis from GCC countries, and purchase more LNG. We will strengthen our cooperation in the upstream sector, engineering services, as well as [downstream] storage, transportation, and refinery. The Shanghai Petroleum and Natural Gas Exchange platform will be fully utilized for RMB settlement in oil and gas trade, […] and we could start currency swap cooperation and advance the m-CBDC Bridge project.
Pozsar quoted Xi’s speech
In dissecting Xi’s timeline of “three to five years,” Pozsar explained that in market terms, this means that five-year forward five-year inflation breakevens should discount a world in which oil and gas are invoiced not only in dollars but also in renminbi, and in which some oil and gas are not available at low prices (and in dollars) for the West because they have been encumbered by the East.
“My sense is that the market is starting to realize that the world is going from unipolar to multipolar politically, but the market has yet to make the leap that in the emerging multipolar world order, cross-currency bases will be smaller, commodity bases will be greater, and inflation rates in the West will be higher,” the author explained.
He added that inflation traders “should be paranoid, not complacent,” saying that “inflation breakevens do not seem to price any geopolitical risk.”
The dusk of petrodollar, the dawn of petroyuan
Striking a major comparison between Xi’s approach and then-president Franklin Roosevelt with King Abdul Aziz Ibn Saud, Pozsar highlighted that United States was at the time dealing “with a Middle East that had just started to develop.” The West was essentially securing oil flow from the Arab states in exchange for security through arms and revenue stability.
But now, US-Saudi Arabia relations are strained, America is now less reliant on oil from the Middle East owing to the shale revolution, and China ended up being the largest importer of oil.
“Back then, ‘liquidity and security’ were more important for an emerging region; today ‘equity and respect’ are more important for what has become an eminent region,” he described. China, he added, is now offering the latter through what Xi described as “a new paradigm of all-dimensional energy cooperation.”
The synergy put forth as a proposal by the Chinese leader “means not just taking oil for cash and arms but investing in the region in the ‘downstream sector’ and leveraging the regional know-how for cooperation in the ‘upstream sector’.”
“Put differently, ‘oil for development’ (plants and jobs) crowded out ‘oil for arms’ – the Belt and Road Initiative met Saudi Arabia’s Vision 2030 in a big win-win,” Pozsar concluded.
The icing on the proverbial cake? All these will be renminbi exclusive, starting with Xi’s promise that “the Shanghai Petroleum and Natural Gas Exchange platform will be fully utilized for RMB settlement in oil and gas trade.”
“China, already the largest buyer of oil and gas from GCC countries, will buy even more in the future, and wants to pay for all of it in renminbi over the next three to five years.” Pozsar also noted that the Chinese leader communicated this “not during the first day of his visit – when he met only the Saudi leadership – but during the second day of his visit – when he met the leadership of all the GCC countries.”
“GCC oil flowing East + renminbi invoicing = the dawn of the petroyuan,” he summed up.
Renminbi perks: projects, gold, CBDC
There will be numerous opportunities for GCC countries to decumulate the renminbi earned from selling oil and gas to China. Referring to Xi’s remarks, these could range from “the sale of clean energy infrastructure, big data and cloud computing centers, 5G and 6G projects, and cooperation in smart manufacturing and space exploration.”
“Cooperation in the upstream sector” could potentially also include “the joint exploration of oil in the South China Sea.”
Pozsar also noted that the People’s Bank of China (PBoC) reported an increase in its gold reserves for the first time in more than three years.
“Why do China’s gold purchases matter in the context of renminbi settlement? Because at the 2018 BRICS Summit, China launched a renminbi-denominated oil futures contract on the Shanghai International Energy Exchange, and since 2016 and 2017, the renminbi has been convertible to gold on the Shanghai and Hong Kong Gold Exchanges, respectively,” Pozsar explained.
He added: “Money is as money does, and convertibility to gold beats convertibility to dollars.”
READ: Zoltan Pozsar: Gold At $3,600 Is Not Improbable If US Refill Reserves With Russian Oil
Xi also referred specifically to the m-CBDC Bridge project in his speech. The central bank digital currency project, “enables real-time, peer-to-peer, cross-border, and foreign exchange transactions,” and is being undertaken by the central banks of China, Thailand, Hong Kong, and United Arab Emirates. This would conduct exchanges “without involving the US dollar or the network of Western correspondent banks that the U.S. dollar system runs on.”
“In a very Uncle Sam-like fashion, China wants more of the GCC’s oil, wants to pay for it with renminbi, and wants the GCC to accept e-renminbi on the m-CBDC Bridge platform, so don’t hesitate – join the mBridge fast train,” said Pozsar.
To make things sweeter for the GCC, Xi also highlighted starting “currency swap cooperation,” facilitating an easier way for the countries to buy the stuff it needs with China extending loans in renminbi. This can be repaid via the swap lines when China buys oil for renminbi.
“Do take a step back and consider… that since the beginning of this year, 2022, Russia has been selling oil to China for renminbi, and to India for UAE dirhams; India and the UAE are working on settling oil and gas trades in dirhams by 2023; and China is asking the GCC to ‘fully’ utilize Shanghai’s exchanges to settle all oil and gas sales to China in renminbi by 2025,” Pozsar wrote. “That’s dusk for the petrodollar… and dawn for the petroyuan.”
China and the OPEC+
The ascension of petroyuan is not something that is just about to start, it has already been set in motion. Among the OPEC+ countries, Russia and Venezuela are already accepting payments for oil in renminbi at steep discounts.
China also inked the Comprehensive Strategic Partnership with Iran – “a 25-year ‘deal’ under which China committed to invest $400 billion into Iran’s economy in exchange for a steady supply of Iranian oil at a steep discount.” It stipulates $280 billion toward developing downstream petrochemical sectors (refining and plastics) and $120 billion toward Iran’s transportation and manufacturing infrastructure in exchange for energy exports at a minimum guaranteed discount of 12% to the six-month rolling mean price.
The China-Iran agreement has the same spirit to what Xi’s speech is saying at the summit with GCC: “investments in downstream petrochemical projects, manufacturing, and infrastructure… [in exchange for] renminbi settlement.”
“Russia, Iran, and Venezuela account for about 40 percent of the world’s proven oil reserves… the GCC countries account for 40 percent of proven oil reserves as well (with Saudi Arabia accounting for half)… and are being courted by China to accept renminbi for their oil in exchange for transformative investments,” Pozsar summed up.
“To underscore, the U.S. has sanctioned half of OPEC with 40 percent of the world’s oil reserves and lost them to China, while China is courting the other half of OPEC with an offer that’s hard to refuse,” he added.
READ: China Makes Historic Economic Partnership With Saudi Arabia
The remaining 20% of proven oil reserves are located in North and West Africa, as well as Indonesia. North Africa is currently dominated by Russia, West Africa by China, and Indonesia has its own agenda with battery metals, according to Pozsar.
Commodity encumbrance
In a nutshell, that is how China is softly imposing the use of yuan in the oil markets, in so-called “three to five years.”
“China will not only pay for more oil in renminbi (crowding out the U.S. dollar), but new investments in downstream petrochemical industries in Iran, Saudi Arabia, and the GCC more broadly mean that in the future, much more value-added will be captured locally at the expense of industries in the West,” Pozsar said.
This has played well for China in other non-oil exporting countries. Called “debt trap diplomacy,” many nations are forced into allegiance or giving preference to mainland China in the geopolitical landscape after being unable to repay borrowed investments from Beijing to finance their respective countries’ development projects.
Forbes reported that 97 countries throughout the world are in debt to China, using World Bank data. Countries that owe China a lot of money are largely in Africa, although they can also be found in Central Asia, Southeast Asia, and the Pacific. Pakistan owes Beijing the most money: $77.3 billion, Angola $36.3 billion, Ethiopia $7.9 billion, Kenya $7.4 billion, and Sri Lanka $6.8 billion.
But, it has a different effect to what China is essentially offering the richer GCC nations: “emancipation,” as Pozsar puts it.
“Think of this as a ‘farm-to-table’ model: I used to sell my chicken and vegetables to you, and you sold soup for a markup in your five-star restaurant, but from now on, I’ll make the soup myself and you’ll get to import it in a can – my oil, my jobs, your spend, ‘our commodity, your problem’,” Pozsar explained.
Pozsar cites the first “casualty” of the commodity encumbrance tactic is the decision of the world’s largest chemicals group, BASF, to downsize “permanently” in Europe after it opened the first part of its new €10bn plastics engineering facility in China.
And like anything else, if it can be pledged to be encumbered, it can be rehypothecated.
Pozsar describes how rehypothecation will add value to the budding system: “heavily discounted oil and locally produced chemicals invoiced in renminbi mean encumbrance by the East, and the marginal re-export of oil and chemicals also for renminbi to the West means commodity rehypothecation for a profit.”
This has already started to manifest. For instance, China has suddenly become a big exporter of Russian LNG to Europe and India has become a big exporter of Russian oil and refined products such as diesel to Europe.
BRICS coin
But China is not the only party playing the commodity encumbrance game. On June 22, 2022, at the BRICS Business Forum, Russian President Vladimir Putin noted that “the creation of an international reserve currency based on a basket of currencies of our countries is being worked on.”
The project is poised to challenge the International Monetary Fund’s Special Drawing Rights (SDR)–an international reserve asset created in 1969 to supplement its member countries’ official reserves. In 2016, renminbi joined the US dollar, euro, yen, and British pound in the SDR basket.
On July 29, 2022, the Executive Board decided on the amounts (number of units) of each currency in the SDR valuation basket. These amounts will be effective for a period of five years, starting from August 1, 2022
Source: IMF
Pozsar cited the Minister-in-charge of Integration and Macroeconomics of the Eurasian Economic Commission, Sergei Glazyev, who’s also in charge of developing BRICS’s “international reserve currency”, in determining how the new asset would be measured.
“Should [a nation] reserve a portion of [its] natural resources for the backing of the new economic system, [its] respective weight in the currency basket of the new monetary unit would increase accordingly, providing that nation with larger currency reserves and credit capacity,” Pozsar quoted Glazyev. “In addition, bilateral swap lines with trading partner countries would provide them with adequate financing for co-investments and trade financing.”
The project is similar in spirit to Xi’s proposal to the GCC countries (and its debt trap diplomacy): currency swap and downstream development for renminbi settlement.
“The BRICS and other interested nations need to talk about setting up their own independent global financial system – whether it would be based on the Chinese currency or they will agree on something different. They need to debate this,” said Sergey Storchak, chief banker of Russian bank VEB.RF, in an interview at the BRICS summit.
Wide participation among global economies are expected once this project materializes as Saudi Arabia, Turkey, and Iran have all started their application to the BRICS. In addition, the Shanghai Cooperation Organization (SCO) granted dialogue partner status to Saudi Arabia and Qatar (which has half of GCC oil reserves) and began procedures to admit Iran as a member at the last summit in Samarkand.
“The China-GCC Summit is one thing, and China’s strategic partnership with Iran is another, but both Saudi Arabia and Iran applying to pillar institutions of the multipolar world order – BRICS+ and the SCO – at the same exact time, plus the idea of ‘BRICS coin’ as a commodity-weighted neutral reserve asset that encourages members to pledge their commodities to the BRICS ’cause’, should have G7 bond investors concerned, because these trends may keep inflation from slowing and interest rates from falling for the rest of this decade,” Pozsar concluded.
The new paradigm
“The ‘new paradigm’, as I see it, comes with a theme of ’emancipation’,” Pozsar explained. “Both sanctioned and non-sanctioned members of OPEC, with Chinese capital, are going to adopt the ‘farm-to-table’ model in which they will not just sell oil but will also refine more of it and process more of it into high value-added petrochemical products.”
He noted that all growth in global oil production came from US shale and other non-conventional sources such as Canadian tar sands. Saudi Arabia has already restricted boosting output by only one million barrels per day by 2025 while America’s biggest shale oil operator Pioneer Natural Resources recently said accelerating drilling would send investors fleeing and leave the sector “back at the bottom” of the stock market.
“It appears to me that unless the U.S. nationalizes shale oil fields and starts to drill for oil itself to boost production, over the next three to five years, we’re looking at an inelastic supply of oil and gas,” Pozsar noted.
This scenario opens the global oil market and makes it vulnerable for China to come in with its “emancipation” proposal.
READ: Joe Biden Prepares to Frantically Sell Oil From Reserves After Snubbed by OPEC
These supply constraints will lead, as Pozsar puts it, to a position where the “new paradigm” will likely be at the expense of refiners and petrochemical firms in the West, and also growth in the West–“much less domestic production and more inflation as steadily price-inflating alternatives are imported from the East.”
The author drew connection in that when one looks at the yield curve and think about the five-year section and then the forward five-year section, Xi may have accomplished his “next three- to five-year” goal of paying for China’s oil and gas imports exclusively in renminbi and may have advanced commodity encumbrance by developing downstream petrochemical industries in the Middle East “region” of Belt and Road and also the rollout of “BRICS coin” by the time the forward five-year section starts.
“I don’t think five-year forward five-year rates are pricing the future correctly: breakevens appear to be blind to geopolitical risks and the likelihood of the above,” said Pozsar. “Recognize two things: first, that inflation has been driven by non-linear shocks (a pandemic; stimulus; supply chain issues involving laptops, chips, and cars; post-pandemic labor shortages; and then the war in Ukraine), and second, that inflation forecasts treat geopolitics in the rearview mirror.”
Pozsar also said that central banks should think about inflation with geopolitics, resource nationalism, and “BRICS coin” in mind as the next set of non-linear shocks “that will keep inflation above target, forcing central banks to hike interest rates above 5%.”
In April, China will host the fourth Belt and Road Forum after it was postponed in 2021 due to the COVID-19 pandemic.
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>>> BYD Company Limited (BYDDF), together with its subsidiaries, engages in the research, development, manufacture, and sale of automobiles and related products in the People's Republic of China and internationally. The company operates through three segments: The Secondary Rechargeable Batteries and Photovoltaic; Mobile Phone Components, Assembly, and Other Products; and Automobiles, Automobile-Related Products and Other Products. The Secondary Rechargeable Batteries and Photovoltaic segment manufactures and sells lithium-ion and nickel batteries, photovoltaic products, and iron batteries primarily for mobile phones, power tools, photovoltaic and energy storage products, and electric vehicles. The Mobile Phone Components, Assembly, and Other Products segment manufactures and sells casings and other mobile phone and electronic product components; provides complete machine assembly services; and offers epidemic prevention materials. The Automobiles, Automobile-Related Products and Other Products segment is involved in the manufacture and sale of automobiles comprising hybrid, battery-electric buses, taxis, sanitation, and passenger vehicles; automobile-related molds and parts; automobile leasing and after-sales services of automobiles; and rail transit and related businesses. In addition, it offers rail transit equipment; solar batteries and arrays; and urban rail transportation services. The company was founded in 1995 and is headquartered in Shenzhen, China.
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>>> The fate of the world economy may depend on what happens to a company most Americans have never heard of
Business Insider
10-22-22
https://www.msn.com/en-us/money/markets/the-fate-of-the-world-economy-may-depend-on-what-happens-to-a-company-most-americans-have-never-heard-of/ar-AA13fP8K?cvid=8afa3a074bec4aab9749d496dd57b1ee
The fate of the global economy may rest on the shoulders of one company: TSMC.
TSMC is the world's biggest chipmaker — its chips power everything from cars to iPhones.
But US-China tensions, and China's standoff with Taiwan, could cost the global economy trillions.
On a tiny island off the coast of China, one company manufactures a product used across the globe for countless household products as varied as PCs and washing machines.
And as that island — Taiwan — worries about the threat of a standoff between the US and China, the world's economy holds its breath. That's because there could be trillions of dollars' worth of economic activity tied to that one company: Taiwan Semiconductor Manufacturing Company, the world's biggest chipmaker.
Industry watchers say an escalating dispute between the US and China over Taiwan could drag down the global economy, given the fact that no other company makes such advanced chips at such a high volume. If TSMC goes offline, they say, the production of everything from cars to iPhones could screech to a halt.
"If China would invade Taiwan, that would be the biggest impact we've seen to the global economy — possibly ever," Glenn O'Donnell, the vice president and research director at Forrester, told Insider. "This could be bigger than 1929."
What is TSMC?
While TSMC may not be a household name, you almost certainly own something that's powered by its chips.
TSMC is in the foundry business, meaning it doesn't design its own chips but instead produces them at fabrication plants for other companies. The company accounts for over half of the global semiconductor market, and when it comes to advanced processors that number is, by some estimates, as high as 90%. In fact, even the best chip from China's top semiconductor manufacturer, SMIC, has been said to be about five years behind TSMC's.
TSMC counts Apple as its biggest customer, supplying the California tech giant with the chips that power iPhones. In fact, most of the world's roughly 1.4 billion smartphone processors are produced by TSMC, as are about 60% of the chips used by automakers, according to The Wall Street Journal.
TSMC semiconductors are also used in high-performance computing: They can quickly process reams of data and guide missiles, making the company highly valuable in the eyes of government entities.
As TSMC has grown to dominate the industry, it has automatically become an oligopoly, according to William Alan Reinsch, a senior advisor at the Center for Strategic and International Studies, a national security think tank.
"When you have a very complex, very sophisticated, and very expensive technology where barriers to entry are very high — I mean, building a fab plant is in the billions — you can't just decide tomorrow, 'Well, I'm going to go into that business,'" he said. "It's not like making tea."
How did we become so reliant on chips made in Taiwan?
The semiconductor industry has its roots in the US, as much of the research and development is done on US soil. Companies in other countries license the US-made technology.
Dylan Patel, a chief analyst at the semiconductor research and consulting firm SemiAnalysis, pointed to the Dutch company ASML as an example: ASML produces high-end chipmaking equipment, but one of the technologies for which it's best known was invented in the US National Laboratories.
Over the past 30 years or so, manufacturers in developed countries concluded it was in their best interest to outsource the manufacturing of the chips, according to Reinsch.
"You build a big factory and you crank these things out by the thousands, and you do it in a low-wage, nonunion country that probably doesn't have environmental requirements," he said. "You keep all the design and IP at home and you do all your sales, marketing, and service at home, and that's where you make the money."
It's this approach that has directly led to the growth of chip foundries like TSMC and reduced production on American soil, Reinsch said.
According to a 2021 report from the Semiconductor Industry Association, in 1990 the US produced 37% of the world's chip supply. These days, the US is responsible for only 12% of global chip production.
Why is this a problem now?
As the coronavirus pandemic and the war in Ukraine have illustrated, having too much reliance on certain countries can upend supply chains when disruptions arise. It's for this reason that many US corporations are exploring "onshoring" — moving some of their manufacturing to the US — to make their supply chains more resilient.
The US's access to TSMC chips, however, is especially vulnerable, because though Taiwan is self-governing, China claims the island as its own and has threatened to invade. Controlling Taiwan is central to Chinese President Xi Jinping's goal of achieving a "great rejuvenation of the Chinese nation" by 2049, the 100th anniversary of the People's Republic of China.
While the consequences of an invasion could be significant, many experts say it's just a matter of time before it happens, whether it's by 2030, 2025, or even by the end of next year. On Monday, US Secretary of State Antony Blinken predicted China would take steps to annex Taiwan on a "much faster timeline" than previously thought, signaling that it could be sooner rather than later. The US government is already playing out war-game scenarios to prepare for this, and in the event of a full invasion it would reportedly consider evacuating the skilled chipmaker engineers on which it's become so reliant.
The spotlight has focused increasingly on Taiwan and the semiconductor industry as a whole in recent weeks following the export regulations the US government slapped on China. Those regulations limit sales of semiconductors made using US technology and are meant to curb China's ability to develop advanced technology.
The US and China are now locked in what Patel described as "a full-scale bilateral economic cold war," one that's likely to have severe financial repercussions, especially given how intertwined the semiconductor supply chain is.
What would happen if China invaded Taiwan?
Taiwan hopes its semiconductor business will protect it from Chinese aggression — government leaders have called the industry a "silicon shield" against invasion.
But if China did invade, disrupting the world's access to chips, "the entire global economy comes to a screeching halt," O'Donnell from Forrester said. "Semiconductors have become almost like the oxygen of the global economy," he said. "Without the chips, you can't breathe."
The effects of such a halt would be "economically devastating," says Martijn Rasser, a former senior intelligence officer at the CIA who is now a security and technology expert at the Center for a New American Security, a left-leaning think tank.
"You'd be looking at trillions of dollars in economic losses," he told Insider.
The US National Security Council agrees, and in July the US commerce secretary said the US would face a "deep and immediate recession" if American businesses no longer had access to these chips.
Some experts have speculated that, in the event of an invasion, the chip-manufacturing facilities would be intentionally destroyed so China couldn't access them. In a US Army journal article published in December, the academic Jared McKinney described this strategy as the "broken nest" — another way to put it is mutually assured destruction.
The destruction of those facilities, or an inability to access their chips, could have major national security implications, Rasser said.
"Every military system that we rely on has a ton of semiconductors in them," he said. "It would start impacting our ability to maintain existing weapon systems, upgrade ones, build new ones."
Considering that the US has committed to defending Taiwan in the event of a Chinese invasion, these hits to the US's defense capabilities could be especially significant.
But while a Chinese invasion of Taiwan would produce the most serious disruption, Rasser says it wouldn't necessarily take an invasion for the world's chip access to be blocked. As well as making investments in Taiwanese firms and poaching their workers, China could institute a blockade on the island that could cut off the world from semiconductor supplies.
What's the solution?
The US is taking some steps to make itself less reliant on Taiwan. In July, for instance, Congress passed the CHIPS Act, which includes nearly $53 billion in subsidies and tax breaks in an effort to bolster chip manufacturing in the US.
Some companies have already begun adding US facilities: Intel is building two $20 billion factories in Ohio, Micron has pledged to spend up to $100 billion on a massive chip factory in upstate New York, Samsung is building a $17 billion factory in Texas, and TSMC is constructing a $12 billion plant in Arizona.
TSMC is also building a new facility in Japan, one that will produce the less advanced chips needed in the auto industry. The Wall Street Journal reported that Japanese officials had signaled they'd like TSMC to expand its presence there by adding capacity for advanced chips as well, another sign global powers are growing wary of the geopolitical risk to Taiwan.
But O'Donnell warned it would be premature to celebrate an end to the chip shortage or to the US's reliance on Taiwanese chips. The factories themselves require equipment that's in short supply because of — ironically enough — the chip shortage. And besides, those plants take years to build and get online.
"Once you stick a shovel in the ground, you're not going to get chips for at least three years," he said.
Plus, there remain obstacles to substantially decreasing the country's reliance on TSMC. While the subsidies and tax breaks will help, Taiwan may continue to remain the cheaper option for businesses. And, for the time being at least, TSMC's chips are likely to be higher quality as well. Given that TSMC is "really at the cutting edge," Rasser said, the chips produced in the US by Intel, for instance, "wouldn't be as sophisticated" as those made in Taiwan.
While producing even these lower-quality chips would go some way to reduce the US's reliance on Taiwan, the US has a shortfall of the skilled workforce needed to ramp up production, a problem companies in this industry are facing across the globe. Rasser says enhanced training and education will be necessary to fill this gap.
It's for these reasons that it could be "years and potentially decades" before the US will be able to declare independence on the chipmaking front.
"The CHIPS Act, it's a good step in the right direction, but it's just a little more than scratching the surface," Rasser said.
In the meantime, the US may have to cross its fingers that an economy-shaking disruption doesn't come to pass.
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>>> Wary of US dollar hegemony, Chinese state researchers float idea of a pan-Asian digital currency
The digital token would be pegged to a basket of 13 currencies, including the yuan, Japanese yen, South Korean won and those of the 10 Asean countries
The government researchers said a common Asian digital currency would lower the region’s reliance on the US dollar and help safeguard financial stability
South China Morning Post
by Frank Tang
13 Oct, 2022
https://www.scmp.com/economy/china-economy/article/3195855/wary-us-dollar-hegemony-chinese-state-researchers-float-idea
China is a global leader in the development of a sovereign digital currency.
The conditions are right for the establishment of a pan-Asian digital currency that could enhance regional monetary cooperation and loosen reliance on the US dollar, Chinese state researchers say.
The idea of an Asia-wide digital token comes as Beijing tries to consolidate its economic influence in the region and its position as a global leader in digital currency development.
China is also working studiously to reduce its reliance on the US dollar system amid threats of financial decoupling from Washington.
“More than 20 years of deepened economic integration in East Asia has laid a good foundation for regional currency cooperation. The conditions for setting up the Asian yuan have gradually formed,” said researchers Song Shuang, Liu Dongmin and Zhou Xuezhi, from the Institute of World Economics and Politics under the Chinese Academy of Social Sciences.
The digital token would be pegged to a basket of 13 currencies, including the yuan, Japanese yen, South Korean won and those of the 10 member countries in the Association of Southeast Asian Nations.
Weighting for each could be similar to that of the International Monetary Fund’s special drawing rights, an international reserve asset.
Distributed ledger technology would underpin the currency, preventing the dominance of any one country and removing obstacles for regional monetary cooperation.
The article was originally published in the August issue of World Affairs journal, which is affiliated with the Chinese Ministry of Foreign Affairs, before it was posted online late last month.
The government researchers said a common Asian digital currency would lower the region’s reliance on the US dollar and help safeguard financial stability.
They pointed to the financial market volatility triggered by aggressive US rate hikes, which have negatively affected foreign exchange reserves of Asian countries.
“East Asian countries have long settled their trade in the US dollar, exacerbating currency mismatches and exchange rate risks. It was the trigger for the 1997 Asian financial crisis,” they said.
It is not the first time a super-sovereign currency has been floated for Asia. Former Malaysian prime minister Mahathir Mohamad proposed a common currency in East Asia to replace the US dollar during the 1997 Asian financial crisis, and insisted on its necessity again in 2019.
In 2006, the Japan-led Asian Development Bank also proposed the Asian Currency Unit, though it was eventually shelved.
The proposed Asian digital currency is more likely to be led by China, which is the world’s second largest economy and has carried out extensive trials of its sovereign digital currency, known as the e-CNY.
China has piloted its central bank digital currency in 23 major cities, primarily for small retail payments, with 5.6 million merchants accepting it and accumulative transactions worth 100 billion yuan (US$13.9 billion) by the end of August.
No timetable has been set for the launch of the e-CNY, but China is far ahead of neighbors Japan and South Korea, neither of which have released detailed plans for their respective central bank digital currencies.
While Beijing maintains the digital yuan is mainly for domestic use, China’s central bank is exploring cross-border use with Thailand, the United Arab Emirates and Hong Kong.
The Chinese researchers proposed that a department should be created under the Asean+3 Macroeconomic Research Office (AMRO), a Singapore-based macroeconomic surveillance organisation headed by Chinese national Li Kouqing, to coordinate creation of a digital currency. Eventually, it would be upgraded to the Asian Monetary Fund.
Cross-border payment should begin between large institutions, such as central banks, commercial banks and state-owned enterprises for areas like commodity trade, outbound investment, government aid or bond issuance.
In August, China’s former vice-minister for finance Zhu Guangyao also suggested a more formal institutional role for AMRO, as well as the Chiang Mai Initiative Multilateralisation – a US$240 billion currency swap pool formed by Asean, China, Japan and South Korea – as a way to boost the use of regional currencies, rather than US dollar.
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>>> U.S. and China reach landmark audit deal in boon for Chinese tech companies
Reuters
August 26, 2022
By Scott Murdoch, Xie Yu, Samuel Shen and Michelle Price
https://finance.yahoo.com/news/china-asks-firms-auditors-prepare-084606738.html
HONG KONG/WASHINGTON (Reuters) -Beijing and Washington took a major step on Friday towards ending a dispute that threatened to boot Chinese companies, including Alibaba, from U.S. stock exchanges, signing a pact to allow U.S. regulators to vet accounting firms in China and Hong Kong.
U.S. regulators have for more than a decade demanded access to audit papers of U.S.-listed Chinese companies, but Beijing has been reluctant to let overseas regulators inspect its accounting firms, citing national security concerns..
The deal marks a partial thaw in U.S.-China relations amid tensions over Taiwan and will come as a relief for hundreds of Chinese companies, investors and U.S. exchanges, giving China the chance to retain access to the world's deepest capital markets if it works in practice.
If not, some 200 Chinese companies could be banned from U.S. exchanges, U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler said. The agency has previously identified Alibaba Group, JD.Com Inc, and NIO INC among those at risk.
Announcing the deal, U.S. officials struck a cautious note, warning it was just a first step and that their view on China's compliance would be determined by whether they are able to conduct their inspections unobstructed, as the deal promises.
"Make no mistake though: The proof will be in the pudding," said Gensler. "This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China."
Still, the Public Company Accounting Oversight Board (PCAOB), which oversees audits of U.S.-listed companies, said it was the most detailed agreement the regulator has ever reached with China.
The China Securities Regulatory Commission (CSRC) said the agreement was an important step towards addressing the auditing issue and benefited investors, companies and both countries.
In principle, the deal appears to give the PCAOB what it has long-demanded, namely full access to Chinese audit working papers with no redactions, the right to take testimony from audit company staff in China, and sole discretion to select which companies it inspects.
U.S. officials said they had notified the selected companies on Friday morning and expected to land in Hong Kong, where the inspections will take place, by mid-September.
REGULATORY NEEDS
The long-running dispute came to a head in 2020 when the United States passed the Holding Foreign Companies Accountable Act, which forced the SEC to take a tougher hand with U.S.-listed Chinese companies. The SEC finalized rules implementing the law in December, starting the clock ticking on potential Chinese company delistings.
"We have to hold China to the same standards as every other company and every other country that lists on American exchanges," U.S. Republican Senator John Kennedy, a key architect of the 2020 law, said in a statement on Friday.
U.S. rules stipulate that if China is not found to be in compliance, its companies could be barred from U.S. exchanges by early 2024, but that deadline could be brought forward. Gensler said Chinese companies still faced delisting if the inspections were obstructed.
The PCAOB and SEC expect to make a determination on China's compliance by the end of the year, officials said.
"This is seen as a positive first step. However, things are not fully cast in stone yet," said Samuel Siew, market specialist at CGS-CIMB.
Major Chinese companies listed in the United States rose in premarket trading, with Alibaba up 2.6%, Pinduoduo gaining nearly 6% and Baidu Inc up 3.3%, before succumbing to the broad sell-off on Wall Street on concerns over Federal Reserve rate hikes.
Currently, China-based U.S. issuers have a combined market capitalization of between $1 trillion to $2 trillion, the SEC said.
“This agreement is an important development for the global economy and our U.S. capital markets, which remain preeminent largely because of their ability to balance investor protections and access to the world’s leading companies,” Lynn Martin, president of the New York Stock Exchange said in a statement.
Nasdaq, the other major U.S. exchange, declined to comment.
CHALLENGES AHEAD
PCAOB officials said the inspections would be conducted in Hong Kong due to strict COVID-related restrictions in China, with the option to move to the mainland in future.
Reuters reported earlier that Beijing told some U.S. listed Chinese firms and their auditors to prepare the transfer of audit documents and staff to Hong Kong.
Kai Zhan, senior counsel at Chinese law firm Yuanda, said the agreement shows "both sides have strong wills to solve" the dispute although there were still challenges.
"Cooperation has not completely broken down despite the Sino-U.S. rivalry," said Zhan, who specializes in areas including capital markets and U.S. sanction compliance.
"In implementation, both sides could easily clash on some technical details, so uncertainty remains."
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>>> US and South Korea begin biggest joint military drills in years
Independent
by Alisha Rahaman Sarkar
August 22, 2022
https://news.yahoo.com/us-south-korea-begin-biggest-120802379.html
The US and South Korea on Monday began their largest joint military drill in years in a show of their preparedness amid heightened tensions with North Korea.
The Ulchi Freedom Shield annual exercises will involve aircraft, warships, tanks and potentially thousands of troops before concluding on 1 September.
South Korean president Yoon Suk-yeol, who took office in May, vowed to “normalise” the combined exercises and boost deterrence against the North as it continues to threaten to upgrade its nuclear capabilities.
The South had separately launched the four-day Ulchi civil defence drills on Monday, officials said, in an effort to boost government readiness. With the changing pattern of war, which now involves cyber safety and supply chain, military and civil exercises will help the country be prepared, Mr Yoon said.
The civil defence exercises will reportedly include simulating joint attacks, front-line reinforcements of arms and fuel and removals of weapons of mass destruction.
The troops will also undergo drone attack training along with new developments in warfare used during Russia's invasion of Ukraine.
Without revealing the number of troops participating in joint defence exercises, the South has portrayed it as a message of strength, days after Seoul’s defence ministry said the Ulchi Freedom Shield “normalises” large-scale training and field exercises between the allies.
This year marks the largest joint drill between the countries since 2017 after being scaled back because of Covid and the South’s efforts to renew talks with North Korea.
The South Korean defence ministry claimed the allies would stage 11 field training programmes involving thousands of soldiers this summer.
Pyongyang, however, called the joint drills a rehearsal for invasion and fired two cruise missiles from the west coast last week when Washington and Seoul kicked off their preliminary training for the exercises.
The drills commenced a week after Kim Yo-jong, the powerful sister of North Korean leader Kim Jong-un, dismissed the South’s proposal of economic benefits in exchange for denuclearisation steps.
She described the South Korean president’s proposal as “foolish” and “audacious”, stressing the North had no intentions to give away the arsenal used by her brother as a guarantee for survival.
She had also criticised Mr Yoon for continuing military exercises with the US and monitoring the North’s missile activity.
The North Korean leader had earlier warned of “deadly” retaliation against South Korea after a recent Covid outbreak, which Pyongyang claimed was caused by leaflets and other objects floated by southern activists.
North Korea has conducted a record number of missile tests this year, involving over 30 ballistic launches, including the country’s first demonstrations of intercontinental ballistic missiles in nearly five years.
The rapid missile tests have prompted concerns over the North conducting its first nuclear test in five years.
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>>> China to Join Russia Military Exercises as U.S. Rivals Deepen Ties
The Wall Street Journal
by James T. Areddy, Ann M. Simmons
https://www.msn.com/en-us/news/world/china-to-join-russia-military-exercises-as-us-rivals-deepen-ties/ar-AA10LyBL?li=BBnb7Kz
China’s People’s Liberation Army said it is set to join military exercises led by Russia in the latest demonstration of partnership between the two U.S. rivals.
Building on a “no limits” pact their presidents signed this year, the Russian and Chinese militaries are expected to drill side-by-side starting later this month in the Russian Far East, according to China’s Ministry of Defense. The exercises will mark their second joint show of force in the region this year after bombers from each country in May conducted a 13-hour drill close enough to Japan and South Korea that those nations scrambled jet fighters, at a time when President Biden was visiting Tokyo.
Russia’s Ministry of Defense didn’t immediately respond to a request for confirmation of whether China would participate in the exercises, which are scheduled Aug. 30 to Sept. 5.
Last month, the Russian ministry said units of its Eastern Military District, in the nation’s Far East near the borders of China and North Korea, as well as airborne, long range aviation and military transport aviation personnel and equipment, would participate in training maneuvers along with military contingents from other states it didn’t name. Reports, including China’s Defense Ministry statement, said India, Belarus, Tajikistan, Mongolia and other nations would join, though Russia hasn’t confirmed the participants.
The Russian invasion of neighboring Ukraine in February, and recent Chinese live fire exercises around Taiwan, have elevated military tensions this year and put both Moscow and Beijing on the receiving end of criticism from Washington. Rather than formal treaty allies, China and Russia appear aligned primarily over shared interests, including a desire to check global dominance of the U.S., according to analysts.
A Russia specialist at Georgetown University, Angela Stent, said the exercises are likely to be scrutinized for signs of Russia’s fighting capability considering its troubles prosecuting the Ukraine war. “The message will be, we have been criticized and sanctioned by the West but we have a range of other countries that are partners. We are not isolated,” she said, noting that position will be enhanced by the participation of both China and India.
China has declined to criticize or publicly endorse Russia’s Ukraine invasion, which began shortly after Chinese leader Xi Jinping hosted his Russian counterpart, Vladimir Putin, in Beijing and they signed a lengthy joint statement that rejected the U.S.-led global political order. After Beijing practiced a possible military blockade of Taiwan this month in response to a visit to the island by House Speaker Nancy Pelosi, the Kremlin blamed the U.S. for heightening tensions.
Mr. Putin this week called Mrs. Pelosi’s visit a “thoroughly planned provocation” by the U.S. to sow chaos. The remarks were welcomed by China’s Foreign Ministry on Wednesday, where a spokesman said they demonstrate “high-level strategic coordination between China and Russia, and the firm support the two countries have rendered each other on issues concerning their core interests.”
Clear limits exist in the Russia-China relationship, which has often been deeply troubled in the past. Beijing has criticized Western governments for cutting trade relations with Russia in an effort to penalize Moscow for the Ukraine invasion and continued to buy its energy exports, but many of China’s biggest government companies have also appeared to quietly abide by some of the sanctions.
The Russian and Chinese militaries have practiced together on various occasions in recent years, often sparking protests from the U.S. and other nations. Details are limited about the coming military exercises, which are known as Vostok 2022, referring to the Russian word for East. Moscow hosts similar large-scale wargames annually and rotates them between different regions.
China’s three-sentence statement said the coming event aims to deepen practical and friendly cooperation between participating countries and is unrelated to the “current international and regional situation,” likely referring to Ukraine and Taiwan.
They follow a series of similar military exercises in Asia, where China’s air force in recent days has flown alongside Thai jets and U.S. Army troops have practiced in Indonesia with allied forces, including Australia and Japan.
When Russia hosted Vostok exercises in 2018, it described the scale as unprecedented since the Soviet era. It said 300,000 troops participated along with 1,000 fixed-wing aircraft and helicopters, 80 ships, and 36,000 tanks, armored and other vehicles.
As a first-time participant in the Vostok exercises in 2018, China said it sent 3,200 soldiers, along with more than 1,000 pieces of weaponry and 30 fixed-wing aircraft and helicopters.
Thomas Graham, a fellow at the Council on Foreign Relations and former Russia specialist on the National Security Council, said the actual number of combatants in such exercises tend to be smaller than the advertised numbers, but in 2018 the militaries did demonstrate a degree of interoperability, such as in the command structure and sharing communications. The question now, he said: “Is this an exercise that shows the two militaries can fight together in a significant way or is it largely a propaganda show?”
Russia’s Defense Ministry has sought to play down the participation of other states in the coming exercises and wave off doubt about its military capabilities as it suffers the high costs of prosecuting its war in Ukraine. In July, Russian officials warned “that a number of foreign media are spreading inaccurate information about alleged mobilization activities.” They said that only part of Russia’s armed forces was involved in Moscow’s military action in Ukraine and the number was sufficient enough to fulfill Mr. Putin’s goals in the campaign.
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>>> Taiwan 'matters far more to the world economy' than many people realize, economist explains
Yahoo Finance
by Dani Romero
August 13, 2022
https://finance.yahoo.com/news/taiwan-world-economy-economist-explains-123545383.html
China's latest military exercises encircling Taiwan have clear ramifications for the global economy, following U.S. House Speaker Nancy Pelosi’s recent visit to Taipei.
"Taiwan matters far more to the world economy than its 1% share of global GDP would indicate," Gareth Leather, Senior Economist in the Emerging Asia team at Capital Economics, wrote in a note.
The military exercises included live-fire drills and missile launches, restricting access to ships and aircraft in the area. Data compiled by Bloomberg shows more than 40 vessels have navigated around the drill zones south of Taiwan’s main port.
"A further escalation in cross-strait tensions that cut Taiwan’s export off from the rest of the world would lead to renewed shortages in the automotive and electronics sectors and put further upward pressure on inflation," Leather wrote.
He noted that Taiwan is the world’s largest producer of the processor chips "that are increasingly ubiquitous in new products," having twice the market share of the next biggest producer.
Leather added that 92% of the most advanced semiconductors are made by TSMC in Taiwan, making its dominance at the high end even greater. So if Taiwanese semiconductor supply were disrupted for a prolonged period, electronics and automotive manufacturers would struggle to find alternative suppliers.
Taiwan’s autonomy has become a key geopolitical interest for the U.S. due to the island's dominance in the global market for microchips. Semiconductors, which go in everything from smartphones to cars, have become an integral piece to our daily lives.
In a 2021 report from the Biden Administration, it was explained that "the United States is heavily dependent on a single company – TSMC – for producing its leading-edge chips." Also in the report, "the lack of domestic production capability also puts at risk the ability to supply current and future national security and critical infrastructure needs."
While Washington and Beijing are locked in a fierce race to become the global leader in high-tech industries, U.S. Congress passed the Chips and Science Act last week, providing $52 billion in subsidies for America’s semiconductor sector.
This would shore up our homegrown chip industry, with around $39 billion being allocated for building new chip fabrication plants on U.S. soil. In the meantime, any added bottleneck would only make the global production of goods particularly vulnerable.
If production facilities become damaged, the stakes are extremely high as it takes two-to-three years to build a semiconductor plant from scratch, according to Leather. The implications would be "extremely expensive" replacing lost manufacturing capacity and it wouldn't be "possible to re-establish TSMC’s most advanced facilities without its personnel and intellectual property."
Given the size of the electronics industry in parts of
Asia and motor industry in parts of Europe, these economies are particularly vulnerable.
Another challenge would be an electronic shortage, which in turn would lead to an increase in prices, adding more pressure to global inflation.
Leather warns that If Taiwanese semiconductor supply were disrupted for a prolonged period, electronics and automotive manufacturers would struggle to find alternative suppliers. This would lead to many firms having to halt production.
"While electronic goods themselves make up a fairly small share of CPI baskets, widespread chip shortages would hit the output of a wider range of consumer goods and even digital services," Leather explained. "Consequently, a major escalation over Taiwan would constitute yet another supply shock, keeping inflation high for even longer."
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>>> China State-Owned Giants to Delist From US Amid Audit Spat
Bloomberg
by Lulu Yilun Chen and John Cheng
August 12, 2022
https://finance.yahoo.com/news/china-state-owned-giants-delist-100529241.html
(Bloomberg) -- Five of China’s largest state-owned companies announced plans to delist from US exchanges as the two countries struggle to come to an agreement allowing American regulators to inspect audits of Chinese businesses.
China Life Insurance Co., PetroChina Co. and China Petroleum & Chemical Corp. all disclosed their intentions to delist in statements published in quick succession on Friday, along with Aluminum Corp. of China and Sinopec Shanghai Petrochemical Co.
The US and China have been at odds for two decades over allowing American inspectors access to the audit work papers of Chinese companies. Negotiators have yet to hammer out an agreement with the clock ticking on a congressionally imposed deadline of 2024 to kick off businesses that don’t comply. Mainland China and Hong Kong are the only two jurisdictions worldwide that don’t allow inspections by the Public Company Accounting Oversight Board, with officials there claiming national security and confidentiality concerns.
As US and Chinese officials try to reach a deal, speculation has been mounting that a solution could involve companies that Beijing deems sensitive voluntarily exiting US markets.
“These state-owned enterprises are in strategic sectors and deemed to have access to information and data that the Chinese government may be hesitant to give access to foreign regulators,” said Redmond Wong, a strategist at Saxo Markets.
The China Securities Regulatory Commission said in a statement that the delisting plans were based on the companies’ business concerns.
The SEC declined to comment. The PCAOB didn’t immediately respond to a request for comment.
About 300 businesses based in China and Hong Kong -- with over $2.4 trillion in market value -- risk being kicked off US Exchanges as the Securities and Exchange Commission increases scrutiny of the firms, Bloomberg Intelligence estimated in May. Among the biggest are China Life, PetroChina, China Petroleum & Chemical, Alibaba Group Holding Ltd. and Baidu Inc.
It’s unclear whether the move to delist will smooth negotiations to break a standoff on audit inspections, a US legal requirement meant to protect investors from accounting frauds and other financial malfeasance. The 2024 deadline stems from a 2020 law called the Holding Foreign Companies Accountable Act that was popular with both Democrats and Republicans.
A voluntary delisting might not keep the PCAOB from demanding to review a company’s audit work papers, PCAOB Chair Erica Williams said this month. The PCAOB’s authority to inspect was retrospective, meaning the watchdog could still demand work papers from those companies even after they leave, Williams said.
“If a firm or issuer decides to delist this year, it really doesn’t matter to me because I need to know if you engaged in fraud last year,” Williams said, not referring to any company specifically.
The US SEC on July 29 added Alibaba to a growing list of companies that could be kicked off American exchanges if the two countries fail to reach a deal.
Alibaba said in July it was seeking primary listings in Hong Kong, joining Bilibili Inc. and Zai Lab Ltd. which made the move earlier. The switch could help companies tap more Chinese investors while providing a template for other US-listed Chinese firms that face delisting.
Alibaba said in August that it would try to maintain its listing on the New York Stock Exchange and Hong Kong Stock Exchange.
Alibaba, Pinduoduo Inc. and JD.com Inc. fell about 2% in New York. PetroChina fell about 1%, while the Kraneshares CSI China Internet Fund ETF declined 2%. The Nasdaq Golden Dragon Index fell nearly 3%, bringing total losses so far this year to 21%.
The US-China Economic and Security Review Commission, which reports to Congress, says China considers eight companies listed on major US exchanges to be “national-level Chinese state-owned enterprises.” They are PetroChina, China Life Insurance, China Petroleum & Chemical, China Southern Airlines Co., Huaneng Power International Inc., Aluminum Corp. of China, China Eastern Airlines Corp. and Sinopec Shanghai Petrochemical.
While the delistings will have little impact on the companies themselves given their New York shares are thinly traded, the moves underscore escalating tensions between the US and China, said Marvin Chen, a strategist at Bloomberg Intelligence.
Relations between the superpowers have been especially tense in recent days after US House Speaker Nancy Pelosi’s trip to Taiwan prompted several days of Chinese military drills around the island.
Congress is considering legislation that could speed up the delisting deadline to as soon as 2023, adding further pressure for the two sides to quickly reach a deal.
The PCAOB chair has declined to provide a definitive date by which an agreement with Chinese authorities must be reached, but reiterated it would need to be soon.
The New York stock exchange delisted China Mobile Ltd., China Telecom Corp and China Unicom Hong Kong Ltd. in January last year, following an order signed by former President Donald Trump that barred investment in Chinese businesses deemed as having links with the military. Huaneng Power International said in June that it intends to delist due to low volume and the administrative burden and costs of maintaining the listing.
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>>> China buys America’s largest pork processor
07-06-2013
https://www.pigprogress.net/pigs/china-buys-americas-largest-pork-processor/
China buys America's largest pork processor
Last month China’s largest meat processor, Shuanghui International Holdings Ltd., agreed to pay USD $4.7 billion to acquire Smithfield Foods, Inc., the world’s largest hog farmer and processor. The deal is the biggest Chinese takeover of an American company in history.
The mega-pork deal immediately caused hand-wringing and outrage among Americans who fear growing Chinese dominance in the global economy. However, many analysts grudgingly agree the deal will be good for Smithfield, good for the US pork sector… and potentially great for the US beef industry if political leaders manage to leverage the deal to force changes in China’s trade policies.
Smithfield has twice as much revenue as its Chinese suitor, but sports a much smaller market value. China’s consumers are becoming wealthier and are adding more pork to their diet, while the market for pork in the US is stagnant.
The US pork industry is already highly concentrated, with Smithfield and four other companies controlling nearly three-quarters of America’s pork processing industry. Any US company that had coveted Smithfield would have had to face government antitrust hurdles. Shuanghui will face regulatory scrutiny through the Committee on Foreign Investments in the US, which looks closely at these acquisitions.
China owns USD $1.2 trillion of US federal debt, the most by far of any foreign nation. But this has nothing to do with America’s national debt. It has everything to do with building a better supply chain that moves American pig meat into the mouths of prosperous, happy Chinese customers. The US pork industry has struggled under the weight of high corn prices, which amount to around two-thirds the cost of raising a pig.
Scaling up
The deal was announced even as the Chinese government publicly committed to scaling up its own domestic pork production. Xiaoping Zhang, country director for the American Soybean Association in Beijing, says China’s backyard farms account for 40% of the country’s pork production. Small-scale inefficiencies make it expensive to grow a hog in China. Herd health has become a problem, so many small-scale farmers left the business.
“When these backyard farmers quit, it caused higher prices, and that was incentive for outside investment from both industry and the Chinese government,” says Zhang.
China’s government hopes that, by 2015, 80% of China’s pork will come from so-called ‘scaled-up’ domestic farms that will produce 500 pigs per year, compared to today’s average small-scale output of 50 pigs per farm per year.
Trade opportunities
Smithfield now produces half its hogs without the feed additive ractopamine, a lean muscle promoting drug that has been banned in China and Russia. This deal, combined with the racto-free pig production, should allow Smithfield to ship even more pork to China.
The acquisition provides a unique opportunity for American political leaders to pressure China into trade reforms. They want China to relax its ban on ractopamine, clearing the way for even more pig meat imports; and lift its 10-year-old ban on US beef imports.
“If you can’t leverage pressure on China now, when can you?” asks Steve Kay, editor and publisher of Cattle Buyers Weekly. “It’s a good opportunity.”
China’s ban on US beef was the result of a BSE case 10 years ago. The Smithfield deal coincides with the World Organization for Animal Health (OIE) decision to grant the U.S. its “lowest risk” status for BSE. (ie - Mad Cow Disease)
“China is not alone in using the decade-old BSE case against the U.S.,” says Kay. “Twenty-two countries still have full or partial bans on U.S. beef as a result of a single 10-year-old case of BSE. These are trade barriers because they are not taking into account science, especially since OIE has recognized U.S. beef as negligible for BSE risk.”
Unlikely bedfellows
While China and the US don’t always see eye to eye politically, the Smithfield deal further nudges the world’s two superpowers to get along. It means China has a vested interest in the well-being of the American economy.
The Smithfield deal will help China get what it desperately needs: respect, through the Smithfield brand. Chinese officials have been stung over and over by food safety scandals and were utterly embarrassed earlier this year when dead pigs were found floating in rivers near Shanghai.
Smithfield’s superior technology, phytosanitary measures and efficiencies will help China move its dubious food safety policies more in line with the western world. America’s pork production has been refined over decades into a system of mass production similar to making cars or televisions. Last year, 62% of the hogs in the US were raised on farms with at least 5,000 head, according to USDA. They’re often housed in vast, climate-controlled buildings, fed specialised diets of corn and soybean meal, and processed into bacon and ham in highly mechanized factories designed to ensure the meat is free of disease and contamination.
Smithfield plants have capacity to slaughter as many as 110,000 hogs a day. Its control of each stage of production helps the company trace back and address any problems with pathogens. “Their traceability is superb,” says John Mabry, an Iowa State University professor who specializes in swine genetics.
China, according to the US Meat Export Federation, has some 14,720 pig slaughterhouses compared with about 600 in the US
Last year the US sent 431,145 metric tons of pork worth $886 million to China. The deal could strengthen US pork prices as pork exports increase. That, in turn, will take more pork off the US domestic market and potentially raise the price of live hogs.
It’s positive for Smithfield and the US pork industry. American grillers may not be as thrilled.
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>>> China's economy brakes sharply in Q2, global risks darken outlook
Reuters
July 15, 2022
By Kevin Yao
https://www.reuters.com/world/china/chinas-q2-gdp-growth-slows-sharply-04-yy-missing-fcast-2022-07-15/
Summary
China's Q2 GDP shrinks from Q1, Y/Y growth slows sharply
Widespread COVID lockdowns hammer industrial activity, demand
June shows bounce in activity, but global risks darken outlook
Fresh COVID flare-ups, Ukraine War, global rate hikes heap pressure
Analysts expect full year GDP growth to lag govt target of 5.5%
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>>> Warren Buffett–backed BYD surpasses Tesla in global EV sales a decade after Elon Musk doubted the Chinese company’s technology
Fortune
BY GRADY MCGREGOR
July 6, 2022
https://fortune.com/2022/07/06/warren-buffett-byd-tesla-ev-sales-elon-musk-doubt-technology/
BYD, the Chinese electric vehicle firm partly owned by Warren Buffett's Berkshire Hathaway, became the world’s largest electric vehicle maker in the first half of 2022, wrestling the title from Elon Musk's EV giant Tesla in another sign of the Chinese automaker's resilience in the face of COVID-inflicted disruptions that plagued its rivals this year.
BYD sold 641,350 new electric vehicles in the first half of this year, compared to Tesla's 564,743, company filings show. Sales at BYD are also growing at a faster pace than at its American counterpart. In the first six months of 2022, BYD sold 486,771 more cars than it did in the first half of 2021, representing an increase of 315%. Tesla, meanwhile, sold 178,693 more vehicles in the first half of this year compared to last, a 46% year-on-year bump.
However, the companies' sales don't represent an apples-to-apples comparison. Many of BYD's car sales are plug-in hybrids and use gasoline engines to supplement battery power. Tesla, on the other hand, exclusively sells fully electric cars. China counts both types of vehicles as "zero-emission."
BYD's stock price in Hong Kong has barely budged since the firm released the sales figures earlier this week. But investors have been high on BYD since the start of this year despite the bear market in the U.S. and a challenging environment in China. BYD's stock price has risen nearly 25% since the start of this year. In that same timeframe, Tesla's stock price in New York has dropped 42%.
Buffett's Berkshire Hathaway was an early backer of BYD, pouring $232 million into the company in 2008. Now worth $7.7 billion, the investment is one of Berkshire's most lucrative bets.
Musk, meanwhile, was an early doubter of BYD. “Have you seen their car?” the Tesla CEO told Bloomberg News in 2011. “I don’t think they have a great product.”
Tesla has attributed its sluggish growth early this year to COVID-19 lockdowns in Shanghai that disrupted production at its gigafactory near the city. "We [lost] a lot of important days of production. And there are sort of upstream supplier challenges where a lot of suppliers also lost many days of production," Musk said in a quarterly earnings call in May.
Dan Ives, analyst at Wedbush, recently estimated that Tesla produced 70,000 fewer cars this year due to the lockdown in Shanghai. On the earnings call, Musk also promised that Tesla's Shanghai plant would "come back with a vengeance." After two months of being closed or operating at reduced capacity, Telsa's gigafactory returned to full capacity in early June.
But Tesla's comeback has not arrived fast enough to catch up with BYD's spring surge.
Unlike Tesla, BYD was "totally resilient from the Shanghai City lockdown and [the] sector's supply-chain disruption," Citi analysts wrote in May. BYD's main production base is in China's southern province of Guangdong, a region that did not face lockdowns as severe as the one in Shanghai.
The Citi analysts also said that BYD's supply chain is "vertically integrated," meaning it produces more parts in-house and is less dependent on outside suppliers than its rivals, helping shield the company from supply-chain disruptions. BYD's supply-chain success may be helping turn its competitors into potential customers. BYD plans to sell batteries to Tesla "very soon," Lian Yubo, BYD's executive vice president, told Chinese media last month. Tesla has not confirmed the statement.
BYD's insulation from the Shanghai lockdown helped it leapfrog rivals to become the second largest automaker of any kind this June. It now ranks behind only FAW-Volkswagen in terms of monthly car sales. In January, BYD was China's seventh largest automaker by sales.
BYD's recent tear has also defied a government probe into alleged pollution at its factories in Changsha, China that threatens to tarnish the company's environmental accolades.
“The story of BYD’s resilience throughout lockdowns and the chip shortage outweighed [the probe],” Bridget McCarthy, market research analyst and head of China operations at Boston-based hedge fund Snow Bull Capital recently told Fortune.
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>>> China unveils cutting-edge aircraft carrier, first to be locally designed
The Washington Post
By Lily Kuo and Cate Cadell
June 17, 2022
https://www.washingtonpost.com/world/2022/06/17/china-third-fujian-aircraft-carrier/
China unveiled its first homegrown aircraft carrier on Friday, a vessel with advanced aircraft launch technology similar to its U.S. counterparts, in an event designed to symbolize the country’s expanding military might.
In a ribbon-cutting ceremony held at the Jiangnan Shipyard in Shanghai, officials unveiled the Type 003 warship, called “Fujian” according to the country’s defense ministry and state media. Officials cited in state media said the ship would not be battle-ready for five years, but is an important step in Beijing’s ambition to develop a “blue water” navy, capable of projecting power far beyond its shores.
The carrier has been the focus of intense interest among military observers and rival nations tracking the development of China’s navy. It’s also a major milestone in Chinese President Xi Jinping’s multiyear drive to modernize the country’s military and cut reliance on foreign military suppliers.
China’s first two carriers include a retrofit of an old Soviet model, the Liaoning, bought from Ukraine in 1998, and the Shandong, which was built in China but based on the Liaoning model and commissioned in 2019.
The Fujian represents a big step forward in technology and capabilities, analysts say.
China secretly building naval facility in Cambodia, Western officials say
Notably, it’s the first Chinese carrier to be equipped with an electromagnetic catapult for launching aircraft, meaning China’s military will be able to launch a wider range of heavier aircraft. The older carriers rely on a “ski jump” configuration which uses a slight incline in the flight deck to give lift, but limits the size and weight of the aircraft.
“That’s where this new catapult comes into play. You’re essentially slingshotting the aircraft into the air,” said Matthew Funaiole, a senior director at the Washington-based Center for Strategic and International Studies who has closely studied satellite imagery of the Fujian since hints of its construction emerged in 2018.
He said this could enable China to launch a “larger, more diverse, more robust” fleet once it sets sail. “What we suspect is that we’ll see things like surveillance aircraft that couldn’t take off before from existing carriers. He said he expects the new carrier will also likely aid in further tests of unmanned aerial vehicles detected on China’s existing carriers.
U.S. aircraft carriers have previously used a steam-powered version of the catapult developed decades ago, but in the past five years newer carriers have adopted the electromagnetic launch system similar to the one seen on the Fujian.
“The big thing for China is that they appear to have entirely skipped steam and moved directly to an (electromagnetic-style) launch system. If their system works, which remains to be seen, this is a very significant leapfrogging of technology,” Funaiole said.
While Chinese military analysts and bloggers have hailed the carrier as “China’s answer to the USS Gerald R. Ford,” commissioned in 2017, much of its capabilities are still unknown. The Ford was the world’s largest and most advanced carrier when it was built.
“There’s extremely scant info emanating on the Fujian and, for that matter, the PLA Navy’s carrier program. The exact capabilities and their performance are shrouded in much secrecy,” said Collin Koh, an expert on the People’s Liberation Army Navy at the S. Rajaratnam School of International Studies in Singapore.
Analysts say the carrier won’t be completed for at least two years, depending on how long it takes to complete its flight deck and install technology as well as train personnel and pilots. The ship will then likely need to complete months of sea trials before going into operation.
China’s third aircraft carrier takes shape, with ambitions to challenge U.S. naval dominance
The unveiling of China’s most advanced carrier comes amid increased tensions in the Taiwan Strait and the South China Sea, where China and its neighbors have competing territorial claims. The recent signing of a security agreement between China and the Solomon Islands and the unveiling of a naval facility in Cambodia have raised further concerns about Beijing’s reach into the Gulf of Thailand and the South Pacific.
The carrier unveiling is also an important win for Xi domestically in the run-up to the China’s National People’s Congress later this year, when he is expected to take his third term in office.
“It’s hard to express how important the prestige and the image of this is for China; it’s that narrative of recapturing China’s former glory, reemerging on the world stage, becoming a regional power and then global power,” said Funaiole.
In China — where major event dates are often selected for their symbolism — state media pointed out the Fujian launch coincided with the 55th anniversary of China’s first successful hydrogen bomb test and the first anniversary of China’s Shenzhou 12 manned space mission.
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>>> China plans to complete space station with latest mission yesterday
AP News
https://apnews.com/article/space-launches-technology-science-china-c0ac9a948f9f48252747a77f7ec4685d
BEIJING (AP) — China is preparing to launch a new three-person mission to complete work on its permanent orbiting space station, the China Manned Space Agency said Saturday.
The Shenzhou 14 crew will spend six months on the Tiangong station, during which they will oversee the addition of two laboratory modules to join the main Tianhe living space that was launched in April 2021.
Their spaceship is due to blast off from the Jiuquan Satellite Launch Center on the edge of the Gobi Desert at 10:44 a.m. Sunday (0244 GMT), the agency said. The crewed space flight program’s workhorse Long March 2F rocket will provide propulsion.
Commander Chen Dong and fellow astronauts Liu Yang and Cai Xuzhe will assemble the three-module structure joining the existing Tianhe with Wentian and Mengtian, due to arrive in July and October. Another cargo craft, the Tianzhou-3, remains docked with the station.
The arrival of the new modules will “provide more stability, more powerful functions, more complete equipment,” said Chen, 43, who was a member of the Shenzhou 11 mission in 2016.
Liu, 43, is also a space veteran and was China’s first female astronaut to reach space aboard the Shenzhou 9 mission in 2012. Cai, 46, is making his first space trip.
SPACE LAUNCHES
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China’s space program launched its first astronaut into orbit in 2003, making it only the third country to do so on its own after the former Soviet Union and the U.S.
It has landed robot rovers on the moon and placed one on Mars last year. China has also returned lunar samples and officials have discussed a possible crewed mission to the moon.
China’s space program is run by the ruling Communist Party’s military wing, the People’s Liberation Army, prompting the U.S. to exclude it from the International Space Station.
Chen, Liu and Cai will be joined at the end of their mission for three to five days by the crew of the upcoming Shenzhou 15, marking the first time the station will have had six people aboard.
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>>> Satellite images suggest new Chinese carrier close to launch
By JON GAMBRELL and DAVID RISING
Associated Press
https://www.msn.com/en-us/news/world/satellite-images-suggest-new-chinese-carrier-close-to-launch/ar-AAY2gFJ?ocid=uxbndlbing
BANGKOK (AP) — China’s most advanced aircraft carrier to date appears to be nearing completion, satellite photos analyzed by The Associated Press showed Friday, as experts suggested the vessel could be launched soon.
The newly developed Type 003 carrier has been under construction at the Jiangnan Shipyard northeast of Shanghai since 2018. Satellite images taken by Planet Labs PBC on May 31 suggest work on the vessel is close to done.
The launch has been long anticipated, and constitutes what the Center for Strategic and International Studies think tank called a “seminal moment in China’s ongoing modernization efforts and a symbol of the country’s growing military might.”
CSIS noted in a report that China often pairs military milestones with existing holidays and anniversaries. It suggested that the vessel could be launched as soon as Friday to coincide with the national Dragon Boat Festival, as well as the 157th anniversary of the founding of the Jiangnan Shipyard.
In the satellite images, the carrier’s deck can be clearly seen. In an image taken Tuesday through wispy clouds, equipment behind the carrier appears to have been removed, a step toward flooding the entire drydock and floating the vessel. Pictures earlier this month showed work ongoing.
Cloud cover blocked Planet Labs satellites from capturing images of the shipyard from Wednesday to Friday.
China's Ministry of National Defense did not immediately respond to a request for comment.
Though no launch was announced, the state-run Global Times newspaper on Tuesday ran a story quoting reports that it “could be launched soon.”
It added that the Chinese navy in April had released a promotional video on the country's carrier program “in which it implied that the country's third aircraft carrier will be officially revealed soon.”
Though the U.S. Department of Defense estimates that the carrier won’t be fully operational until 2024, first needing to undergo extensive sea trials, the carrier is China’s most advanced yet. As with its space program, China has proceeded extremely cautiously in the development of aircraft carriers, seeking to apply only technologies that have been tested and perfected.
Its development is part of a broader modernization of China's military as it seeks to extend its influence in the region. China already has the largest navy in the world in terms of numbers of ships, but not near the capabilities of the U.S. Navy.
Among other assets, the U.S. Navy remains the world’s leader in aircraft carriers, with its forces able to muster 11 nuclear-powered vessels. The Navy also has nine amphibious assault ships, which can carry helicopters and vertical-takeoff fighter jets as well.
The expected launch of the new Chinese carrier comes as the U.S. has been increasing its focus on the region, including the South China Sea. The vast maritime region has been tense because six governments claim all or part of the strategically vital waterway, through which an estimated $5 trillion in global trade travels each year and which holds rich but fast declining fishing stocks and significant undersea oil and gas deposits.
China has been far and away the most aggressive in asserting its claim to virtually the entire waterway, its island features and resources.
The U.S. Navy has sailed warships past Chinese-held humanmade islands in the sea, which are equipped with airstrips and other military facilities. China insists its territory extends to those islands, while the Navy says it conducts the missions there to ensure the free flow of international trade.
Once mainly a coastal force, China's navy has in recent years expanded its presence into the Indian Ocean, the Western Pacific and beyond, setting up its first overseas base over the last decade in the African Horn nation of Djibouti, where the U.S., Japan and others also maintain a military presence.
The carrier is China’s second domestically developed carrier, following a Type 002 ship that is currently undergoing sea trials. Its other carrier is a modified former Soviet ship bought as a hulk from Ukraine and refurbished over several years as an experimental platform that nevertheless packs considerable combat capability with an airwing of Chinese-built fighters developed from the Russian Su-33.
In addition to being the largest of its three carriers, the new Type 003 class is fitted with a catapult launch system that will “enable it to support additional fighter aircraft, fixed-wing early-warning aircraft, and more rapid flight operations and thus extend the reach and effectiveness of its carrier-based strike aircraft,” the U.S. Defense Department said in its annual report to Congress on China’s military in November.
“In particular, the PRC’s (People’s Republic of China’s) aircraft carriers and planned follow-on carriers, once operational, will extend air defense coverage beyond the range of coastal and shipboard missile systems and will enable task group operations at increasingly longer ranges,” the Defense Department said, adding that the Chinese navy’s “emerging requirement for sea-based land-attack systems will also enhance the PRC’s ability to project power.”
China's existing carriers weigh in at about half the size of the U.S. Nimitz class flattops and displace about 100,000 tons fully loaded.
Experts from the Washington-based CSIS, which has been monitoring the construction for years, said in an analysis Thursday of different satellite images by Maxar Technologies, also taken Tuesday, that a smaller vessel had been moved out of the carrier's way, and that water now partially fills some of the dry dock.
But, they said, more work still needed to be done before the vessel could leave the dock.
“The staircases that workers use to access the carrier — as well as the support structures and other equipment that skirt the ship — will need to be removed,” CSIS said. “The caisson, which segments the dry dock and allows work to proceed simultaneously on multiple vessels, will also be opened to allow water to fill the entire dry dock.”
The Wall Street Journal first published the Maxar images of the vessel from the CSIS analysis.
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>>> Taiwan raids Chinese firms in latest crackdown on chip engineer-poaching
Reuters
May 26, 2022
https://finance.yahoo.com/news/taiwan-raids-chinese-firms-latest-092556768.html
TAIPEI (Reuters) - Taiwan authorities raided ten Chinese companies suspected of illegally poaching chip engineers and other tech talent this week, the island's Investigation Bureau said on Thursday, the latest crackdown on Chinese firms to protect its chip supremacy.
Home to chipmaker giant TSMC and accounting for the majority of the world's most advanced semiconductor manufacturing capacity, Taiwan has ramped up a campaign to counter illegal poaching by Chinese companies in what the island sees as a threat to its chip expertise.
The bureau said it raided 10 Chinese companies or their R&D centers which operate in Taiwan without approval earlier this week. It said nearly 70 people have been summoned for questioning in a joint crackdown across several cities including the capital Taipei and the island's semiconductor hub, Hsinchu.
"The illegal poaching of Taiwan's high-tech talent by Chinese companies has badly impacted our international competitiveness and endangered our national security," the bureau said in a statement.
It said technology is vital to Taiwan's security and urged people to "stay high on alert" for such Chinese activities.
The bureau did not name the companies currently being investigated, adding they included integrated circuit design firms and electronics parts makers.
China's Taiwan Affairs Office has not responded to Reuters' requests for comment on the issue.
The Investigation Bureau has launched investigations into around 100 Chinese companies suspected of illegally poaching technology talents, a senior bureau official told Reuters last month.
China's scramble for chip engineering talent has intensified amid Beijing's goal of achieving self-reliance in advanced chips, especially after a trade war with the former Trump administration in the United States.
Taiwanese law prohibits Chinese investment in some parts of the semiconductor supply chain, including chip design, and requires reviews for other areas such as chip packaging, making it very difficult for Chinese chip companies to operate on the island legally.
In March, the bureau raided eight Chinese companies aimed at countering what it said was "the Chinese Communist Party's illegal activities of talent-poaching and secret-stealing".
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>>> 'Everything is halted': Shanghai shutdowns are worsening shortages
Washington Post
by Abha Bhattarai
April 26, 2022
https://www.yahoo.com/news/everything-halted-shanghai-shutdowns-worsening-103816660.html
Thousands of air fryers are stuck in factories, warehouses and ports in central China, where shutdowns have stalled millions of dollars worth of inventory for Yedi Houseware, a family-run business in Los Angeles.
How quickly those backlogged appliances make it to the United States could have wide-ranging implications across the U.S. economy, as domestic manufacturers and retailers brace for another round of disruptions from recent covid-related shutdowns in Shanghai, China's largest city. White House officials are paying close attention to the disruptions to monitor the potential impact on the U.S. economy.
"Things are getting crazy again," said Bobby Djavaheri, the company's president. "Everything is halted. There are closures this very minute that are adding to the supply chain nightmare we've been experiencing for two years."
Other executives are dealing with similar scrambles as the situation in China appears to change every day, sweeping up many different sectors.
Widespread covid outbreaks in China have bought entire cities to a standstill and hobbled manufacturing and shipping hubs throughout the country. An estimated 373 million people - or about one-quarter of China's population - have been in covid-related lockdowns in recent weeks because of what is known as the country's zero covid policy, according to economists at Nomura Holdings. There are also fears that new lockdowns could soon take hold in the capital city, Beijing, escalating the threat to the global economic recovery.
Anxiety over new disruptions has already caused the Chinese stock market to fall sharply, weighing on U.S. stock indexes as well.
And there are signs things could only get worse. Continuing lockdowns in Shanghai - a major hub for America's semiconductor and electronics supply chains - has set up automakers, electronics companies and consumer goods firms for months of delays and higher costs.
The challenges come on top of more than two years of global shipping disruptions that some had hoped would ease this year.
Tech giants and major automakers rely heavily on Shanghai-based suppliers and ports. Roughly one-half of Apple's top suppliers, for example, are based in or near the city, according to an analysis by Nikkei Asia. (Apple did not immediately respond to requests for comment.) Meanwhile, Volkswagen's chief executive said this month that the automaker is "temporarily unable to meet high customer demand" because of ongoing lockdowns. The company, which had to stop production at certain facilities for more than a month for covid-related reasons, says it is gradually resuming production now.
"If Shanghai continues being unable to resume work and production, from May, all tech and industrial players involving the Shanghai supply chain will completely shut down, especially the auto industry!" Richard Yu, head of consumer and auto business at Chinese tech giant Huawei, was reported to have said on the social media platform WeChat.
The delays and closures are adding to costs and could pose another threat to long-term inflation, which is already at a 40-year high. Yedi Housewares, for example, raised prices on all of its products, including air fryers, electric pressure cookers and bread makers, by 10 percent in January.
Costs have continued to climb since then, in part because of the war in Ukraine. The price of plastic, a major component in air fryers, is up about 5 percent this year, Djavaheri said. The company is also paying more for transportation, since it's begun moving goods by truck from Shanghai to ports in Ningbo, three hours away, in hopes of putting them on a ship there.
White House officials are closely monitoring the situation in Shanghai, with the State Department providing frequent updates on the potential impacts. New economic data from March shows Chinese exports of good rose by 15 percent relative to last year, but this data does not reflect the impact of the Shanghai lockdown that began at the end of last month, according to a White House official, who spoke on the condition of anonymity to provide internal administration assessments.
The administration is already seeing "significant impacts" to airports critical to air cargo shipments and links in the supply chain such as factories and warehouses, the person said. Despite the closure of the port, White House officials are seeing alternate ports ratcheting up their work, relieving some of the expected pressure for consumers.
Mark Beneke, who co-owns a used car dealership in Fresno, Calif., says it's become increasing difficult to secure parts for Asian-made vehicles like Hyundai Sonatas and Kia Optimas since the Shanghai lockdown began a month ago.
Used car prices are already up 35 percent from a year ago, according to the Bureau of Labor Statistics, and Beneke says he expects them to climb even higher in coming weeks as a result of new shortages and delays.
"We were expecting prices to start coming down this summer, but it looks like they're going to keep going up," he said.
In some cases, though, retailers are better positioned to weather the latest challenges than they were a year ago. Many have stashed away extra inventory in U.S. warehouses and stores to guard against supply chain delays. Roughly 90 percent of goods at grocery and drugstores are in stock, according to data analytics firm Information Resources. And the number of import containers sitting on the docks for more than nine days at the ports of Los Angeles and Long Beach has been cut by one-half since October.
At the same time, consumer demand for many goods - including clothing, toys and furniture - appears to be waning as people spend more on travel, dining out and other experiences that they largely avoided earlier in the pandemic.
"The demand just isn't there anymore," said Isaac Larian, chief executive of MGA Entertainment, the toy giant behind popular brands like Little Tikes and L.O.L. Surprise. "Sales are slowing down. Families are saying, 'I'll take my kids to Disney this summer instead of buying more toys."
The shipping time for toys from China to U.S. stores has ballooned from 21 days to 159 days during the pandemic, he said.
"All holiday toys have to ship out of China by the beginning of August, but that is not going to happen," Larian said. "The factories are having a tough time getting labor, prices are going up, China keeps closing provinces. The big picture is bad, worse than last year."
Back in Los Angeles, Djavaheri of Yedi Houseware, says he's just beginning to recover from closures in southern China earlier this year, where his company makes electric pressure cookers. The brand - which has been featured in Oprah's Favorite Things list for three years in a row - is still struggling to make enough products to meet demand.
"To be honest, I don't even want to be in China but it's the only option," Djavaheri said. "If there was a way to make air fryers or electric pressure cookers in America, I would've been there yesterday. Instead we're dealing with hurdle after hurdle: Inflation, logistics, it's a constant nightmare."
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>>> Covid Surge in China Sparks Fears of a Beijing Lockdown
Barron's
By Lina Saigol
April 25, 2022
China's capital Beijing reported a spike in Covid-19 cases.
Concerns that Beijing could be headed for a Shanghai-style lockdown that could further damage China’s economy were growing Monday after the Chinese capital reported a spike in Covid-19 cases.
Authorities in Beijing ordered 3.5 million residents in the biggest district of Chaoyang to undergo three rounds of mass testing this week and shut down some residential areas in a bid to contain the spread of the virus. The move sparked panic buying at supermarkets as residents rushed to stockpile essentials.
China already is trying to contain a spike in Covid infections in the economic hub of Shanghai, where more than 25 million residents have been locked down for weeks.
The rising cases threaten to exacerbate disruption to global supply chains. Apple (ticker: AAPL) supplier Hon Hai Precision Industry , also known as Foxconn Technology Group, paused operations at two of its factories in China’s Kunshan, a city close to Shanghai, after new Covid-19 cases were reported on site, the South China Morning Post reported.
In a statement, reported by Reuters, Foxconn said the suspension of operations would have a limited effect as production had been shifted elsewhere.
The deteriorating outlook dragged down commodities. Iron ore futures in Singapore dropped as much as 11% in response to the negative sentiment and were recently 6.2% lower at $141.40 a ton. The onshore yuan fell to its weakest in a year, while oil dropped about 3% to trade below $100 a barrel.
“Lockdowns in China — and fears that these will spread and persist — is hitting sentiment in commodity markets. U.S. oil futures slid $4 to $98, whilst Brent slid a similar amount to $102,” said Neil Wilson, chief market analyst at markets.com.
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>>> Chinese rare earth minerals are ‘a national security risk’: Sen. Mark Kelly
Yahoo Finance
by Akiko Fujita
January 21, 2022
https://finance.yahoo.com/news/chinese-rare-earth-minerals-are-a-national-security-risk-sen-mark-kelly-141923102.html
The Biden administration’s push to reduce U.S. reliance on Chinese imports has renewed domestic efforts to produce rare earths minerals, critical to the production of electric vehicles and electronics.
A new bipartisan Senate bill is aiming to accelerate that timeline, by banning defense contractors from sourcing those materials in the first place.
In an interview with Yahoo Finance Live, the bill's co-sponsor Sen. Mark Kelly (D, AZ) called Chinese rare earth minerals "a national security risk" and urged the Pentagon to act quickly to eliminate the metals from military weapons systems.
“We've got to stop relying on Chinese rare earths in our defense industry. It's a national security risk to us. If China decided to cut us off on those rare earth minerals right now, this would have a serious impact on our national defense,” Kelly said. “So, this requires that DOD and the Department of Interior work together to build a stockpile of rare earth minerals.”
The bill marks the latest U.S. attempt to break China’s near monopoly on a group of 17 metals that are crucial to the development of everything from smart electronic devices to wind turbines. The country controls nearly 80% of rare earths imports, according to data from the U.S. Geological Survey, while the U.S. claims just one rare earth mine and has no capability to process the minerals.
Last month, China moved to strengthen its hold on the market by consolidating key producers within a new conglomerate to double down on the development of mines in China.
Kelly’s legislation, known as the Restoring Essential Energy and Security Holdings Onshore for Rare Earths Act of 2022, specifically calls for the U.S. Department of Defense and Interior to develop a strategic reserve of rare earths and products large enough to meet the needs of one year, by 2025. It also bans the use of Chinese metals in sensitive military systems by 2026, and requires defense contractors to track and disclose the origins of the metals used in equipment it delivers to the Pentagon.
“This sets the parameters, to put the United States in a position that we have to choose to do this. We build this stockpile, defense contractors will have access to it, and we will build the supply chain of rare earths that we need,” Kelly said. “We don't want to continue to be in the situation where our adversary, could cut us off from things that we need for our national defense.”
The U.S. has been here before.
For decades, the only rare earths mine in the country is in Mountain Pass, California, and it has dominated global supply. But, concerns around its environmental impact, treatment of workers, and regulation slowed output in the 1980s.
That coincided with China’s aggressive move to capture global market share through government subsidies, lax environmental standards, and lower labor costs. By 2010, China accounted for 97% of global rare earth supply.
Over the years, Beijing has sought to use its leadership in the metals space as leverage in geopolitics. In 2010, China halted all rare earths exports to Japan, after the country detained a Chinese fishing captain near disputed islands in the South China Sea. Later that year, China slashed its export quota for the metals to protect domestic supply, inflaming trade ties with the U.S. and its allies.
But U.S. attempts to revive its domestic metals industry have been fraught with challenges. Fears of a rare earth shortage prompted Molycorp Inc. to reopen the Mountain Pass mine in 2010. That same year, the company listed on the New York Stock Exchange, only to see its price collapse. Poor investment decisions ultimately led to its demise, with the company filing for bankruptcy five years later. Las Vegas-based MP Materials (MP), which bought the mine in 2017, has been attempting to revive domestic production since.
The Biden administration’s larger focus to reduce U.S. reliance on Chinese supply chains, may provide a tailwind to the industry. Last year, the president signed an executive order, calling for a review of the domestic supply chain on critical resources, including rare earths and electric car batteries. This fall, the U.S. Department of Energy announced $30 million in funding to national labs to build out materials critical to clean energy technology.
Kelly said his legislation will push the U.S. to double down on those efforts.
“We do not have a significant enough supply here in the United States today. And this legislation will fix that,” he said. “We can build this strategic reserve of rare earth minerals over time if we focus on it. And if we choose to do it.”
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Rickards - >>> Contagion!
BY JAMES RICKARDS
OCTOBER 4, 2021
https://dailyreckoning.com/contagion-2/
Contagion!
There has been a litany of bad news recently, including the U.S. August humiliation in Afghanistan, China’s aggressive actions against Taiwan and increased tensions with Iran, North Korea and Russia.
It will take the U.S. years, possibly decades, to recover from the debacle of August 2021 and the collapse of American prestige. All of these geopolitical events combine to undermine confidence in U.S. power.
When that happens, a loss of confidence in the U.S. dollar is not far behind.
And, perhaps most importantly of all recent bad news, is a market meltdown and slowing growth in China.
Greatest Ponzi Ever
I’ve long advised my readers that the Chinese wealth management product (WMP) system is the greatest Ponzi in the history of the world. Retail investors are led to believe that WMPs are like bank deposits and are backed by the bank that sells them. They’re not.
They’re actually unsecured units in blind pools that can be invested in anything the pool manager wants.
Most WMP funds have been invested in the real estate sector. This has led to asset bubbles in real estate (at best) and wasted developments that cannot cover their costs (at worst). When investors wanted their money back, the sponsor would simply sell more WMPs and use the money to pay back the redeeming investors.
That’s what gave the product its Ponzi characteristic.
The total amount invested in WMPs is now in the trillions of dollars used to finance thousands of projects sponsored by hundreds of major developers. Chinese investors are all-in with WMPs.
Now the entire edifice is collapsing as I predicted it would.
The largest property developer in China, Evergrande, is quickly headed for bankruptcy. That’s a multibillion-dollar fiasco on its own. Evergrande losses will arise in WMPs, corporate debt, unpaid contractor bills, equity markets and unfinished housing projects.
China’s entire property and financial system is on the verge of a world-historic crack-up. And it won’t remain limited to China.
It comes back to contagion.
Financial Contagions Are Like Biological Contagions
Unfortunately, since early last year, the world has learned a painful lesson in biological contagions. A similar dynamic applies in financial panics.
It can begin with one bank or broker going bankrupt as the result of a market collapse (a “financial patient zero”).
But the financial distress quickly spreads to banks that did business with the failed entity and then to stockholders and depositors of those other banks and so on until the entire world is in the grip of a financial panic as happened in 2008.
Disease contagion and financial contagion both work the same way. The nonlinear mathematics and system dynamics are identical in the two cases even though the “virus” is financial distress rather than a biological virus.
And unfortunately, each crisis is bigger than the one before and requires more intervention by the central banks.
The reason has to do with the system scale. In complex dynamic systems such as capital markets, risk is an exponential function of system scale. Increasing market scale correlates with exponentially larger market collapses.
Today, systemic risk is more dangerous than ever because the entire system is larger than before. This means that the larger size of the system implies a future global liquidity crisis and market panic far larger than the Panic of 2008.
Too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system and have much larger derivatives books.
Contagion and The Old Man and the Sea
To understand the risk of contagion, you can think of the marlin in Hemingway’s The Old Man and the Sea. The marlin started out as a prize catch lashed to the side of the fisherman Santiago’s boat.
But once there was blood in the water, every shark within miles descended on the marlin and devoured it. By the time Santiago got to shore, there was nothing left of the marlin but the bill, the tail and some bones.
An even greater danger for markets is when these two kinds of contagion converge. This happens when market losses spill over into broader markets, and then those losses give rise to systematic trading against a particular instrument or hedge fund.
When the targeted instrument or fund is driven under, credit losses spread to a wider group of fund counterparts that then fall under suspicion themselves. Soon a marketwide liquidity panic emerges in which “everybody wants his money back.”
This is exactly what happened during the Russia/Long Term Capital Management (LTCM) crisis in 1998.
To the Brink of Collapse
It was an international monetary crisis that started in Thailand in June 1997, spread to Indonesia and Korea and then finally to Russia by August 1998. It was exactly like dominoes falling.
LTCM wasn’t a country, although it was a hedge fund as big as a country in terms of its financial footings.
I was right in the middle of that crash. I was the general counsel of that firm. I negotiated that bailout. The importance of that role is that I had a front-row seat.
I was in the conference room, in the deal room, at a big New York law firm. There were hundreds of lawyers. There were 14 banks in the LTCM bailout fund.
There were 19 other banks in a $1 billion unsecured credit facility. Included were Treasury officials, Federal Reserve officials, other government officials, Long Term Capital and our partners.
I was on point for one side of the deal and had to coordinate all that.
Wall Street Bailed out Itself
It was a $4 billion all-cash deal, which we put together in 72 hours with no due diligence. Anyone who’s raised money for his or her company or done deals can think about that and imagine how difficult it would be to get a group of banks to write you a check for $4 billion in three days.
Systematic pressure on LTCM persisted until the fund was almost broke. As Wall Street attacked the fund, they missed the fact that they were also the creditors of the fund. By breaking LTCM, they were breaking themselves. That’s when the Fed intervened and forced Wall Street to bail out the fund.
Those involved can say they bailed out Long Term Capital. But if Long Term Capital had failed, and it was on the way to failure, $1.3 trillion of derivatives would’ve been flipped back to Wall Street.
In reality, Wall Street bailed out itself.
The panic of 2008 was an even more extreme version of 1998. We were days, if not hours, from the sequential collapse of every major bank in the world. The 2008 panic had its roots in subprime mortgages but quickly spread to debt obligations of all kinds, especially money market funds and European bank commercial paper.
Think of the dominoes again. What had happened there? You had a banking crisis. Except in 2008, Wall Street did not bail out a hedge fund; instead, the central banks bailed out Wall Street.
Systemic Risk Is Greater Than Ever
The point, again, is that today systemic risk is more dangerous than ever, and each crisis is bigger than the one before.
Remember, too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system and have much larger derivatives books.
The ability of central banks to deal with a new crisis is highly constrained by low interest rates and bloated balance sheets, which have exploded even higher in response to the pandemic.
The Fed’s balance sheet is currently about $8.5 trillion. Last March it was $4.2 trillion. In September 2008, it was under $1 trillion, so that just shows you how bloated the Fed’s balance sheet has become since the Great Financial Crisis.
The threat of contagion is a scary reminder of the hidden linkages in modern capital markets.
The conditions are in place.
But you can’t wait for the shock to occur because by then it will be too late. You won’t be able to get your money out of the market in time because it’ll be a mad rush to the exits.
The solution for investors is to have some assets outside the traditional markets and outside the banking system.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> China 'Wantonly Engaged in Military Aggression,' Taiwan Premier Warns Amid Record Incursions
Newsweek
by Xander Landen
Oct 2, 2021
https://www.msn.com/en-us/news/world/china-wantonly-engaged-in-military-aggression-taiwan-premier-warns-amid-record-incursions/ar-AAP4Roz?ocid=uxbndlbing
Taiwan reported that 38 Chinese aircraft entered the island's air defense identification zone (ADIZ) on Friday, marking the largest daily Chinese incursion into the area.
The Taiwanese military used aircraft to warn away the Chinese planes, and deployed missile systems to monitor them, Reuters reported on Saturday.
"China has been wantonly engaged in military aggression, damaging regional peace," Taiwan Premier Su Tseng-chang told reporters, according to the news organization.
Oct. 1 wasn't a good day. The #PLAAF flew 38 warplanes into #Taiwan's ADIZ, making it the largest number of daily sorties on record. Threatening? Of course. It's strange the #PRC doesn't bother faking excuses anymore.
PLAAF refers to the People's Liberation Army Air Force.
The incursion came on the day Beijing celebrated the founding of the People's Republic of China, 72 years ago.
"PLAAF sorties are pretty routine at this point, but stepping up bomber flights on a major PRC (People's Republic of China) holiday underscores that this is political warfare and part of a massive coercion campaign," Drew Thompson, a visiting senior research fellow at the Lee Kuan Yew School of Public Policy at the National University of Singapore told CNN.
Taiwan has been publicizing PLA Air Force sorties into its air defense identification zone for the last 13 months. As Newsweek previously reported, it saw its highest number of monthly Chinese flights on record in September, when it recorded 117 incursions by Chinese military aircraft including nuclear-capable bombers, fighter jets and reconnaissance planes.
The previous record occurred in April, when Taiwan saw 107 incursions.
China views Taiwan as part of its territory, and earlier this year, warned the island that "independence means war" after it increased military activities near the island.
"Xi Jinping has instructed the PLA to heighten its readiness and prepare for warfighting under 'realistic fighting conditions.' Hence, it is relatively unsurprising that the PLA continues to fly into Taiwan's ADIZ as part of realistic training and preparation for armed conflict," Derek Grossman, a senior defense analyst at the RAND Corporation told CNN.
Last month, Chinese state media warned that Taiwan would face "severe" military and economic consequences if Washington allowed the self-ruled island to change the name of its representative office in the U.S.
The Biden administration has considered allowing the office to change its name from the "Taipei Economic and Cultural Representative Office" (TECRO) to the "Taiwan Representative Office."
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>>> Tensions grow as U.S., allies deepen Indo-Pacific involvement
The Spokesman-Review
Sept. 23, 2021
By David Rising
Associated Press
https://www.spokesman.com/stories/2021/sep/23/tensions-grow-as-us-allies-deepen-indo-pacific-inv/
BANGKOK — With increasingly strong talk in support of Taiwan, a new deal to supply Australia with nuclear submarines, and the launch of a European strategy for greater engagement in the Indo-Pacific, the U.S. and its allies are becoming more assertive in their approach toward a rising China.
China has bristled at the moves, and the growing tensions between Beijing and Washington prompted U.N. Secretary-General Antonio Guterres on the weekend to implore U.S. President Joe Biden and Chinese leader Xi Jinping to repair their “completely dysfunctional” relationship, warning they risk dividing the world.
As the U.N. General Assembly opened Tuesday, both leaders chose calming language, with Biden insisting “we are not seeking a new Cold War or a world divided into rigid blocs,” and Xi telling the forum that “China has never, and will never invade or bully others or seek hegemony.”
But the underlying issues have not changed, with China building up its military outposts as it presses its maritime claims over critical sea lanes, and the U.S. and its allies growing louder in their support of Taiwan, which China claims as part of its territory, and deepening military cooperation in the Indo-Pacific.
On Thursday, China sent 24 fighter jets toward Taiwan in a large display of force after the island announced its intention to join a Pacific trade group, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, that China has also applied to join.
On Friday, Biden hosts the leaders of Japan, India and Australia for an in-person Quadrilateral Security Dialogue for broad talks including the COVID-19 pandemic and climate change, but also how to keep the Indo-Pacific, a vast region spanning from India to Australia, “free and open,” according to the White House.
It comes a week after the dramatic announcement that Australia would be dropping a contract for conventional French submarines in favor of an Anglo-American offer for nuclear-powered vessels, a bombshell that overshadowed the unveiling of the European Union’s strategy to boost political and defense ties in the Indo-Pacific.
“One thing is certain, that everyone is pivoting toward the Indo-Pacific,” said Garima Mohan, an Asia program fellow with the German Marshall Fund think tank.
As partners pursue moves that play to their own strengths and needs, however, the past week has underscored the lack of coordination as a networked security strategy develops, she said.
“Not everyone has the same threat assessment of China,” she said in a telephone interview from Berlin.
The EU policy emphasizes the need for dialogue with Beijing, to encourage “China to play its part in a peaceful and thriving Indo-Pacific region,” while at the same time proposing an “enhanced naval presence” and expanded security cooperation with regional partners.
It also notes China’s increased military buildup, and that “the display of force and increasing tensions in regional hotspots such as in the South and East China Sea, and in the Taiwan Strait, may have a direct impact on European security and prosperity.”
Germany, which has close economic ties to China, got a wake-up call last week when China rejected its request for a port call for the frigate Bavaria, which is currently conducting maneuvers in the Indo-Pacific.
“China is telling them this inclusive approach is not going to work, so in a way it’s a rude awakening for Berlin,” Mohan said. “You have to take a position, you can’t have your cake and eat it too, and if you have an Indo-Pacific strategy … you can’t make it neutral.”
Other EU countries, most notably France, have also sent naval assets for exercises in the Indo-Pacific, and Britain has had a whole carrier strike group conducting exercises for several months as London pursues the new tilt toward the region recommended by a recent British government review of defense and foreign policy.
China’s Foreign Ministry said after rejecting the Bavaria’s port call that it remained “willing to carry out friendly exchanges with Germany on the basis of mutual respect and mutual trust,” but made clear it was displeased with the increased naval presence in the region.
“Individual powers… have repeatedly dispatched military aircraft and warships to the South China Sea for some time in the name of exercising freedom of navigation to flex muscle, stir up trouble and deliberately provoke conflicts on maritime issues,” spokesman Zhao Lijian said. “China’s determination to safeguard national and territorial sovereignty and maritime rights and interests is unwavering, and will continue to properly handle differences with the countries concerned through consultations and negotiations.”
Beijing was less reserved in its reaction to the submarine deal with Australia, under which the U.S. and Britain will help Canberra construct nuclear-powered submarines, calling it “highly irresponsible” and saying it would “seriously damage regional peace and stability.”
In signing the pact with the U.S. and Britain, Australia canceled a $66 billion deal with France for diesel-powered submarines, infuriating Paris, which recalled its ambassadors to Washington and Canberra and suggested it calls into question the entire cooperative effort to blunt China’s growing influence.
While clearly irked by the surprise deal, many observers have suggested that the vociferous reaction from France may be more directed toward a domestic audience, where President Emmanuel Macron faces a reelection bid early next year.
But there was clear disappointment that the U.S. seemed to be ignoring France’s own engagement in the region by not informing them in advance, said Laurence Nardon, an expert at the French Institute for International Relations.
“There was a way to do this while keeping Europeans in the loop,” she said. “The Indo-Pacific is important for the EU too; it’s not one or the other.”
In a call with Macron late Wednesday, Biden reaffirmed “the strategic importance of French and European engagement in the Indo-Pacific region,” according to a joint statement.
More than just a decision to pursue nuclear submarines, the deal was a clear signal of Australia committing long term to being in the U.S. camp on China policy, said Euan Graham, an expert with the International Institute for Strategic Studies in Singapore.
“The submarine decision represents an emphatic doubling down on the Australia-U.S. alliance by both countries,” he said in an analysis of the deal.
As the pact was introduced, Australian Prime Minister Scott Morrison alluded to the long-term nature, saying “at its heart, today’s announcements are about the oldest of friendships, the strongest of values and the deepest of commitment.”
The submarine deal seems likely to exacerbate the ongoing trade war between China and Australia, and Australia is hoping to strike a free trade deal with Quad partner India to help offset the economic impact.
While the European strategy outline will take time, the plan provides clarity in how the EU is prepared to work with the U.S. and its allies in the region — something that has been lacking in the past.
“There’s a lack of understanding on the U.S. side of why Europe is interested in the Indo-Pacific and exactly what kind of role it wants to play,” Mohan said in a podcast on the issue. “There’s also a lack of understanding of the U.S. approach.”
In the outline of the strategy, the EU broadly looks to pool its resources for greater effect, and to work more closely with the Quad countries, the 10-member Association of Southeast Asian Nations, and others.
It also envisions enhancing current operations, such as the Atalanta anti-piracy mission off the Horn of Africa and in the western Indian Ocean, and the expansion of the EU maritime security and safety mission in the wider Indian Ocean area, which has already been broadened to Southeast Asia.
“The European assessment is very realistic about what they can and cannot do in the region,” Mohan said. “It’s about making sure the resources, the spending, that’s done right and has an impact.”
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