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>>> China Stocks Tumble in ‘Panic Selling’ Amid Broad Crackdown
Bloomberg
by Jeanny Yu
July 26, 2021
https://news.yahoo.com/china-stocks-tumble-panic-selling-060406343.html
(Bloomberg) -- A selloff in Chinese private education companies sent shockwaves through the equity market Monday, as investors scrambled to price in the growing risks from an intensifying crackdown by Beijing on some of the nation’s industries.
Stocks slumped on the mainland and in Hong Kong, with the benchmark CSI 300 Index dropping 3.2% and the Hang Seng Index tumbling 4.1%, the most since May last year. Steep losses in education stocks in the wake of a sweeping overhaul spilled over into other areas, with technology, health-care and property-related stocks falling.
“I see panic selling in the market now as investors are pricing in a possibility that Beijing will tighten regulation on all sectors that have seen robust growth in recent years,” said Castor Pang, head of research at Core Pacific Yamaichi. “I don’t think investors can do any bottom fishing at this point. We don’t know where the bottom is.”
New Oriental Education & Technology Group Inc. plunged by a record 47% in Hong Kong. It warned in a filing that the regulations will have a material adverse impact on the company. Koolearn Technology Holding Ltd. tumbled 33%, the biggest decliner on the Hang Seng Tech Index, which dropped 6.6%. China Maple Leaf Educational Systems Ltd. fell 10%.
The stocks also dropped in U.S. premarket trading, with Tal Education and New Oriental both falling around 30%, adding to the losses suffered last week.
Chinese regulators on Saturday published reforms that will fundamentally alter the business model of private firms teaching the school curriculum, as Beijing aims to overhaul a sector it says has been “hijacked by capital.” The new regulations ban firms that teach school curriculums from making profits, raising capital or going public. Friday was already a bloodbath for the sector in both Hong Kong and the U.S., after a leaked document circulated on social media.
The “worst-case became a reality,” wrote JPMorgan Chase & Co. analysts including DS Kim in a note, saying it was uncertain whether the companies could remain listed. “It’s unclear what level of restructuring the companies should undergo with a new regime and, in our view, this makes these stocks virtually un-investable.”
Worst
The latest reforms follow an unprecedented pace of regulatory tightening from Beijing, amid crackdowns on industries from tech to real estate. The government’s moves to rein in the nation’s powerful tech firms such as Jack Ma’s Ant Group Co. and Didi Global Inc. have sent global investors fleeing. A campaign to cut leverage in the property industry has also weighed on builder shares, with a Hong Kong gauge of related firms falling to its lowest since February.
Meituan, Property
Elsewhere, Meituan tanked 14% after China issued regulations to tighten oversight of its massive food delivery sector. Property management stocks also tumbled after Beijing vowed closer scrutiny of the sector while health-care shares plummeted amid investor concerns about it being the target. The Hang Seng China Enterprises Index, which include Hong Kong-listed mainland stocks, entered a bear market after falling 24% from a February peak.
“Overall sentiment is really bad now,” said Jackson Wong, asset management director at Amber Hill Capital Ltd. “Regulations on the education sector were unexpected and are really negative for the general market.”
Mainland investors have been net selling Hong Kong shares via exchange links in the city for a sixth straight day, the longest streak since May 2019, according to Bloomberg-compiled data.
In the latest move, companies that teach school subjects can no longer accept overseas investment, which could include capital from the offshore registered entities of Chinese firms, according to a notice released by the State Council. Those now in violation of that rule must take steps to rectify the situation, the country’s most powerful administrative authority said, without elaborating.
“Curriculum tutoring firms should remodel their businesses or even switch to a different industry as soon as possible,” said Jiang Ya, an analyst with Citic Securities Ltd. “These measures are just the beginning and there is potentially an abundance of follow-up policies and continued tight regulation.”
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>>> U.S.-China Trade Booms as If Virus, Tariffs Never Happened
Bloomberg
By Eric Martin and James Mayger
July 22, 2021
https://www.bloomberg.com/news/articles/2021-07-22/u-s-china-goods-trade-booms-as-if-virus-tariffs-never-happened
China buying more farm goods; U.S. consumer demand strong
U.S. imports are ‘through the roof,’ retail federation says
China and the U.S. are shipping goods to each other at the briskest pace in years, making the world’s largest bilateral trade relationship look as if the protracted tariff war and pandemic never happened.
Eighteen months after the Trump administration signed the trade deal, the agreement has turned out to be a truce at best. The U.S. trade deficit hasn’t shrunk, most levies are still in place, and it hasn’t led to negotiations over other economic issues.
And yet, bilateral trade in goods is an area of stability in a relationship that has otherwise continued to deteriorate, with rising tension over Hong Kong, Taiwan, human rights, the origins of the Covid-19 pandemic, accusations of computer hacking and many other flashpoints.
Surging Surplus
Booming Chinese exports have overpowered imports hitting a record
Monthly two-way trade, which tumbled to $19 billion in February of last year amid shutdowns in Chinese factories, rebounded over the past year to new records, according to official Chinese data. And that boom looks set to continue, with China purchasing millions of tons of U.S. farm goods for this year and next and stuck-at-home U.S. consumers still shopping and importing in record amounts.
While the U.S. government’s numbers differ somewhat, the bustling trade has defied all expectations that the tariffs on hundreds of billions of dollars worth of merchandise would force a decoupling of supply chains. Instead, both sides have learned to live with the taxes, with Chinese firms buying more to fulfill the terms of the 2020 trade deal, and U.S. companies purchasing goods they can’t get elsewhere to meet elevated household demand fueled in part by trillions of dollars in government stimulus.
“We’ve seen the strong consumer demand that’s been occurring throughout the pandemic, and we’ve seen the import levels just go through the roof,” said Jonathan Gold, vice president of supply-chains and customs policy at the National Retail Federation, which represents vendors from mom-and-pop stores through the big-box chain behemoths. “That’s a strong sign that the economy continues to recover.”
Exports from South Korea and Taiwan to the U.S. have also risen over the same period, underscoring the strength of U.S. demand despite one of the worst outbreaks of Covid-19 of any nation.
U.S. Demand Soars
Chinese, Korean and Taiwanese exports to U.S. have boomed
Almost half of the $259 billion in cargo moving in and out of Los Angeles port -- the U.S.’s biggest -- involves China and Hong Kong. U.S. demand for goods continues unabated, with record inbound shipments to the port in May as companies start to restock ahead of the Christmas shopping season.
“All signs point to a robust second half of the year,” Los Angeles port Executive Director Gene Seroka said during a recent press briefing, noting that fall fashion, back-to-school, Halloween and holiday goods were already arriving on the docks.
With tariffs in place on more than $300 billion in imports from China, from footwear and clothing to electronics and bicycles and even pet food, many U.S. retailers are choosing to absorb the cost and squeezing their profit margins, the NRF’s Gold said. Some are passing these along to consumers.
Firms also are dealing with backlogs and bottlenecks at U.S. ports and increased shipping costs.
The number of container ships waiting to enter the twin ports of Los Angeles and Long Beach, California, increased to a 3 1/2-month high this week, while the spot shipping rate for a 40-foot container from Shanghai to Los Angeles is more than triple a year ago.
“Between the cost of the tariffs and the increased cost of transportation that we’re seeing, that’s having an impact on companies’ bottom line,” Gold said. “They’ve seen significant cost increases as a result of both the trade war and the transportation crisis we’re facing.”
The U.S.-China Tariffs
Tariffs, by percentage rate, imposed by the U.S. and China on each other since March 2018
The Biden administration hasn’t said whether it plans to continue with the deal and is reviewing U.S. policy toward China, but with U.S. Trade Representative Katherine Tai calling the trade relationship “unbalanced” and Treasury Secretary Janet Yellen saying the deal didn’t address the fundamental problems with China, the outlook is unfavorable.
On top of those tensions, China’s purchasing targets expire at the end of the year, and the nation is well behind where it promised it would be now. Those targets were initially seen as unrealistically high and problems like the Covid-19 pandemic or the grounding of the Boeing 737 Max jet put them even further out of reach.
With Beijing missing its purchase targets, China refraining from aircraft purchases and companies moving automotive production out of the U.S. to avoid getting hit with tariffs from the trade war, the agreement between the world’s two biggest economies is “pretty irrelevant at this stage,” said Chad Bown, a senior fellow at the Peterson Institute for International Economics, whose latest research has focused on the pact.
“China buys what China needs,” Bown said. “If it’s buying more of certain American products, it’s doing so probably out of its own interest.”
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>>> China: Fragile Giant
BY JAMES RICKARDS
JULY 6, 2021
https://dailyreckoning.com/china-fragile-giant/
China: Fragile Giant
I’ve made many visits to China over the past thirty years and have been careful to move beyond Beijing (the political capital) and Shanghai (the financial capital) on these trips.
My visits have included Chongqing, Wuhan (the origin of the coronavirus outbreak), Xian, Nanjing, new construction sites to visit “ghost cities,” and trips to the agrarian countryside.
My trips included meetings with government and Communist Party officials and numerous conversations with everyday Chinese people.
These trips have been supplemented by reading an extensive number of books on the history, culture and politics of China from 3,000 BC to the present. This background gives me a much broader perspective on current developments in China.
In short, my experience with China goes well beyond media outlets and talking heads.
An objective analysis of China must begin with its enormous strengths. China has the third-largest territory in the world, with the world’s largest population (although soon to be overtaken by India).
China also has the fifth-largest nuclear arsenal in the world, with over 280 nuclear warheads. This is about the same as the U.K. and France but well behind Russia (6,490) and the U.S. (6,450). China is the largest gold producer in the world at about 500 metric tonnes per year.
Its economy is the second-largest economy in the world — behind only the U.S. China’s foreign exchange reserves (including gold) are the largest in the world.
By these diverse measures of population, territory, military strength and economic output, China is clearly a global super-power and the dominant presence in East Asia. Yet, these blockbuster statistics hide as much as they reveal.
China’s per capita income is under $12,000 per person compared to per capita income of about $64,000 in the United States. Put differently, the U.S. is only 38% richer than China on a gross basis, but it is 500% richer than China on a per capita basis (of course the massive economic fallout from the coronavirus will have an impact).
China’s military is growing stronger and more sophisticated, but it still falls short against the U.S. military when it comes to aircraft carriers, nuclear warheads, submarines, fighter aircraft and strategic bombers.
Most importantly, at under $12,000 per capita GDP, China is stuck squarely in the “middle income trap” as defined by development economists.
The path from low income (about $5,000 per capita) to middle-income (about $10,000 per capita) is fairly straightforward and mostly involves reduced corruption, direct foreign investment and migration from the countryside to cities to pursue assembly-style jobs.
The path from middle-income to high-income (about $20,000 per capita) is much more difficult and involves creation and deployment of high-technology and manufacture of high-value-added goods.
Among developing economies (excluding oil producers), only Taiwan, Hong Kong, Singapore and South Korea have successfully made this transition since World War II. All other developing economies in Latin America, Africa, South Asia and the Middle East including giants such as Brazil and Turkey remain stuck in the middle-income ranks.
China remains reliant on assembly-style jobs and has shown no promise of breaking into the high-income ranks.
To escape the middle income trap requires more than cheap labor and infrastructure investment. It requires applied technology to produce high-value added products. This explains why China has been so focused on stealing U.S. intellectual property.
China has not shown much capacity for developing high technology on its own, but it has been quite effective at stealing such technology from trading partners and applying it through its own system of state-owned enterprises and “national champions” such as Huawei in the telecommunications sector.
But the U.S. and other countries are cracking down on China’s technology theft and China cannot generate the needed technology through its own R&D.
In short, and despite enormous annual growth in the past twenty years, China remains fundamentally a poor country with limited ability to improve the well-being of its citizens much beyond what has already been achieved. And that has serious implications for China’s leadership…
China’s economy is not just about providing jobs, goods and services. It is about regime survival for a Chinese Communist Party that faces an existential crisis if it fails to deliver.
It’s an illegitimate regime that will remain in power only so long as it provides jobs and a rising living standard for the Chinese people. The overriding imperative of the Chinese leadership is to avoid societal unrest.
If China’s job machine seizes, as parts of it did during the coronavirus outbreak, Beijing fears that popular unrest could emerge on a potentially scale much greater than the 1989 Tiananmen Square protests. This is an existential threat to Communist power.
President Xi Jinping could quickly lose what the Chinese call, “The Mandate of Heaven.”
That’s a term that describes the intangible goodwill and popular support needed by emperors to rule China for the past 3,000 years.
If The Mandate of Heaven is lost, a ruler can fall quickly. Even before the crisis, China has had serious structural economic problems that are finally catching up with it.
China is so heavily indebted that it’s at the point where more debt does not produce growth. Adding additional debt today slows the economy and calls into question China’s ability to service its existing debt.
China also confronts an insolvent banking system and a real estate bubble. Up to half of China’s investment is a complete waste. It does produce jobs and utilize inputs like cement, steel, copper and glass. But the finished product, whether a city, train station or sports arena, is often a white elephant that will remain unused. The Chinese landscape is littered with “ghost cities” that have resulted from China’s wasted investment and flawed development model.
Essentially, China is on the horns of a dilemma with no good way out. China has driven growth with excessive credit, wasted infrastructure investment and Ponzi schemes.
The Chinese leadership knows this, but they had to keep the growth machine in high gear to create jobs for millions of migrants coming from the countryside to the city and to maintain jobs for the millions more already in the cities.
The two ways to get rid of debt are deflation (which results in write-offs, bankruptcies and unemployment) or inflation (which results in theft of purchasing power, similar to a tax increase).
Both alternatives are unacceptable to the Communists because they lack the political legitimacy to endure either unemployment or inflation. Either policy would cause social unrest and unleash revolutionary potential.
China also has serious demographic challenges that will limit future growth…
In 1980, China instituted a one-child policy in an effort to control population growth. But the 1980 announcement was really a matter of formalizing an existing policy. The Chinese have a cultural preference for boys over girls. So, when the one-child policy was implemented, the Chinese used pre-natal tests to determine sex and then aborted the girls.
At a more crude level, families kept buckets of water next to birthing beds so that if a girl was born she could be drowned immediately. It is estimated that between 20 million to 30 million baby girls were killed this way, resulting in an equivalent surplus of men over women.
These excess men will never find wives in China. Since women can be selective about husbands, it follows that the 30 million excess men will be the least talented and poorest in Chinese society. This cohort is highly prone to antisocial behavior, including alcohol and drug abuse and violence.
The demographic time bomb is now detonating. The missing children from thirty or forty years ago are the missing prime age workers of today. The Chinese economy grew strongly from 1995 to 2010, mainly because of a rural-to-urban migration and the rise of assembly-style manufacturing jobs.
Now the migration is over, the assembly-style jobs are moving to Vietnam and India, and China’s lack of high-value-added technology has left it stuck in the slow-growth middle-income trap. China might have overcome this through the sheer weight of low-wage workers, but they don’t exist.
China will lose over 100 million workers in the next ten years due to aging, retirement and the absence of working-age replacements. China is now trying to undo the demographic damage with a new “three-child policy.”
But, it’s too late. Demographic disasters take thirty years or more to create and they can take thirty years or more to cure. For the next thirty years, China’s worker shortage will be a drain on growth.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> How China Is Reining in Its Mighty Tech Firms
Bloomberg
by Coco Liu and Zheping Huang
July 8, 2021
https://www.bloomberg.com/news/storythreads/2021-07-09/how-china-is-reining-in-its-mighty-tech-firms?srnd=premium
What You Need To Know
China’s government stunned investors and tech industry players this week, launching an investigation into data violations at Didi Global Inc. and blocking downloads of its app just days after the ride-hailing giant raised $4.4 billion in the second-largest debut by a Chinese firm in U.S. history. The State Council or cabinet followed swiftly with a warning it will crack down on overseas listings in the interest of safeguarding national security.
Now, Bloomberg News reports the State Council plans to close a big loophole that China’s largest corporations have used since 2000 to float abroad — making its strongest move yet to take control of a trend that’s enriched tech giants and bankers alike for two decades.
Why It Matters
Unfolding in rapid-fire fashion over the July 4 weekend and subsequent days, the latest moves mark an expansion and escalation in a broader campaign to curb the growing power of internet titans from Jack Ma’s Ant and Alibaba to Tencent and Meituan since late 2020.
It’s the culmination of a growing perception in Beijing in recent years that — following years of phenomenal, near-unchecked expansion — online businesses are amassing valuable data, minting billionaires and creating private business strongholds with enough resources and popular followings to perhaps someday threaten the Communist Party’s grip on power.
The government is now employing various avenues — including anti-monopoly investigations, new laws and direct communications with top executives — to rein them in. With Didi, that campaign is now pivoting to take direct aim at the source of their power: The enormous amounts of data that they hoover up daily from hundreds of millions (in some cases, upwards of a billion) users both at home and abroad.
President Xi Jinping’s government wants to find a way to harness that data to fuel more broad-based economic growth over the next few decades. The moves have chilled the global investment community — China’s largest tech firms have shed at least $800 billion of market value since February, when Beijing’s effort kicked into high gear. The current salvo, which expressly focuses on data security and the risks of exposing Chinese secrets to overseas interests, has now ratcheted up the uncertainty.
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>>> Five Best Chinese Stocks To Buy And Watch Now
Investor's Business Daily
ED CARSON
06/16/2021
https://www.investors.com/news/best-chinese-stocks-to-buy/?src=A00220
Hundreds of Chinese companies are listed on U.S. markets. But which are the best Chinese stocks to buy or watch right now? 360 Digitech (QFIN), NetEase (NTES), Futu Holdings (FUTU), Bilibili (BILI) and UP Fintech Holding (TIGR).
China is the world's most-populous nation and the second-largest economy with a booming urban middle class and amazing entrepreneurial activity. Often dozens of Chinese stocks are among the top performers at any given time, across an array of sectors.
Best Chinese Stocks Across Many Industries
As the world's largest internet market, it's no surprise to see big growth from China stocks focusing on e-commerce, messaging or mobile gaming. Notable Chinese internet stocks include:
Alibaba (BABA)
JD.com (JD)
Pinduoduo (PDD)
Tencent (TCEHY)
Vipshop (VIPS)
Baidu (BIDU)
Tencent Music Entertainment (TME)
NetEase (NTES)
Trip.com (TCOM)
Dada Nexus (DADA)
Bilibili (BILI)
Joy (YY)
KE Holdings (BEKE)
In electric vehicles, several Chinese companies are becoming serious rivals to Tesla (TSLA) in the world's biggest auto market.
Nio (NIO)
Xpeng Motors (XPEV)
Li Auto (LI)
BYD Co. (BYDDF)
Several Chinese financial firms or brokerages listed in the U.S.
Futu Holdings (FUTU)
Up Fintech Holding (TIGR)
360 Digitech (QFIN)
Noah Holdings (NOAH)
Several China stocks are in solar power
Daqo New Energy (DQ)
JinkoSolar (JKS)
For-profit education Chinese stocks are a notable non-tech sector.
New Oriental Education (EDU)
Tal Education (TAL)
17 Education & Technology Group (YQ)
GSX Techedu (GOTU).
Don't forget stocks in other fields, such as beauty products maker Yatsen (YSG) or data-center operator GDS Holdings (GDS).
Chinese Stock Risks
Investors should be aware of significant risks with investing in Chinese stocks. The authoritarian state and its regulators can impose sweeping restrictions, fines or bans on major companies, often with little notice or transparency.
Alibaba ran afoul of regulators in late 2020, with regulators opening probes into internet platforms and suspending the Ant Group IPO. In April, China fined Alibaba $2.8 billion for anti-competitive actions and ordered it to change various practices.
Ant Group is limiting the scope of some of its businesses to comply with regulators' demands.
On April 29, financial regulators ordered several big internet companies, including Tencent, to stop providing financial services aside from payments.
Further antitrust probes and fines are likely for other internet giants.
Accounting fraud, while less likely with institutional-quality names such as Alibaba, remains a concern. Luckin Coffee admitted to widespread fraud in 2020. Fraud charges alone can trigger massive share price losses.
For-profit education firms, which have faced accounting questions, have come under pressure as local and national officials call for new regulations for the sector.
Meanwhile, a new U.S. law could force Chinese companies to delist from U.S. markets. That threat isn't imminent, and could be averted with negotiations between the Treasury Department and Beijing over accounting oversight. Still, it's something that could loom large for China stocks in the coming years.
China Stock Investing Via ETFs
One way to minimize individual China stock risks is via ETFs. Another advantage of buying ETFs is that a growing number of Chinese companies are listing in Hong Kong or Shanghai, instead of in addition to the U.S.
KraneShares CSI China Internet ETF (KWEB) tracks major Chinese internet companies. Many Chinese stock holdings in the KWEB ETF are U.S.-listed or traded, such as Alibaba stock, JD.com, Tencent, Pinduoduo and Bilibili, but KWEB also holds companies listed on Chinese markets. Direxion Daily FTSE China Bull (YINN), a three-times levered ETF of the 50 largest companies listed in Hong Kong, including Alibaba, JD.com and Tencent stock, but its biggest weights are in financials. (The Direxion Daily FTSE China Bear (YANN) is a three-times levered ETF shorting Hong Kong's biggest companies.)
Best China Stocks To Buy: Key Ingredients
Focus on the best stocks to buy and watch, not just any Chinese companies.
IBD's CAN SLIM Investing System has a proven track record of significantly outperforming the S&P 500. Outdoing this industry benchmark is key to generating exceptional returns over the long term.
Look for companies that have new, game-changing products and services. Invest in stocks with recent quarterly and annual earnings growth of at least 25%.
Start with those with strong earnings growth, such as Alibaba or Pinduoduo stock. If they're not profitable, at least look for rapid revenue growth as with Nio stock. The best China stocks should have strong technicals, including superior price performance over time. But we'll be highlighting stocks that are near proper buy points from bullish bases or rebounds from key levels.
Chinese stocks were out of favor for much of 2021. Whether it's a general malaise for growth stocks or EV names such as Nio and Xpeng, or a regulatory crackdown for Alibaba, JD.com and other internets, U.S.-listed Chinese stocks generally did not fare well.
But many China stocks are bouncing back.
Best Chinese Stocks To Buy Or Watch
360 Digitech QFIN Financial Services-Specialty 99
Bilibili BILI Internet-Content 52
Futu Holdings FUTU Finance-Investment banks/brokerages 98
NetEase NTES Computer Software-Gaming 59
UP Fintech TIGR Finance-Investment banks/brokerages 97
So let's analyze these five top China stocks: 360 Digitech stock, Bilibili stock, Futu stock, NetEase stock and UP Fintech stock.
360 Digitech Stock
360 Digitech's data-driven digital platform helps financial institutions target products to consumers.
That's paying off. 360 Digitech earnings growth has accelerated for four straight quarters. In its first quarter report released on May 27, 360 Digitech earnings surged 458% vs. a year earlier, crushing views. Sales also beat easily, though growth slowed significantly to 22%.
In a delayed reaction, QFIN stock skyrocketed 20% on June 1. On June 3, shares spiked to a record high and have continued to push higher.
QFIN stock is now out of range from an alternate buy point of 35.25, with the IBD 50 stock extended right now. With the exception of a couple days, 360 Digitech has risen almost straight from the bottom in just a few weeks.
Investors could have bought QFIN stock at a 28.61 double-bottom buy point, or perhaps as it cleared a pseudo-handle on June 1.
Keep a close eye on this hot stock to see if it sets up again.
The relative strength line for QFIN stock is back at record highs. The RS line, the blue line in the charts provided, tracks a stock's performance vs. the S&P 500 index.
QFIN stock has a best-possible 99 IBD Composite Rating.
Bilibili Stock
Bilibili provides an online entertainment platform targeting younger generations in China. In addition, the platform includes videos, live broadcasting, and mobile games.
The company is not yet profitable, and is projected to keep losing money through at least 2022. But sales growth has been strong, with Q1 revenue up 82%.
Bilibili stock nearly tripled from a late November breakout to the Feb. 11 peak of 157.66. Shares then corrected 46% to 84.40 on May 13, finding support just above the 200-day line.
BILI stock rebounded above its falling 50-day line on May 28. Shares recently found support at that level again. There's an early entry for Bilibili stock at 122.83.
The RS line has fallen significantly since early February after a big uptrend, but is trying to bounce back.
Futu Stock
Futu Holdings is a Chinese online brokerage and wealth management firm.
Futu earnings shot up 531% per share in the first quarter, easily beating views. Revenue growth leapt 348%, accelerating for a sixth straight quarter.
The EPS Rating is a 74. The Composite Rating for FUTU stock is 98.
Since clearing a downward-sloping trend line at the end of 2020, FUTU stock erupted for a gain of more than 480% to its Feb. 10 peak of 204.25. Shares then lost more than half their value by late March 25 before rebounding again. On April 19, FUTU stock exploded for a 16% gain, breaking out of a deep, loose cup-with-handle base. But shares plunged 23% the following session on a proposed stock offering, which priced a couple days later.
FUTU stock reclaimed its 50-day line on May 26.
The official buy point is 204.35, but 178.28 is an early entry. FUTU stock briefly cleared an aggressive entry of 158 on June 15, but quickly fell back as the market softened. The entry is from a handle that's slightly too low in the deep base to be proper. That early entry also roughly coincides with a downward-sloping trend line.
On June 1, Futu said it gained 100,000 accounts in Singapore since launching there three months ago.
The RS line for this China stock leader is well off highs but that follows a stretch of massive outperformance.
NetEase Stock
The mobile gaming giant on May 18 reported a 25% EPS gain on a 30% revenue gain for the first quarter, both topping views. That followed two quarters of declining EPS.
NTES stock has been a leading U.S.-listed China stock since 2000. But it announced in late May that it plans a Hong Kong IPO for its streaming music service.
Its current consolidation is only 26% deep, much better than many Chinese stocks. NTES stock bottomed in late March, just above its 200-day line and right around the top of a prior base, both natural areas of support.
NetEase has a handle but the midpoint is below the midpoint of the base, so it's technically not valid. But investors could use 120.94 as an early entry. The official buy point is 134.43, according to MarketSmith.
NetEase stock has been testing its 50-day line.
The Composite Rating for NTES stock is 59.
The RS line for NTES stock is well off highs.
UP Fintech Stock
UP Fintech is an online brokerage focusing on Chinese investors.
Revenue growth has accelerated for six straight quarters, to 256% in Q1. UP Fintech earnings per share shot up to 16 cents vs. 1 cent a year earlier.
TIGR stock went on a massive run starting at the tail end of 2020, spiking 400% from the 7.70 buy point to the 38.50 peak on Feb. 19. Shares then plunged two-thirds to 12.87. After some ups and downs, TIGR stock has soared from a May 13 short-term low of 14.21. But UP Fintech stock is still building the right side of what would be a very deep base.
The official buy point is 38.60. Ideally, TIGR stock would form a handle, shaking out weak holders and offering a lower entry. But Tuesday's 16% sell-off shows how this stock can fall even faster than it rises.
The RS line for TIGR stock is rebounding but still off highs, but that follows a near-vertical ascent in early 2021.
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>>> Goldman Sold $10.5 Billion of Stocks in Block-Trade Spree
Bloomberg
by Bei Hu, Gillian Tan and Drew Singer
https://www.msn.com/en-us/money/news/goldman-sold-24105-billion-of-stocks-in-block-trade-spree/ar-BB1f1ZM7?ocid=uxbndlbing
(Bloomberg) -- Goldman Sachs Group Inc. liquidated $10.5 billion worth of stocks in block trades on Friday, part of an extraordinary spree of selling that erased $35 billion from the values of bellwether stocks ranging from Chinese technology giants to U.S. media conglomerates.
The Wall Street bank sold $6.6 billion worth of shares of Baidu Inc., Tencent Music Entertainment Group and Vipshop Holdings Ltd. before the market opened in the U.S, according to an email to clients seen by Bloomberg News.
That move was followed by the sale of $3.9 billion of shares in ViacomCBS Inc., Discovery Inc., Farfetch Ltd., iQiyi Inc. and GSX Techedu Inc., the email said.
More of the unregistered stock offerings were said to be managed by Morgan Stanley, according to people familiar with the matter, on behalf of one or more undisclosed shareholders. Some of the trades exceeded $1 billion in individual companies, calculations based on Bloomberg data show.
Wall Street is now collectively speculating on the identity of the mysterious seller or sellers. The liquidation triggered price swings for every stock involved in the high-volume transactions, rattling traders and prompting talk that a hedge fund or family office was in trouble and being forced to sell.
Several major investment banks with ties to hedge fund Archegos Capital Management LLC liquidated holdings, contributing to the slump in share prices of ViacomCBS and Discovery, IPO Edge reported, citing people it didn’t identify. CNBC reported forced sales by Archegos were probably related to margin calls on heavily leveraged positions. Archegos is controlled by former Julian Robertson protege and Tiger Management analyst Bill Hwang.
Maeve DuVally, a Goldman Sachs spokeswoman, declined to comment. A spokesperson for Morgan Stanley declined to comment. A person reached at Archegos’s New York office on Friday declined to comment. An email sent to Hwang seeking comment wasn’t returned.
Price Swings
In block trades, large volumes of securities are privately negotiated between parties, usually outside of open market.
Friday’s selloff dragged companies including Alibaba Group Holding Ltd. and NetEase Inc. lower. The peers later recovered after traders said word of the offerings lessened fears that a broader trade was unfolding throughout the sector.
That late rebound pushed up an index of companies engaged in internet-related businesses in China and the U.S., with the measure halting a three-day selloff while still notching a slide of about 6.5% for the week.
Chinese stocks have been under pressure after a warning from the Securities and Exchange Commission that it’s taking steps to force accounting firms to let U.S. regulators review the financial audits of overseas companies -- the penalty for non-compliance being ejection from exchanges. In addition to that, Bloomberg News reported that China’s government has proposed forming a joint venture with local technology giants that would oversee the lucrative data they collect.
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Delisting - >>> Trump Signs Bill That Could Lead To Delisting Of Chinese Stocks Including Nio, Li, Xpeng, Alibaba
Bloomberg
by Gary Anglebrandt
December 19, 2020
https://finance.yahoo.com/news/trump-signs-bill-could-lead-172751659.html
U.S. President Donald Trump has signed a bill calling for the delisting of foreign companies that don't adhere to the same accounting transparency standards that securities regulators impose on public U.S. firms.
Why It Matters: The Holding Foreign Companies Accountable Act takes aim at Chinese companies and drew rare strong bipartisan support in the U.S. Congress before arriving on Trump's desk.
The act says delisting could happen if a given company doesn't comply with audit inspections three years in a row.
China's government does not allow the board to perform audit inspections of Chinese companies listed in the US. Audit inspections are performed on other U.S.-listed companies by the Public Company Accounting Oversight Board, set up after accounting scandals such as the one that blew up Enron in the early 2000s.
Chinese companies listed in the U.S. have been embroiled in financial scandals in the past — including Luckin Coffee Inc - ADR (OTC: LKNCY) this year, which led to a Nasdaq delisting.
Sixteen Chinese companies have delisted since February 2019, according to a government report in October.
Carson Block, who has made himself a short-selling star through his investigations into Chinese companies, has called for the delisting of Chinese firms, saying to Bloomberg last month: "This is China and the Chinese stock promotion, manipulation fraud machine laughing in the face of the SEC."
What's Next: Markets now await any news on specific delistings. The bill could affect 217 Chinese companies, including popular stocks such as Alibaba Group Holding Ltd - ADR (NYSE: BABA), JD.Com Inc (NASDAQ: JD), Nio Inc - ADR (NYSE: NIO), Xpeng Inc - ADR (NYSE: XPEV) and Li Auto Inc. (NASDAQ: LI).
But because of the three-year compliance timeline in the act, delistings may not be imminent.
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>>> Alibaba Group (NYSE: BABA)
Ray Dalio - >>> 10 Best Growth Stocks To Buy Now According To Ray Dalio
Yahoo Finance
Sorina Solonaru
November 26, 2020
https://finance.yahoo.com/news/10-best-growth-stocks-buy-220447261.html
Bridgewater fortified its stake in Alibaba Group (NYSE:BABA) during Q3 by 40%, valued at $392.2 million, a much larger position relative to the one in Alibaba’s rival, JD.Com. The stock was in the portfolios of 166 hedge funds tracked by Insider Monkey at the end of September. Our calculations also showed that BABA ranks #4 among the 30 most popular stocks among hedge funds.
BABA gained around 30% from the end of Q2 (through November 24). In its Q3 2020 Investor Letter, Rowan Street Capital highlighted Alibaba’s control over the entire value chain:
“Alibaba’s integrated ecosystem connects and controls the whole value chain of branding, broadcasting, sales conversion and sharing. That’s very different from how it works in the U.S., where internet giants such as Amazon, Facebook and Alphabet are individually dominant in certain parts of the value chain, but not in the complete manner that Alibaba has achieved. None has an ecosystem that connects the entire marketing and commerce value chain from branding, broadcasting and sales conversion. Alibaba connects the entire value chain.
[…] We believe the odds are still in our favor to earn long-term double-digit compounded returns from our Alibaba investment even from current market levels.”
You can read more about their analysis of Alibaba here.
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JD.Com, Inc. (NASDAQ:JD)
Ray Dalio - >>> 10 Best Growth Stocks To Buy Now According To Ray Dalio
Yahoo Finance
Sorina Solonaru
November 26, 2020
https://finance.yahoo.com/news/10-best-growth-stocks-buy-220447261.html
Dalio slightly increased the position in JD.Com, Inc. (NASDAQ:JD), the technology-driven Chinese retailer. Bridgewater’s stake in the JDD is currently worth $129.5 million at the end of September, up by 21% from a quarter earlier. 87 hedge funds held positions in the stock at the end of June against the all time high of 90 at the end of the first quarter.
JD.com announced a positive earnings surprise of 30% in Q3, and its stock returned 35.5% since the end of June (through 10/16), outperforming the market by an even larger margin. According to our calculations, JD.Com, Inc. ranked #27 in our 30 most popular stocks among hedge funds, 2020 Q1 rankings. Here is Dan Loeb’s optimistic review of the two e-commerce giants, JD and Alibaba:
“During the quarter, we took advantage of jitters about China’s relationships with Hong Kong and the U.S. that created an air pocket in trading of Chinese-related shares to establish new positions in e-commerce leaders Alibaba and JD.com. As we have articulated in prior letters3, our outlook for Alibaba and the broader Chinese e-commerce market is bright. We believe online gross merchandise value (“GMV”) will grow at a mid-teens CAGR over the next five years, propelled by both (1) rising consumption per capita, as the Chinese retail market is equal in size to the U.S. despite four times as many consumers, and (2)increased penetration of retail by online, a trend which we believe has been structurally accelerated by the COVID- 19 pandemic.
As the e-commerce market matures, we believe Alibaba & JD will leverage scale and growing repositories of transaction data to increase monetization of their platforms through targeted advertising to improve revenue yields (revenues as a percentage of GMV) from a starting point of less than 4% today. As a point of comparison, brick-and-mortar retail store rent expenses in China are greater than 10% of sales on average, which provides a significant umbrella for online marketplaces to take a greater share of GMV through a combination of commission and advertising spending as online retailer cost structures converge with brick- and-mortar retail.”
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Pinduoduo (NASDAQ:PDD)
Ray Dalio - >>> 10 Best Growth Stocks To Buy Now According To Ray Dalio
Yahoo Finance
Sorina Solonaru
November 26, 2020
https://finance.yahoo.com/news/10-best-growth-stocks-buy-220447261.html
1,094,888 shares of Pinduoduo (NASDAQ:PDD), the Chinese Internet giant, is the amount held by Bridgewater in its 13F portfolio on September 30, giving the firm a stake worth $81.2 million at the end of September. Not only Dalio has great expectations from PDD’s performance, as hedge fund sentiment towards the stock has been bullish since Q2, when the number of hedge fund positions increased by around 7% from the previous quarter.
Pinduoduo’s fast growth is indisputable, as the e-commerce channel registers a year-over-year revenue growth of about 89% for Q3, amassing 14.2 billion Chinese Yuan ($2.2 billion). Continuing its customer-centric approach, PDD launched in August a new service called Duo Duo Maicai, hoping to expand market share against its rivals. Nevertheless, Tao Value, an investment management firm that has held bullish positions in PDD for a long time, signals the challenges that the company might face. Here is that Tao Value had to say in its Q3 2020 investor letter:
“Pinduoduo (ticker: PDD) dragged 93 bps this quarter. Investors had high expectation on Pinduoduo coming into this quarter, yet the reported Q2 GMV & revenue fell short of such hype. The stock dropped 14% on the earnings day alone. On business side, management indicated its strategic shift to develop technology solutions for the vast, yet under-digitalized agriculture value chain in China. I think it is a difficult but meaningful problem to tackle.”
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>>> TAL Education Group (NYSE:TAL)
Ray Dalio - >>> 10 Best Growth Stocks To Buy Now According To Ray Dalio
Yahoo Finance
Sorina Solonaru
November 26, 2020
https://finance.yahoo.com/news/10-best-growth-stocks-buy-220447261.html
TAL Education Group (NYSE: TAL) is another Chinese company in the education sector that investors have been enthusiastic about in Q3. Bridgewater raised its stake in the company by 53%, valued at $52 million at the end of September. A total of 40 hedge funds tracked by Insider Monkey had holdings in the stock at the end of June, an increase of 5% from 2020 Q1 and the highest figure for this statistic.
According to Yahoo Finance, TAL is trading at a trailing P/E ratio of 1801 and is currently valued at $44 billion. Total revenues in FY2018 amounted to $1.72 billion and increased to $3 billion in FY2020. Nevertheless, the stock’s recent performance is a bit disappointing for its investors, as the stock returned only 8% since the end of June and underperformed the market's 18% gain. <<<
>>> TAL Education Group (TAL) provides K-12 after-school tutoring services in the People's Republic of China. The company offers tutoring services to K-12 students covering various academic subjects, including mathematics, physics, chemistry, biology, history, geography, political science, English, and Chinese. It also provides tutoring services primarily through small classes under the Xueersi, Mobby, and Firstleap brand names; personalized premium services under Izhikang name. In addition, the company operates jzb.com, an online education platform that serves as a gateway for online courses offered through xueersi.com; and other Websites for specific topics and offerings, such as college entrance examinations, high school entrance examinations, graduate school entrance examinations, preschool education, and raising infants and toddlers, as well as mathematics, English, and Chinese composition. Further, it operates mmbang.com and the Mama Bang app, an online platform focusing on children, baby, and maternity market; and provides consulting services for overseas studies under the Shunshun Liuxue name, as well as tutoring services for students aged two through twelve under the Mobby brand. Additionally, the company offers education and management consulting, investment management and consulting services; develops and sells software and networks, as well as related consulting services; and sells educational materials. As of February 29, 2020, its educational network included 871 learning centers and 767 service centers in 69 cities throughout China and one city in the United States. The company was founded in 2003 and is headquartered in Beijing, the People's Republic of China.
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New Oriental Education (EDU) -- Ray Dalio - >>> 10 Best Growth Stocks To Buy Now According To Ray Dalio
Yahoo Finance
Sorina Solonaru
November 26, 2020
https://finance.yahoo.com/news/10-best-growth-stocks-buy-220447261.html
New Oriental Education & Technology Group Inc. (NYSE:EDU)
We begin with New Oriental Education & Technology Group Inc. (NYSE::EDU), the most recognized brand in Chinese private education, currently valued at $3.7 billion. Having previously said that “not investing in China is risky”, Bridgewater expects great performance from the stock. Dalio's EDU position was worth $42 million at the end of September after boosting his EDU holdings by 46.3% in Q3.
The most recent news is New Oriental’s secondary listing on the Hong Kong stock exchange, closing on its first day of trading at HK$1,365, a 14.7% increase from its offer price. The company plans to invest the net proceeds in its business growth and geographic expansion. According to Yahoo Finance, EDU is trading at a trailing P/E of 72. The Chinese education company had total revenues of $2.45 billion in FY2018 and managed to increase this to $3.6 billion in FY2020.
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>>> China Opens Its Bond Market—With Unknown Consequences for World
The nation’s entry into the World Trade Organization rocked global commerce. The financial markets could be next.
Bloomberg
November 22, 2020
https://www.bloomberg.com/news/features/2020-11-22/china-s-bond-market-opening-is-set-to-reshape-the-financial-world
China’s 2001 entry into the World Trade Organization transformed the global economic order. Yet even as China became the factory to the world, its financial system remained a closed shop, with strict controls on the flow of money in and out. For years there’s been talk of a “two-way opening,” but slow progress. Now the admission of foreign investors into China’s $15 trillion bond market—cemented this year when the country rounded out its inclusion in all three of the top global indexes—may just mark the big bang equivalent to WTO entry.
Global pension funds, starved for yield in a low-growth world, will now have access to safe government debt that pays more than 3%. And if officials deliver on their pledges to open up, reinforced in the Communist leadership’s 2021-25 five-year plan outlined in October, Chinese investors may soon find it a lot easier to snap up shares in Apple, Starbucks, or Tesla—not just their phones, cappuccinos, and cars. The Chinese could join their government, which has long been a major buyer of overseas assets such as Treasuries, as a powerful source of funding.
“China will turn from an exporter of goods to an exporter of capital, with significant consequences, of course, for the world,” says Stephen Jen, who runs Eurizon SLJ Capital, a hedge fund and advisory firm in London.
But what will the consequences be? Major changes to the financial system in the past have produced some unfortunate results. The euro’s 1999 introduction sowed the seeds for the region’s debt crisis a decade later. A wave of overseas savings that poured into the U.S. during the 2000s helped trigger the mortgage boom that catastrophically burst in 2007-08. Bloomberg Markets gathered views on how the opening might affect the future of global finance in the years ahead. Here are some of the themes that emerged.
Chinese Savers Go Global
Jen, who started his career at Morgan Stanley covering the impact of the Asian financial crisis on the foreign exchange market, sees China’s capital market opening as the biggest structural change to international finance since the launch of the euro.
Sustained inflows of foreign capital could make Beijing comfortable about loosening the controls that have bottled up domestic money in China for so long. Indeed, it would probably have to; otherwise the yuan would strengthen, eroding the country’s export competitiveness. That would let loose a wave of Chinese savings on the world—Jen estimates there’s as much as $5 trillion of pent-up Chinese demand for investments outside China. That could resemble the petrodollars that flowed from oil-exporting countries in the 1970s, which ended up financing a huge, and tragically unsustainable, borrowing spree by Latin American nations.
“Outflows will probably be offset by the inflows for a few more years,” Jen says of China. Petrodollar-like net outflows might take a few more years to materialize, “but that is definitely a scenario we will need to deal with,” he says.
A Slice of the Action
To gain exposure to China’s rapid economic expansion, global investors generally have had to buy proxy assets such as the Australian dollar, commodities, or a small range of Hong Kong-listed Chinese shares. China’s bond market opening gives them direct exposure. It also provides an alternative to Japanese government bonds and other low- or negative-yielding sovereign debt, says Ed Al-Hussainy, a senior analyst for global rates at Columbia Threadneedle in New York, which had $476 billion under management in October and has been stepping into the China market recently.
“The demand is off the charts for anything liquid with a little bit of pickup in yield over Treasuries,” he says. “People are willing to pay up for liquidity, and that’s the key thing that’s improving in the Chinese onshore market. So inevitably we’ll be pushed in that direction.”
China’s central government bonds are now included, or on a phased path to inclusion, in the three key international bond indexes that investors use as benchmarks compiled by FTSE Russell, JPMorgan Chase, and Bloomberg Barclays (part of Bloomberg LP, the owner of Bloomberg Markets). About $5.3 trillion in assets tracks these indexes, according to estimates from Goldman Sachs Group Inc. Passive index-tracking funds will need to buy Chinese bonds to match the benchmarks. Some active managers, concerned about transaction costs, may steer clear; others are likely to overweight China because of the attractive yields.
Flow on Effect
China’s bond yields look more like those of emerging markets—in the FTSE World Government Bond Index benchmark they will be second highest after Mexico’s—yet investors will probably view them as developed-market securities, Goldman analysts say. After pulling in $230 billion from foreign investors to its fixed-income market in the past five years, China will see about $770 billion more in the next five, Goldman analysts including Kenneth Ho estimated in October.
A Class by Itself
Market players don’t expect the resulting shifts in asset allocation to increase bond yields much elsewhere—but the money will need to come from somewhere. Overseas investors held almost 13% of Japanese government bonds and more than 30% of Treasuries at the end of June. About one-quarter of euro region government bonds are held by investors outside the currency union, according to estimates from Commerzbank AG.
“We have a huge overhang of JGBs and European bonds—and a lot of that is dead weight,” says Columbia Threadneedle’s Al-Hussainy.
Competitor for Capital
Washington, in particular, could find itself competing with Beijing for overseas capital. China’s current account is barely positive relative to the size of its economy, even with its large trade surpluses with the U.S. It runs vast deficits in the trade of services, and some economists predict it will in the future run current-account deficits. If that happens, China would need to pull in money from abroad, just as the U.S. has for decades.
“China could enter structural current-account deficits, which will force it to open the market and import capital from abroad,” says Aidan Yao, a senior economist at AXA Investment Managers in Hong Kong who previously worked for the Hong Kong Monetary Authority. With China and the U.S.—sometimes referred to as the G2—both competing for savings, “either the rest of the world has to step up savings to finance G2’s shortfalls, or G2 will have to adjust themselves,” Yao says.
Competition could be all the fiercer if Washington expands on moves in 2020 to reduce Chinese borrowers’ access to American capital. Lawmakers from the Republican and Democratic parties have both proposed rules that would make it tougher for China’s companies to issue stock in the U.S., for example.
“The harder the U.S. tries to isolate China, the more efforts China should make in opening up,” says Yao Wei, chief China economist at Société Générale SA in Paris. “Allowing in more foreign investments will further deepen China’s integration into global financial markets, which will make decoupling more difficult.”
Better Credit Allocation and Transparency
Chinese regulators hope that opening their bond market will improve how credit gets allocated. The nation’s Communist leadership has sought to transition the economy to a more market-based system in which investors and credit analysts price funding for different borrowers according to their risk. Policymakers hope that will stem the buildup of stressed and defaulting loans, reduce excess capacity, and result in more productive investment.
That helps explain why the People’s Bank of China and other regulators worked so hard to win acceptance into the benchmark bond indexes. That approval required addressing a wide variety of complaints about the local market, such as the excessive paperwork required from foreigners and the slow pace of trade completion. Regulators also provided more hedging options, and the government boosted the size of individual bonds to increase their liquidity. After a messy 2015 yuan devaluation, the PBOC has also tried to reassure overseas investors by conducting exchange rate management with greater transparency and stability.
The Chinese Communist Party’s five-year plan, outlined in October, recommitted to opening up. Han Wenxiu, a senior official involved in drafting the plan, said at a briefing that “China will see the scale of foreign trade, foreign capital utilization, and outbound investment continue to expand.” PBOC Governor Yi Gang has also highlighted the value of financial opening, saying it improves efficiency and aids higher-quality economic development.
“Foreign institutions can be a source of fresh blood that can introduce innovative and mature ways of doing business to the local market, which has long been dominated by Chinese banks and brokerages,” says Becky Liu, head of China macro strategy at Standard Chartered Plc.
“The authorities may end up with domestic investors who are being crowded out of the government bond market”
Unintended Consequences
There’s always a risk that things won’t go as planned. For instance, what if, instead of disciplining the Chinese fixed-income market, the opening gave China’s riskiest borrowers even cheaper credit?
Here’s how that might happen: Foreign investors stick primarily to buying bonds sold by the central government and three state-owned lenders known as policy banks that are closely associated with government objectives. As of mid-2020, overseas managers held 8.5% of central government bonds, up from just 2.4% in February 2016. By contrast, their share of corporate bonds, at 0.7%, was barely changed from 0.6%, Goldman analysts estimated.
“The authorities may end up with domestic investors who are being crowded out of the government bond market,” says Michael Spencer, chief Asia-Pacific economist at Deutsche Bank AG in Hong Kong. “By pushing down yields on the risk-free assets, these foreign inflows may be forcing the Chinese investors even further out the credit curve. So if you think they are not very good to begin with in pricing credit, then these inflows actually may be making that problem worse.”
Spreads across China’s domestic corporate debt market are less differentiated than in the U.S. bond market. Top-grade corporate bonds yielded about 70 basis points, or 0.70 percentage point, more than China’s government bonds in late October. High-yield securities had rates 329 basis points higher, according to the ChinaBond platform. By contrast, investment-grade U.S. corporate spreads were at 123 basis points over Treasuries and junk bonds had a 488 basis-point premium.
Record Holdings
Losing Control
The more open the market is, the more difficult it will be for Chinese policymakers to maintain their grip on interest and exchange rates. Moves that drive up yields—such as monetary tightening to control inflation—could spur a wave of inflows that sends the currency climbing, making exports less competitive. Similarly, measures that undermine the confidence of overseas investors could prompt a destabilizing exodus.
China’s policymakers are cautious and patient. That helps explain why they kept the financial system cordoned off even as they opened the economy in myriad other ways starting in the late 1970s. They welcomed investment in manufacturing, but portfolio inflows were another matter. After all, emerging-market crises in the 1980s and 1990s showcased the danger of “hot money” that can quickly exit a country, causing wrenching financial turmoil.
“With an open financial market with easier inflow and outflow, the Chinese government and central bank will have to be more cautious managing those funding costs and interest rates,” says Lu Ting, chief China economist at Nomura Holdings Inc. in Hong Kong. “And of course, it will make it more challenging to manage the exchange rate.”
China might need to reestablish controls and limits if the financial market opening spurs excessive volatility. Authorities in recent years have managed swings in the currency by introducing or removing curbs on the foreign exchange market. So while China’s policymaking elite seemingly agree on the benefits of opening, the process is likely to be a stop-start one.
Pros Outnumber Cons
China wants and needs overseas capital to fund its growth and promote the global use of its currency, which remains a bit player in international transactions. The country’s growth rate has steadily decelerated in recent years, even before the pandemic, and the era of outsize current-account surpluses is over. With an aging and shrinking labor force, China risks falling into the “middle-income trap”—stagnating before it reaches rich-world levels of development. Improved financial transparency, a diverse funding mix, and more productive investment will be key to ensuring that doesn’t happen.
For the rest of the world, China’s financial integration will bring unpredictable change, just as the country’s entry into the global trading system did. Its giant labor force made goods more affordable around the world, improving the lives of millions. But it also hollowed out manufacturing towns from Michigan to northern England, imposing social costs with political consequences that are still playing out. Similarly, the coming shift of trillions of dollars of capital across borders seems likely to create winners and losers around the globe.
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>>> Australia hopes Asia-Pacific trade deal will improve ties with China - report
11-14-20
Reuters
By Lidia Kelly
https://www.reuters.com/article/australia-china-trade-idUSKBN27V023
MELBOURNE (Reuters) - Australia hopes that an ambitious trade deal to be signed on Sunday between 15 Asia-Pacific economies will help improve the country’s strained relations with China, Australia’s Trade Minister Simon Birmingham said.
The China-backed Regional Comprehensive Economic Partnership (RCEP) deal to be signed by the Association of Southeast Asian Nations (ASEAN) could become the world’s largest free trade agreement.
Covering nearly a third of the global population and about 30% of its global gross domestic product, the deal will progressively lower tariffs and aims to counter protectionism, boost investment and allow freer movement of goods within the region.
Australia’s ties with China, its biggest trading partner, became frayed after Canberra called for an international inquiry into the source of the novel coronavirus, which erupted in the central Chinese city of Wuhan late last year.
Trade disputes have hit a dozen Australian industries and threatened exports to China of agricultural products, timber and resources worth billions of dollars.
The ASEAN pact offers a platform that can lead to a positive change in relations, Birmingham said.
“The ball is very much in China’s court to come to the table for that dialogue,” Birmingham told The Age newspaper ahead of the conclusion of the ASEAN talks.
“It is crucial that partners like China, as they enter into new agreements like this, deliver not only on the detail of such agreements, but act true to the spirit of them.”
Asked earlier this month whether China imposed restrictions on several Australian imports, foreign ministry spokesman Wang Wenbin said the measures taken by China were “legitimate, reasonable and beyond reproach.”
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>>> China Halts Ant’s Record IPO, Throwing Ma’s Empire Into Turmoil
Bloomberg
By Lulu Yilun Chen and Richard Frost
November 3, 2020
https://www.bloomberg.com/news/articles/2020-11-03/ant-group-says-hong-kong-ipo-also-suspended
Shanghai exchange cites ‘major issues’ when suspending debut
Ma was called into a meeting with top regulators on Monday
China Stops Jack Ma’s $35 Billion Ant IPO From Going Forward
It was heralded as China’s answer to JPMorgan -- a homegrown financial giant on the cusp of the biggest stock-market debut the world has ever seen.
Instead, with billions on the line and an initial public offering all but sealed, Chinese authorities have abruptly thrown into doubt the future of Ant Group Co. and its celebrated founder, the billionaire Jack Ma.
Only days before the financial-technology juggernaut was to go public in Shanghai and Hong Kong -- a coup for China’s financial markets that once would have been unimaginable -- the $35 billion IPO was halted on Tuesday after Ma, China’s richest man, was summoned by regulators. In an extraordinary turn of events, authorities announced that they had belatedly discovered an array of shortcomings that, by some accounts, might require the sprawling Ant to be overhauled.
The move upends what had been one of China’s biggest business success stories, as well as what was to be a pivotal step in the development of the nation’s fast-growing capital markets.
“It’s definitely surprising,” said Mike Bailey, director of research at FBB Capital Partners. “If there is something strange going on on the macro side for China’s financial markets or in the company, that would be worrisome.”
In just a decade, Ant, an affiliate of Ma’s Alibaba Group Holding Ltd., has exploded into the world’s largest financial technology company, reshaping the lives of many ordinary Chinese. But its ascendance -- and Ma’s growing global reputation -- has also posed a threat to China’s state-run lenders and their political benefactors.
Tuesday’s developments left bankers and global investors groping for answers. The immediate fate of the many billions already tied up in the IPO is for now uncertain. Reaction in the financial market was swift, with Alibaba’s U.S.-listed shares falling and futures on Hong Kong’s benchmark also declining.
Changes Needed
Chinese authorities didn’t give much detail about the issues behind the suspension, beyond saying that the much-anticipated debut couldn’t go ahead because there had been “significant change” in the regulatory environment.
The company will have to make changes that include capital increases at its lucrative micro-lending units, according to people familiar with the matter. It will also have to reapply for licenses for the units to operate nationwide, the people added, asking not to be identified discussing a private matter.
Ant, which spun out of Alibaba in 2010, has long been seen as a champion of China’s economy and an example of how the Communist Party has allowed entrepreneurs -- especially in the technology sector -- to flourish within its top-down political system. Tuesday’s setback may cast a pall over the country’s financial markets, even as President Xi Jinping tries to create stock exchanges that can rival the U.S.
“Ant Group sincerely apologizes to you for any inconvenience caused by this development,” the company said in a message to investors. “We will properly handle the follow-up matters in accordance with applicable regulations of the two stock exchanges.”
There were warning signs on Monday when Ma was summoned to a rare joint meeting with the People’s Bank of China and three other top financial regulators and told his firm would face increased scrutiny and be subject to the same restrictions on capital and leverage similar to banks.
“This further reinforces the regulatory pressures building on tech giants,” said Nader Naeimi, head of dynamic markets at AMP Capital Investors Ltd. in Sydney. “It’s good news for banks, bad news for Jack Ma,” he said, referring to the competitive threat Ant poses for traditional lenders.
The company’s debut was expected for Thursday. Alibaba, which owns about a third of Ant and is listed in the U.S., tumbled 6.8% at 12:44 p.m. in New York.
Record IPO
The IPO was on pace to break records. It had attracted at least $3 trillion of orders from individual investors for its dual listing in Hong Kong and Shanghai, and in the preliminary price consultation of its Shanghai IPO, institutional investors subscribed for over 76 billion shares, more than 284 times the initial offering tranche.
Chinese fintech giant could have set IPO record
The fintech company’s IPO would have given it a market value of about $315 billion based on filings, bigger than JPMorgan Chase & Co. and four times larger than Goldman Sachs Group Inc.
But Ant has faced scrutiny in Chinese state media in recent days after Ma criticized local and global regulators for stifling innovation and not paying sufficient heed to development and opportunities for the young. At a Shanghai conference late last month, he compared the Basel Accords, which set out capital requirements for banks, to a club for the elderly.
And over the weekend, at a meeting of the Financial Stability and Development Committee led by Vice Premier Liu He, officials stressed the need for fintech firms to be regulated.
Ant dominates China’s payments market via the Alipay app. It also runs the giant Yu’ebao money-market fund and the country’s largest online consumer-lending platform. Other businesses include a credit-scoring unit and an insurance marketplace.
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>>> This IPO is a measure of China's growing strength
By Julia Horowitz
CNN Business
October 25, 2020
https://www.cnn.com/2020/10/25/investing/stocks-week-ahead/index.html
When Ant Group prices its IPO in Shanghai and Hong Kong this week, it could set a new world record for a stock market listing. But it will also ram home a much bigger point.
What's happening: In finance and tech, China’s clout is growing just as its economy recovers from the pandemic in better shape than other big players.
Ant is the crown jewel of Jack Ma's tech empire, best known for its Alipay app that has more than 730 million monthly active users. On Tuesday, it's expected to announce that it will surpass the $29.4 billion Saudi Aramco's float raised last December by selling shares both in Hong Kong and on Shanghai's Star Market, China's answer to the Nasdaq.
For Beijing, which wants to encourage more seasoned investors to park their money in Chinese stocks and more Chinese tech companies to list their shares at home, it's poised to be a huge win.
"The Chinese government is more than happy to host a national champion on one of its major capital markets domestically at a time when many Chinese companies are facing greater political headwinds overseas," Xiaomeng Lu, senior geotechnology analyst at Eurasia Group, told me.
Lu said Beijing has been trying to send a message to China's top tech companies: "This is a difficult time, and we have your back."
A growing number of firms are listening as US-China tensions ramp up. There's little clarity on whether the presidential election in November will reset the relationship.
US threats and restrictions against Chinese tech companies like TikTok and WeChat send a warning. On Wall Street, Chinese firms also face additional scrutiny. Luckin Coffee was kicked off the Nasdaq following the disclosure of major accounting irregularities. US lawmakers, government agencies and stock exchanges have since taken steps aimed at limiting Beijing's access to America's vast capital markets.
"Chinese companies consider repatriation both to please [Beijing] and to insulate themselves from potential US action," Brock Silvers, chief investment officer at Kaiyuan Capital and former chief investment officer at Adamas Asset Management, told me.
In such an environment, a company like Ant has good reason to pursue a listing at home. Over the long term, that should be to China's benefit.
Ant's decision to opt for the Star Market, a pet project of Chinese President Xi Jinping, will give it a huge boost in legitimacy and value, Lu said, noting that the massive IPO will push the market capitalization of the Shanghai Stock Exchange, which includes the Star board, close to that of the Tokyo Stock Exchange. Silvers points out that the listing also gives China "greater control over an important company in a cutting edge sector."
Watch this space: China's markets are still "fairly immature" and "highly volatile," per Lu. But a listing like Ant's will certainly help raise their profile.
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Rare earths - >>> Does China Pose a Threat to Global Rare Earth Supply Chains?
https://chinapower.csis.org/china-rare-earths/
As China’s economy has developed over the last several decades, its leaders have sought to transform the country into a key player in strategically important industries. Toward this end, Beijing has established China as the dominant global supplier of rare earths, a collection of 17 minerals that are indispensable to the manufacturing of smartphones, electric vehicles, military weapon systems, and countless other advanced technologies.
Beijing has demonstrated a willingness to leverage its weight in the global rare earth industry in pursuit of its political objectives, raising alarm bells in several major countries. However, China’s influence within the industry is likely to be eroded in the coming years as changing market dynamics empower new actors to compete.
The Global Marketplace for Rare Earths
The global rare earths trade is relatively small compared to other commodities. In 2019, the value of worldwide rare earth imports stood at just $1.15 billion – a fraction of the more than $1 trillion in global crude oil imports. The total value of goods produced using rare earths, however, is immense. Each Apple iPhone, for example, relies on multiple rare earth elements. Neodymium is used to make tiny, yet powerful, magnets that allow iPhone speakers to function. Europium is used in trace amounts to produce red colors on screens, and cerium is used to polish the phones during the manufacturing process. During the 2019 fiscal year, Apple sold $142.4 billion worth of iPhones.
Despite their name, most rare earth elements are relatively abundant. The process of mining rare earths and transforming them into usable materials is, however, expensive and damaging to the environment. For years, Beijing exploited its relatively low-cost labor force and lax environmental laws to gain a competitive edge in the global market and become the leading supplier of rare earths. From 2008 to 2018, China exported nearly 408,000 metric tons of rare earths, which amounted to 42.3 percent of all rare earth exports over the period. The United States was the second-largest exporter, supplying roughly 9.3 percent of the global total. Malaysia (9.1 percent), Austria (9.0 percent), and Japan (7.1 percent) rounded out the top five.
According to China’s General Administration of Customs, China exported 45,552 metric tons of rare earths worth $398.8 million in 2019. The vast majority of these exports went to the world’s major economic and technological powerhouses. About 36 percent (by volume) went to Japan, making it the top destination of Chinese rare earths. The US was a close second, taking in 33.4 percent of Chinese exports. Alongside the Netherlands (9.6 percent), South Korea (5.4 percent), and Italy (3.5 percent), these five countries imported a combined 87.8 percent of China’s rare earth exports.
Breakdown of Global Rare Earth Exports (2008-2018)
Country Export Volume
(metric tons)
Share (%) Export Value
(millions of US$)
Share (%)
China 407,886.6 42.3 8,112.2 46.3
USA 89,467.1 9.3 953.6 5.4
Malaysia 87,696.1 9.1 942.4 5.4
Austria 87,055.1 9.0 867.8 5.0
Japan 68,412.9 7.1 2,172.6 12.4
Rest of World 223,172.7 23.2 4,467.7 25.5
Source: UN Comtrade Database
At 42.6 percent of total exports by volume, lanthanum was China’s top rare earth export by a wide margin. Lanthanum is used in significant quantities in hybrid vehicle batteries. Each Toyota Prius, for instance, contains some 10-15 kilograms (kg) of the substance. Terbium, which is significantly more expensive, was China’s top export by value, accounting for roughly 14.5 percent ($57.9 million) of the country’s total exports in 2019. Terbium is primarily used in solid-state electronic devices but is also used in sonar systems and television screens.
China’s Push to Dominate the Rare Earth Industry
China’s dominance in the rare earth industry is the result of decades of targeted industrial policies aimed at leapfrogging other nations. In recent years, Beijing has also looked to reform China’s rare earth industry to enhance efficiency, better protect the environment, and crack down on illegal mining.
The Chinese government took major steps to support its nascent rare earth industry by issuing export tax rebates in the mid-1980s. The rebates lowered costs for Chinese mining companies, which allowed them to gain a foothold in the global market. From 1985 to 1995, China’s rare earth mining production exploded from just 8,500 metric tons to roughly 48,000 metric tons, and its share of global mining output widened from 21.4 percent to 60.1 percent.1
As China’s mining capacity expanded, rare earth producers in other countries began to shift their production to China to take advantage of the country’s low labor costs and weak environmental regulations. However, in 1990, the Chinese government declared rare earths to be protected and strategic minerals, which prohibited foreign firms from mining rare earths within China and restricted foreign participation in rare earth processing projects, except in joint ventures with Chinese firms. This enabled Chinese companies to gain foreign know-how through these partnerships while steadily cutting out foreign competition from the supply chain.
These measures were successful at developing China’s rare earth industry, but export quotas proved to be Beijing’s most consequential policy. Starting in the late 1990s, Beijing began imposing tiered quotas designed to discourage the export of cheaper upstream products like raw ores and encourage the export of oxides, metals, and alloys – the forms of rare earth minerals ready to be used in downstream products.
Beijing steadily tightened its export quotas and then abruptly slashed them by 37 percent in 2010, allowing just 30,259 metric tons to be exported. The move caused the average price of global rare earth imports to skyrocket from $9,461 per metric ton in 2009 to nearly $66,957 in 2011. Many manufacturers in the US, Japan, and Europe were left struggling to afford supplies of rare earths, while China held a glut of supplies at home.
Cheap domestic supplies of rare earths gave Chinese manufacturers the opportunity to scale up the production of key products like permanent magnets, which are integral to the functioning of wind turbines, hybrid vehicles, and other advanced technologies. Beijing’s policies allowed China to capture nearly all of the global market. As of 2019, China still produced roughly 85 percent of the world’s rare earth oxides and approximately 90 percent of rare earth metals, alloys, and permanent magnets.
While successful, Beijing’s policies put China in the crosshairs of major rare earth importers. In 2012, the US, EU, and Japan filed a series of trade disputes against China in the World Trade Organization (WTO), claiming that Chinese government policies were unfairly benefiting its industry at the expense of other countries. The WTO ruled against China in 2014, and by 2015 China finally ended its export quota system.
World Trade Organization
Through 2019, the US, EU, and other countries filed 44 disputes against China in the World Trade Organization. What were the causes of these disputes? Find out in our feature on China’s influence in the WTO.
As China’s rare earth industry has matured, recent government policies have focused on boosting efficiency, limiting environmental damage, and reducing illegal mining. Below is a list of important plans and strategies relating to rare earths.
In 2016, China’s Ministry of Industry and Information Technology released the Rare Earth Industry Development Plan (2016-2020), which set goals for capping rare earth mining production at 140 metric tons per year by 2020, boosting spending on research and development, and cracking down on illegal mining and smuggling of rare earths.
China’s “Made in China 2025” strategy, announced in 2015, seeks to transform China into a leader in 10 strategically important high-tech industries. While the strategy does not list rare earths among its 10 key technologies, it calls for promoting the “intelligentization” of the rare earth industry. Chinese government documents and industry experts have also made clear that rare earths will be needed to support all 10 technologies.
China’s State Council released a white paper, “Situation and Policies of China’s Rare Earth Industry,” in 2010, which outlined goals for improving industry regulation, reducing resource use, and enhancing environmental protection.
The National Medium- and Long-Term Program (MLP) for Science and Technology Development (2006-2020) lists rare earths among key materials that are needed to support basic industries.
Deep Reliance on China
China has demonstrated a willingness to leverage its influence in the global rare earth industry in pursuit of its political objectives. While several major countries have sought to limit their exposure to supply chain disruptions emanating from China, they nonetheless remain deeply reliant on Chinese rare earth exports.
Beijing’s most notable use of rare earths as a political tool came in 2010 amid a heated dispute with Tokyo. After Japan arrested the captain of a Chinese fishing boat that rammed a Japanese Coast Guard vessel in the waters near the contested Senkaku/Diaoyu Islands, China restricted rare earth exports to Japan for two months.
The impact on Japan’s supply chains was limited, but it highlighted the country’s reliance on China for more than 80 percent of its rare earth imports. Tokyo quickly took steps to limit future supply chain disruptions. In 2011, Japan’s Sojitz Corporation and government-owned Japan Oil, Gas and Metals National Corporation (JOGMEC) invested $250 million in Australian miner, Lynas Corporation. The financial boost helped Lynas to become the only supplier outside of China capable of processing rare earths, and the company now supplies Japan with nearly one-third of its rare earth imports.
Nearly a decade later, China again sought to leverage its strength in the global rare earth market – this time against the US. Amid searing US-China trade tensions, Chinese President Xi Jinping visited a rare earth facility in Jiangxi province in May 2019, which many interpreted as a warning to the US. An article published in People’s Daily seemed to confirm these suspicions when it hinted that China could cut off exports to the US as a “counter weapon” in the trade war. Days later, Beijing raised tariffs on US rare earths (and other products) from 10 to 25 percent. The Trump administration reportedly drew up plans for its own tariffs on Chinese rare earths, but never implemented them due to concerns that this would leave US companies exposed with no affordable alternative suppliers.
Policymakers in the US are particularly concerned about the threat of supply chain disruptions to the US defense industry, which uses rare earths in a wide range of technologies, from sonar and communication equipment to missiles and jet engines. According to the Congressional Research Service, each US F-35 multirole fighter requires about 427 kg of rare earths, and each Virginia-class nuclear submarine requires nearly 4.2 metric tons.
US Defense Applications of Rare Earths
Element
Communication Electric Motors Guidance and Control Targeting and Weapons
Dysprosium ? ?
Europium ? ?
Lanthanum ?
Lutetium ?
Neodymium ? ? ?
Praseodymium ? ?
Samarium ? ?
Terbium ? ? ?
Yttrium ? ?
Note: There are also numerous rare earths used for electronic warfare technologies.
Source: Congressional Research Service
In recent years, the US has sought to reestablish itself as a major world supplier of rare earths. After being shuttered for years, the US’ only rare earth mine, located in Mountain Pass, California, came under new ownership in 2017 and resumed production. However, the mined material that it produces is still sent to China for processing. The US government has also made notable policy changes, including the May 2018 addition of rare earths to a list of minerals deemed critical to US economic and national security. In July 2019, President Trump also declared rare earth metals and alloys “essential to the national defense,” which freed up resources for the Department of Defense (DoD) to take action to secure a domestic rare earth production capability.
Other economies have sought to reduce rare earth imports from China. The EU funded an initiative that has developed a process for recycling permanent magnet waste into new alloys and materials, which aims to both reduce dependence on China and help Europe meet its climate change goals. South Korea has sought to diversify its supplies of rare earths by reducing imports from China and increasing imports from Japan, as well as by finding innovative ways to reduce consumption of rare earths.
Among these major economies, only Japan has achieved some success at reducing reliance on China. From 2008 to 2018, the share of Japanese rare earth imports from China fell from 91.3 percent to 58 percent. As of 2018, the US still imported 80.5 percent of its rare earths from China. The EU and South Korea have successfully diversified their imports of certain compounds, like cerium, but they remain almost completely reliant on China for imports of rare earth metals and alloys.2 For example, the EU imported 7,105.9 metric tons of cerium compounds in 2018, of which less than one-quarter came from China. However, nearly all (98.5 percent) of its imports of rare earth metals and alloys came from China.
Reliance on Chinese Rare Earth Metals and Alloys (2018)
Economy Imports from China (metric tons)
Total Imports % of Imports from China
EU 869.2 882.2 98.5
USA 417.6 438.6 95.2
South Korea 86.1 94.6 90.9
Japan 4,233.4 8,729.2 48.5
Note: Excludes oxides and other compounds
Source: UN Comtrade Database
Growing Global Competition
While China maintains a commanding presence within the global rare earth industry, Beijing’s capacity to unilaterally disrupt supply chains is likely to be eroded in the coming years. A number of initiatives are underway that may prove successful at establishing new rare earth suppliers outside of China. Shifting market dynamics are likely to aid these efforts.
There are already signs that other players have started to chip away at China’s dominance in certain areas. Mining of raw rare earth materials outside of China has ramped up significantly in recent years as the US’ Mountain Pass mine, and other mines around the world, have increased their output. China’s share of global mining production has slipped as a result, from a high of 97.7 percent in 2010 to 62.9 percent in 2019 – the lowest point since 1995. China’s share of global rare earth reserves has likewise fallen from 50 percent to 36.7 percent over the same period.3
China’s status as the preeminent supplier of oxides, metals, and permanent magnets has not been similarly diminished – but it may be in the coming years. In the US, the company MP Materials is working to bring online facilities at Mountain Pass that would allow it to process its mined minerals, instead of sending them to China for processing. The company aims to accomplish this in 2021 and to establish the ability to refine and separate rare earth metals in the coming years.
International efforts are also underway. In April 2020, the US DoD green-lit initial funding for a joint venture between Australia’s Lynas Corporation and US-based Blue Line Corporation to construct a processing facility in Texas. If successful, it would allow Lynas to ship rare earth materials from its processing facility in Malaysia to the US for final processing – rather than to China. The Japanese government (through JOGMEC) is looking to invest in US and Australian initiatives, likely including the new facility in Texas. These steps are part of Tokyo’s announced goal of further reducing Japan’s reliance on Chinese rare earth imports to less than 50 percent by 2025.
Due to growing demand for rare earths, these ventures will likely be more successful than previous attempts to establish rare earth suppliers outside of China. Much of this new demand is being driven by rapid growth of the renewable energy and electric vehicle industries, which utilize large quantities of rare earth permanent magnets. From 2007 to 2017, China’s production of renewable and nuclear energy more than tripled, accounting for roughly 51 percent of the global increase in production over this period. China’s electric vehicle market is growing even faster. Between 2014 and 2019, the number of electric vehicles in China swelled from approximately 90,000 to nearly 3.4 million.
As China’s domestic consumption of rare earths grows, the country will be increasingly reliant on imports to feed its appetite for the materials. China already became the world’s largest importer of rare earths in 2018, and it is expected to become a net importer by the middle of the decade. Under these conditions, Beijing’s influence over the global rare earth industry would be significantly reduced, and new players might finally find themselves able to compete.
<<<
>>> 'Indications and warnings' from China
Chinese President Xi Jinping is rumored to be engaged in a power struggle that has shifted rhetoric and heightened military readiness.
By Bill Gertz
The Washington Times
July 29, 2020
https://www.washingtontimes.com/news/2020/jul/29/china-shows-signs-of-hostility-against-us/
Authorities in Beijing are taking steps that are setting off alarm bells inside the U.S. military and intelligence communities.
What intelligence agencies call “indications and warnings” — signs of potential hostile military or other actions against the United States — are being detected from inside China. Analysts suggest these movements reveal Beijing may be preparing for some type of military or covert action.
One indicator was Twitter video showing authorities putting up signs telling citizens how to take cover in a bomb shelter.
The account @TruthAbtChina on July 25 tweeted video from Beijing and Shanghai showing posters instructing people how to go to underground bunkers if an alarm signals a military attack.
One poster read: “How to quickly enter the wartime civil air defense facility after you hear the alarm.”
Civil defense has been a major focus of Chinese Communist Party leaders since the 1960s, when Beijing feared attack from the Soviet Union.
Also, China’s “Great Underground Wall” — 3,000 miles of tunnels connecting nuclear missiles, warheads and production plants — highlights the CCP’s concern with underground facilities.
Another source in Asia reported that Taiwanese ham radio operators were picking up indicators that China may be preparing to take some type of action against Taiwan’s outer islands, which are closer to the mainland than the main Taiwan island, which sits around 100 miles off the southern coast.
A third indicator comes from a businessman with contacts inside China who says locals there are reporting unusual movements of equipment and shifts in production at some factories away from producing civilian products.
There are also rumors of a major political power struggle in Beijing pitting Chinese President Xi Jinping against political elements behind former Chinese Vice President Zeng Qinghong — an ally of former leader Jiang Zemin and part of the Shanghai political faction.
“The internal messaging has suddenly turned much more bellicose, and crackdowns internally have ratcheted up, significantly,” said the businessman, speaking on background. “It is not clear if their concern is external or internal, but there has been a shift in Chinese-focused rhetoric, and military readiness is suddenly heightened.”
The last time similar indicators were seen was around 2012 when senior party leader Bo Xilai set himself up as a new sort of populist leader in southern China until he was ousted by Mr. Xi.
ESPER LEFT OUT OF CHINA SPEECHES
Four senior Trump administration officials in recent weeks issued major foreign policy addresses outlining the threats posed by communist China and the Trump administration’s response to it.
One official who was not part of the four-part critique and counterproposal was Defense Secretary Mark Esper, who instead recently announced he is ready to travel to China for meetings with military leaders there.
The conciliatory approach appears part of the past engagement policies that placed a high value on military exchanges with Beijing, but the effort to “build trust” with the People’s Liberation Army has largely failed to produce closer ties or cooperation.
Secretary of State Mike Pompeo slammed such engagements in his own address on China, questioning whether there were any benefits to the U.S. from 50 years of engagement with China. “The old paradigm of blind engagement with China has failed,” he said.
White House National Security Adviser Robert O’Brien kicked off the series of speeches last month, identifying America’s dealings with China as the greatest failure of U.S. foreign policy since the 1930s.
FBI Director Christopher Wray then outlined the Chinese intelligence and technology theft danger, which he called the greatest long-term threat to American economic and national security.
Attorney General William Barr then lambasted the Chinese Communist Party for exploiting American openness. “The CCP has launched an orchestrated campaign, across all of its many tentacles in Chinese government and society, to exploit the openness of our institutions in order to destroy them,” he said.
By contrast, Mr. Esper, in a July 21 speech, sounded more like a defense secretary in the Obama administration while laying out his views on China.
Instead of focusing on Beijing’s alarming buildup of conventional and nuclear forces aimed at preparing for a future conflict with the United States, Mr. Esper instead offered a relatively dry outline of the U.S. military’s plan to bolster regional readiness and increase alliance ties.
The secretary did highlight what he called China’s “systematic rule-breaking, coercion and other malign activities” in the South China Sea and East China Sea, and its imposition of a draconian new security law in Hong Kong.
But Mr. Esper also lauded his “multiple” conversations with Chinese military leaders and announced that he plans to travel to China later this year “to enhance cooperation on areas of common interest, establish the systems necessary for crisis communications, and reinforce our intentions to openly compete in the international system in which we all belong.”
The problem is that China has shown no willingness to enhance mutual cooperation or establish systems of military communications.
A senior administration official said the Pentagon leader was left out of the four-speech strategy because of a lack of solid China hands in key policy positions after the departure in December of Assistant Defense Secretary Randall Schriver. Instead, Pentagon policy bureaucrats known to favor softer policies on China remain in key positions.
A senior State Department official said Mr. Esper’s moderate stance on China is not a problem and appears more of a “good cop-bad cop” tactic.
Jonathan Hoffman, Mr. Esper’s chief spokesman, denied that Mr. Esper is soft on China and insisted that the Pentagon has been focused on the China threat for years by implementing plans for long-term competition.
“The secretary has focused on this topic in his public and private remarks for more than a year. Notably, he spoke out at the 2019 ASEAN defense ministers’ meeting plus to our partner nations and his Chinese counterpart, and again to the International Institute for Strategic Studies last week to a global audience,” he said.
More messaging along those lines is expected in the coming weeks.
“At the same time, however, if we are looking for a diplomatic — not military — solution to Chinese misadventure and malign influence, then other elements of the U.S. government should be communicating as well, which we have seen increasingly over the last year from all corners of the administration,” Mr. Hoffman said.
Militarily, American forces “will continue to exhibit action and capacity in our ability to confront China if needed,” he added, noting stepped-up freedom of navigation operations in the South China Sea.
The highest-profile military show of force in the region was the recent dual aircraft carrier operations in the South China Sea — a direct challenge to China’s expansive sovereignty claims. The Pentagon has also built up advanced capabilities and adopted strategies and plans to protect the American people and promote shared interests in the Indo-Pacific, the spokesman said.
“As the secretary said, ‘While we hope the CCP will change its ways, we must be prepared for the alternative,’” Mr. Hoffman said.
CFR’S HAASS ON POMPEO
Richard Haass, president of the establishment Council on Foreign Relations, recently challenged Secretary of State Mike Pompeo’s speech calling 50 years of American engagement with China a failure.
Writing in The Washington Post, Mr. Haass described Mr. Pompeo’s “blistering” speech in California last week as undiplomatic and inaccurate.
Mr. Haass praised the engagement policy launched by President Nixon and then-Secretary of State Henry Kissinger, saying it saw China as a “counterweight” to the Soviet Union and aimed at shaping Beijing’s foreign policies and not reforming its communist system.
Mr. Haass’ piece echoed many of China’s own talking points, arguing that Beijing is peaceful, has not fought a war in over 30 years and has not invaded Taiwan yet.
“Theodore Roosevelt advised the United States to speak softly and carry a big stick,” Mr. Haass wrote. “This president and his chief diplomat are perilously close to getting it backward.”
Evidence of how closely Mr. Haass’ views fit with those of China’s propagandists was on display on Twitter. A tweet by Mr. Haass promoting his op-ed was retweeted by none other than chief Foreign Ministry propaganda official Hua Chunying.
A senior Trump administration official tells Inside the Ring that Mr. Haass’ views are stuck in the “China fantasy” policy of the 1970s that sought to downplay or ignore threats posed by Beijing.
The Council on Foreign Relations president “mistook Nixon and Kissinger’s incidental expediency for permanent strategy, confusing means with goals,” the official said.
“In fact, the primary impetus for Nixon and Kissinger to go to China was to seek Chinese help in getting the U.S. out of the Vietnam War to boost Nixon’s 1972 reelection.”
The official noted that it was the Chinese communists — not the Americans — who wanted a joint geopolitical counterweight to the Soviet Union.
“The Chinese played the U.S. card much more adroitly than the other way around,” the official said. “The post-Watergate spin on Nixon and Kissinger’s strategic brilliance in the 1970s reflects a poverty of epistemological humility.”
Asked about the official’s comments, Mr. Haass said his op-ed “speaks for itself.”
<<<
>>> The China Myth, Exposed
BY JAMES RICKARDS
AUGUST 3, 2020
https://dailyreckoning.com/the-china-myth-exposed/
The China Myth, Exposed
For almost twenty years, the myth of a “rising China” and the “Chinese century” has been gathering steam.
Of course, the U.S. is recognized as a superpower now, but its days as the greatest power in the world were numbered, according to this myth.
China was prized both by U.S. manufacturers for its cheap labor and by U.S. consumers for the cheap prices on Chinese exports (never mind that the goods were shoddy with few exceptions and often fell apart not long after you removed them from their glossy clamshell wrappers).
The globalists praised the advent of highly integrated supply chains and just-in-time logistics that would bind global economies together and pave the way for One World governance, taxation and money.
There was only one problem with this narrative. It was completely false.
Chinese labor is running low because as many as possible have already moved from the country to the city.
Tight supply chains proved fragile as we saw during the COVID-19 pandemic when the U.S. could not get protective gear made in China and China threatened to cut off exports of antibiotics to the U.S.
Our craze for cheap Chinese goods meant that China piled up over $1.4 trillion in U.S. Treasury notes which makes China our biggest creditor.
Beyond that are horrific human rights abuses such as organ harvesting (without anesthetic) from political dissidents, concentration camps, reeducation camps, forced abortions, forced sterilizations, firing squads and more.
The Silicon Valley CEOs simply turned a blind eye in pursuit of profits. The cost in lost U.S. jobs was catastrophic.
The China myth has now been revealed to be a fraud. China has shown its true colors by suppressing freedom in Hong Kong in violation of a treaty with the UK that was supposed to run until 2047.
China’s military is still weak, despite advances in recent years. Its economy is bloated with unpayable debt and it is alienating potential friends from Australia to Japan and beyond.
The globalist dream for China has crashed and burned. Good riddance.
Meanwhile, dramatic developments may be under way within China itself…
Washington Times national security reporter Bill Gertz has excellent connections inside the U.S. intelligence community and a long track record of accurate geopolitical predictions far in advance of events.
Gertz now reports that China is going on red alert.
It’s putting up signs telling citizens how to get to bomb shelters. Military factories are being moved away from factories that produce civilian products. Ham radio operators report rumors of an impending attack on some remote islands technically controlled by Taiwan.
These activities suggest China may be preparing military action of some kind.
More importantly, rumors persist of an internal power struggle between Chairman Xi and what is known as the Shanghai political faction led by Zeng Qinghong.
China is entirely subordinate to the Chinese Communist Party. You can study the Chinese government all you like, but you won’t learn anything about how China works unless you study the role of the party.
The Communist Party and its survival come first. Everything else in China is devoted to that end.
The problem is that the Communist Party itself is opaque and difficult to understand. Written rules mean nothing. What counts are personal loyalties and control over organs of state power through party cadres.
For the time being, Communist Party Chairman Xi seems to be in a dominant position. He has the most firm grip on power of any leader since Mao Zedong, who died in 1976.
Considering China is much richer and more powerful militarily today than in the days of Mao, Chairman Xi is arguably the most powerful individual in history with firm control over the lives of 1.4 billion Chinese and many more in surrounding countries.
It’s difficult to know, but Chairman Xi may be walking on shaky ground.
It’s often difficult to sort fact from fiction in China, but investors should be braced for some kind of geopolitical shock emerging from China in the next few months.
It could be military action or what could essentially be a coup.
The rumors may amount to nothing, but they may indicate a major shock. And I should point out that Bill Gertz has a great track record for accurate forecasting.
Treasuries, gold and cash would benefit from a Chinese shock, while Chinese stocks and emerging markets would be badly damaged.
Investors should prepare accordingly.
Below, I show you why the Chinese economy is basically a house of cards, and why it’s mired in the “middle income” trap. Read on.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
NetEase - >>> 19 of the Best Stocks You've Never Heard Of
Kiplinger
by Jeff Reeves
6-23-20
https://www.kiplinger.com/slideshow/investing/t052-s001-19-of-the-best-stocks-youve-never-heard-of/index.html
NetEase
Sector: Information technology
Market value: $53.3 billion
Dividend yield: 1.1%
NetEase (NTES, $409.30) is a video game studio that primarily serves the lucrative and fast-growing marketplace in China. In addition to highly successful in-house titles such as Fantasy Westward Journey, NTES also is the local partner of big Western studios like Activision Blizzard (ATVI) to service hits such as Overwatch that are more familiar to U.S. audiences.
The outlook for video game spending is always quite strong, as the sector always experiences year-over-year growth like clockwork. But the coronavirus pandemic has really accelerated spending among gamers in 2020.
Longer-term, investors are also quite bullish on NTES; Goldman Sachs recently upgraded the stock because of growth in its other education and music segments, creating a more diversified revenue stream, and maintained its Buy rating on expectations of "steady execution and good cash flows from its game biz."
All told, seven Buys versus just one Hold over the past three months puts NTES among some of the best stocks that don't make the average investor's radar.
<<<
>>> Can the U.S. End China’s Control of the Global Supply Chain?
Bloomberg News
June 8, 2020
U.S. officials push for more production at home or by allies
Pandemic raises both reasons for and costs of diversifying
https://www.bloomberg.com/news/articles/2020-06-08/why-the-u-s-can-t-easily-break-china-s-grip-on-supply-chains?srnd=premium
The trade war amplified calls in the U.S. and elsewhere for reducing dependence on China for strategic goods. Now, the pandemic has politicians vowing to take action.
The Trump administration has talked about bringing supply chains home from China, and even publicly floated the need for a group of friendly nations in Asia that could help produce essential goods. President Donald Trump last month even said the U.S. would “save $500 billion” if it cut off ties with China.
But interviews with nearly a dozen government officials and analysts in the Asia-Pacific region show that any broader effort to restructure supply chains is little more than wishful thinking so far. While governments are pushing to win investments, such as Taiwan Semiconductor Manufacturing Co.’s planned state-of-the-art semiconductor factory in the U.S., it won’t be simple to dismantle an entrenched system when many companies are struggling to survive.
More likely is that the virus will accelerate a change that was already driven by market forces as rising wages and costs in China over the past decade caused an exodus of lower-value manufacturing, much of it to Southeast Asia. That’s despite the desire from some in the Trump administration to start decoupling the world’s biggest economies as the U.S. and China spar over everything from the virus to 5G networks to Hong Kong.
“The rhetoric meets the reality, which is that many firms have supply chains set up the way they do for very sensible reasons,” said Deborah Elms of the Asian Trade Centre, which has seen an increase of companies looking for advice on reorganizing to increase competitiveness. “Coming out of Covid, it’s going to be even harder to move supply chains because your cash flow is low, your staff are working from home or coming slowly back into the office, and the business climate has shifted.”
While the world trade network mostly held up well amid rolling lockdowns as Covid-19 spread, the economic cost fueled calls among politicians for greater self-sufficiency and alternatives to China. U.S. Secretary of State Mike Pompeo, whose department announced an Economic Security Strategy last year, in April named Australia, New Zealand, Japan, India, and South Korea as countries that the U.S. has been talking to on supply chains.
A key plank of the State Department’s new Economic Security Strategy is expanding and diversifying supply chains that protect “people in the free world,” according to Keith Krach, a State Department official who leads efforts to develop international policies related to economic growth.
Krach said in April a so-called “Economic Prosperity Network” of like-minded allies would be built for critical products.
‘China Plus One’
Industries would include pharmaceuticals, medical devices, semiconductors, automotive, aerospace, textiles and chemicals, among others.
But the idea right now appears to lack any firm foundation. The State Department doesn’t have jurisdiction over trade, and officials in other Asian countries said no formal talks were taking place. A person close to the administration said Krach is prone to pushing grand ideas publicly that haven’t yet become policy.
Still, other governments are moving on their own to shift production away from China -- especially since the Covid disruptions. This includes Taiwan and Japan, which were among the biggest investors in China’s manufacturing capacity in the early days.
“Many companies have already begun adopting a ‘China plus one’ manufacturing hub strategy since the U.S.-China trade war began in 2018, with Vietnam having been a clear beneficiary,” said Anwita Basu, head of Asia country risk research at Fitch Solutions. While the pandemic will give that another push, “shifts away from China will be slow as that country still boasts an annual manufacturing output that is so large that even a group of countries would struggle to absorb a fraction of it.”
Apple AirPods Maker Inventec Is Latest to Set Up Shop in Vietnam
Vietnam Could Sustain Growth of 4-5%, Prime Minister Says
In 2019, Taiwanese officials encouraged the island’s firms to build a “non-red supply chain” outside of China, passing a law that promised rent assistance, cheap finance, tax breaks and simplified administration for investments in Taiwan. The move helped the island’s economy weather the trade war last year and led to more than NT$1 trillion ($33.5 billion) pledged or invested domestically, and more overseas.
Japan recently started down the same path, with Prime Minister Shinzo Abe’s government budgeting about 220 billion yen ($2 billion) for companies shifting production back home and 23.5 billion yen for those seeking to move production to other countries.
“Everyone agrees we really have to reconsider the sustainability of supply chains,” Hiroaki Nakanishi, chairman of Hitachi Ltd. and head of Japan’s biggest business lobby Keidanren, said on television last month. “It’s unrealistic to suddenly return all production to Japan. But if we are totally reliant on one specific country and they have a lockdown, there will be huge consequences.”
Huawei Crackdown Sends Shockwaves Through Asia Supply Chain
South Korea has similar plans as part of its economic blueprint for the rest of the year, announced earlier this month. The government said it will provide tax incentives, ease investment-related regulations and expand financial support for companies that ‘u-turn.’ Yet, it hasn’t said how much money will be earmarked for the entire support program.
For all that, China retains some key advantages. Last year 38% of Taiwan’s $11 billion of overseas investment still went to the mainland, as did 10% of Japan’s -- despite increased investments in Southeast Asia over the past few decades due to periodic bouts of anti-Japanese rioting in China.
Young Liu, chairman of Taiwan-based Hon Hai Precision Industry, whose Foxconn unit manufactures iPhone in plants in China, said in mid-May that it’s difficult to move assembly of mobile devices to the U.S due to the sheer number of workers needed.
“China remains unmatched as a manufacturing site given its numbers of skilled workers, deep supplier networks and the government’s credible public support for manufacturers and provision of reliable infrastructure,” wrote Gavekal Dragonomics analyst Dan Wang in a report in April.
Even if companies find economic alternatives to Chinese factories, or bow to political pressure to increase production in their home markets, there’s another reason why production inside China continues to make sense: the vast and growing Chinese domestic market.
Tesla, Honeywell
Tesla Inc. is now producing cars there for what is now the world’s largest auto market, and last month Chinese Premier Li Keqiang sent Honeywell International Inc. a letter welcoming its new investment in Wuhan, the city where the coronavirus outbreak started. He and other Chinese officials have touted continued economic cooperation with the U.S. and vowed to implement a “phase one” trade deal with the U.S. reached in January.
“The formation and development of global industrial and supply chains are determined by market forces and companies’ choices,” Chinese foreign ministry spokesman Geng Shuang said in March. “As such, it is unrealistic and insensible to try to sever them or even trumpet ‘shifting’ or ‘decoupling’ theories as they run counter to economic law.”
For all the talk of dependence on China, the pandemic showed that other nations could quickly adapt to meet the need for critical supplies when China’s lockdown halted deliveries of protective clothing, ventilators and medical supplies. Vietnam rapidly ramped up production of face masks, exporting more than 415 million in four months, while the U.S. pushed automakers and other manufacturers to retool plants to make respirators and other critical supplies.
Over the long term, however, there are questions of whether those models are sustainable -- and who will pay for new plants outside China.
Waving a Wand
A May 14 executive order from Trump allows the U.S. International Development Finance Corp., America’s development bank for emerging markets, to partner with the Department of Defense in the U.S. to lend money to American companies looking to build out supply chains for critical goods such as ventilators and generic drugs.
But with governments already having to fund trillions of dollars in bailout packages for existing businesses and companies going bust in droves, finding the extra capital to restructure global supply chains is a tall order. Andrew Hastie, an Australian lawmaker and chair of the nation’s security and intelligence committee, called in a recent essay for “time limited tax incentives” to build national self-reliance in key pharmaceuticals, medical supplies and other critical goods.
In the end, the biggest force diluting China’s position in the global supply chain will likely be the long, slow evolution of global trade, as companies see opportunities that arise from new markets, new technologies and changing patterns of wealth. Why would a firm “say to their staff and their shareholders we have opted for political reasons to change the way that we do things,” said Elms, whose organization helps governments formulate trade policy.
“The numbers have to make sense,” she said. “The structure that you have is based on millions of individual company decisions. It’s not so easy to wave a wand and say: Make it so!”
<<<
>>> Tesla China Rival NIO Is Bullish About Domestic Market Growth
Bloomberg News
May 31, 2020
https://www.bloomberg.com/news/articles/2020-05-31/tesla-china-rival-nio-is-bullish-about-domestic-market-growth
NIO chief sees room for growth in market share for EV makers
Automaker isn’t ruling out a stock-exchange listing in China
NIO Founder William Li Is Bullish About Domestic Market Growth
NIO Inc. founder William Li said the long-term growth potential of China’s electric-vehicle market remains in place, boding well for his company even as competition from the likes of Tesla Inc. intensifies.
The country’s auto market has started to recover from the depths of the coronavirus pandemic, and the minuscule market share of electric cars means they have a chance to grab sales from gas guzzlers, Li said in an interview on Bloomberg Television.
But he has his work cut out. Electric-car sales have declined for 10 straight months in China and are forecast to drop 14% this year to fewer than 1 million units, according to BloombergNEF. Meanwhile, global electric-car leader Tesla started deliveries from its massive new Shanghai plant around the start of the year.
“We do compete against each other, but in general we are allies,” Li said, stressing both are trying to win users from gasoline rivals. “In fact, our sales kept growing since Tesla started production in Shanghai.”
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NIO predicted Thursday that its deliveries and revenue this quarter will more than double from a year earlier, as well as from the first three months of 2020. The company also reported a narrower first-quarter loss after curbing spending.
In April, the company struck a definitive pact for a 7 billion yuan ($1 billion) investment from entities led by the Hefei municipal government in China, alleviating concerns that it is running out of cash. That funding and potential future financings have put NIO on a solid footing, Li said.
“We are confident to have secured sufficient funding for the company’s development,” Li said.
The April fundraising effort paves the way for more Chinese financing for New York-traded NIO, Li said. That could prove helpful as U.S.-China tensions are heating up, with Chinese companies listed in the U.S. facing a threat of being forced out. The company now meets the criteria for a local Chinese listing, though it has no concrete plans for one, he said.
“This isn’t a challenge for NIO only,” Li said. “We wouldn’t exclude any potential options.”
Shares of NIO have lost more than a third of their value since the company’s 2018 initial public offering in New York.
Li also described Volkswagen AG’s plans, announced last week, to deepen its relationship with a Chinese EV partner in the Hefei region as “very positive news” for NIO. The move signals that the area is emerging as a powerhouse in the EV industry, and Li said NIO is also seeking to increase cooperation with local partners and encourage its suppliers to invest more in the region.
<<<
>>> Why NIO Stock Is Up Sharply Today
Sales appear strong ahead of earnings.
Motley Fool
John Rosevear
May 26, 2020
https://www.fool.com/investing/2020/05/26/why-nio-stock-is-up-sharply-today.aspx
What happened
Shares of Chinese electric-vehicle maker NIO (NYSE:NIO) were up on Tuesday, on signs of strong demand for its vehicles ahead of its earnings report later this week.
As of 1:30 p.m. EDT, NIO's American depositary shares were trading up about 13.8% from Friday's closing price.
So what
With the COVID-19 outbreak receding in China, demand seems to be strong for NIO's upscale electric vehicles -- even without dealer visits. China Daily reported that a 40-minute NIO livestream last week, in which CEO William Bin Li presented the company's vehicles in detail and answered questions, led to 320 vehicle orders, 5,288 test-drive appointments, and total sales of 150 million yuan ($21 million) by the next day.
The report fed into growing investor excitement around NIO, which secured what appears to be a long-term funding deal last month. The deal, with economic-development authorities in China's Anhui province, will provide NIO with 7 billion yuan ($981 million) in new funding in exchange for a 24.1% stake and an agreement to move NIO's operations to Anhui's capital city, Hefei.
Now what
Auto investors still have some big questions related to the structure of NIO's deal with authorities in Anhui. The parties are creating a new company into which NIO will put most or all of its assets in China in exchange for a 75.9% stake. But it's not clear what will will happen to NIO's debt -- or exactly what its U.S. shareholders will own once the transaction is completed.
The good news is that more information, and (hopefully) answers to those and other questions, should be forthcoming when NIO reports its first-quarter earnings before the market opens on Thursday, May 28.
<<<
>>> Dozens of Chinese companies added to U.S. blacklist in latest Beijing rebuke
Reuters
May 22, 2020
By David Shepardson and Karen Freifeld
https://finance.yahoo.com/news/u-adding-33-chinese-companies-194423758.html
WASHINGTON (Reuters) - The United States said on Friday it would add 33 Chinese firms and institutions to an economic blacklist for helping Beijing spy on its minority Uighur population or because of ties to weapons of mass destruction and China's military.
The U.S. Commerce Department's move marked the Trump administration's latest efforts to crack down on companies whose goods may support Chinese military activities and to punish Beijing for its treatment of Muslim minorities. It came as Communist Party rulers in Beijing on Friday unveiled details of a plan to impose national security laws on Hong Kong.
Seven companies and two institutions were listed for being "complicit in human rights violations and abuses committed in China's campaign of repression, mass arbitrary detention, forced labor and high-technology surveillance against Uighurs" and others, the Commerce Department said in a statement.
Two dozen other companies, government institutions and commercial organizations were added for supporting procurement of items for use by the Chinese military, the department said in another statement.
The blacklisted companies focus on artificial intelligence and facial recognition, markets that U.S. chip companies such as Nvidia Corp and Intel Corp have been heavily investing in.
Among the companies named is NetPosa, one of China's most famous AI companies, whose facial recognition subsidiary is linked to the surveillance of Muslims.
Qihoo360, a major cybersecurity firm taken private and delisted from the Nasdaq in 2015, recently made headlines for claiming it had found evidence that CIA hacking tools were used to target the Chinese aviation sector.
The Commerce Department said it was adding the firms and institutions to its "entity list," which restricts sales of U.S. goods shipped to them and some more limited items made abroad with U.S. content or technology. Companies can apply for licenses to make the sales, but they must overcome a presumption of denial.
Softbank Group Corp-backed CloudMinds was also added. It operates a cloud-based service to run robots such as a version of Pepper, a humanoid robot capable of simple communication. The company was blocked last year from transferring technology or technical information from its U.S. unit to its offices in Beijing, Reuters reported in March.
Qihoo, NetPosa and CloudMinds could not be immediately reached for comment.
Xilinx Inc, which makes programmable chips, said at least one of its customers was on the list but that it believes the business impact will be negligible.
“Xilinx is aware of the recent additions to the Department of Commerce’s Entity List and is evaluating any potential business impact," the company said. "We comply with any new U.S. Department of Commerce rules and regulations.”
The new listings follow a similar October 2019 action when Commerce added 28 Chinese public security bureaus and companies - including some of China's top artificial intelligence startups and video surveillance company Hikvision - to a U.S. trade blacklist over the treatment of Uighur Muslims.
The actions follow the same blueprint used by Washington in its attempt to limit the influence of Huawei Technologies Co Ltd for what it says are national security reasons. Last week, Commerce took action to try to further cut off Huawei's access to chipmakers.
<<<
>>> Hong Kong Headed for Crisis Again
BY JAMES RICKARDS
MAY 22, 2020
https://dailyreckoning.com/hong-kong-headed-for-crisis-again/
Hong Kong Headed for Crisis Again
I’ve been visiting Hong Kong for over 35 years. My first visit was in 1982 and my most recent was in May 2018.
All large cities change over time. New districts are developed. New buildings are erected and some old ones torn down.
Cities on the water, like Hong Kong, can use landfills to build more land and transform colourful (if dangerous) dockside alleys into sleek convention centres and hotel districts. None of that is unexpected, especially in dynamic cities like Hong Kong.
Yet in addition to physical infrastructure (which changes), cities have a kind of soul or zeitgeist, which is less susceptible to change.
St Mark’s Square in Venice, the Louvre in Paris and the Houses of Parliament in London are all defining and, if not eternal, at least help to keep a place rooted over time.
My visits to Hong Kong in the late 1990s and early 2000s were characterised by the same energy and dynamism I had encountered decades earlier.
I had routinely described Hong Kong to friends as the most energetic city in the world after New York.
The ‘One country, two systems’ seemed to work well together.
Yet as China’s growth ‘miracle’ gathered steam from 2002-2007, a legal heavy hand and gloomy administrative culture directed from Beijing descended on Hong Kong. You could feel it in the air.
At first, I noticed the lack of energy. The city was still rich and active, but there was a ‘business as usual’ attitude that was less driven than the energetic venue I had always known. Then I noticed a more depressed attitude among the bankers, investors and event planners I associated with.
They still made money, but the typical upbeat smile had been replaced with a more worried look.
This was accompanied by a rise in street protests against the heavy hand of Beijing on matters such as free speech, government autonomy and the relative importance of Hong Kong in the Chinese master plan.
Clearly, Shanghai had come into its own as the financial centre of China, so Hong Kong’s special role had been greatly diminished. The starkest evidence of change came during my last visit in May 2018…
I was presenting to a group of elite policymakers and property developers at the prestigious Asia Society local headquarters. At one point, one of the local elites took me aside, looked over his shoulder and at a near whisper said, ‘Be careful what you say.’
Global investors are accustomed to treating Hong Kong as a bastion of free markets and fair dealing. Those assumptions were suddenly no longer true, as Beijing began to treat Hong Kong as just another piece on a chessboard of market manipulation and geopolitical ambition.
The Chinese authoritarianism evident in Hong Kong last year only cemented that policy shift. What developments can we expect now that the freewheeling Hong Kong we knew from 1960-2005 has come to an end?
Last year’s unrest in Hong Kong was another symptom of the weakening grip of the Chinese Communist Party on civil society. The unrest spread from street demonstrations to a general strike and shutdown of the transportation system, including the cancellations of hundreds of flights.
This social unrest died down after the proposed bill to extradite Hong Kong citizens to China was pulled off the table. But now Beijing is clamping down hard with its proposed legislation to punish dissent.
Expect the pro-democracy protests to resume again. They may even grow larger. How will China react?
A direct Chinese invasion cannot be ruled out if local authorities cannot squash the unrest.
Of course, that would be the last nail in the coffin of the academic view of China as a good global citizen.
That view was always false, but now even the academics have started to understand what’s really going on. The situation in Hong Kong today is eerily reminiscent of the days leading up to the Tiananmen Square massacre on 4 June 1989.
In both cases, a particular cause for complaint gave rise to demonstrations, which soon grew and led to wider demands for political liberty and justice. Tiananmen started as a demonstration against inflation, which drew college students and housewives.
At its height, over one million protestors were active in Beijing, while demonstrations sympathising with the Tiananmen protestors appeared in over 400 Chinese cities.
Tiananmen Square is immediately adjacent to the Forbidden City and the Chinese leadership compound, so the demonstrators posed a potential threat to the government itself. Finally, hard-line Communist Party leaders ordered tanks and troops to attack the demonstrators.
No one knows the exact number killed, but estimates range from the low thousands to the tens of thousands. The entire incident has been covered up and is never mentioned in official communications or taught in Chinese schools…
As I described earlier, Last year’s Hong Kong demonstrations began on a small scale to protest a proposed law that would allow extradition of Hong Kong people to Beijing for trial on charges that arose in Hong Kong.
That would have deprived Hong Kong people of legal protections in local law, and could have subjected prisoners to torture and summary execution. The demonstrations grew exponentially and involved hundreds of thousands of protestors.
The list of demands also grew to include more democracy and freedom, and adherence to Hong Kong’s rule of law. Now the protests look like they’re starting again, and rightly so. Here’s China’s dilemma…
If Beijing tolerates more protests (and they succeed), they may lead to greater autonomy for Hong Kong at a time when Beijing is trying to strengthen and centralise its control. But if Beijing cracks down on the protestors, it will have another Tiananmen Square massacre on its hands with two important differences.
Hong Kong is a major city and will not be as easy to control as a confined square in Beijing.
And the rise of social media, mobile devices and live streaming guarantee that Beijing will not be able to hide or cover up any atrocities.
The jury is out on which path the Communists would take. But with China’s increasing belligerence in the region, don’t count out a strong response.
Unfortunately, the resolution may not be the peaceful one hoped for but another bloody massacre.
With the U.S. warning China against strong action in Hong Kong, let’s just hope the situation doesn’t light a powder keg resulting in a shooting war.
In case investors didn’t have enough to worry about with the coronavirus, they may have a whole lot more to deal with before too long.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> An emerging market debt crisis could be the next front in U.S.-China conflict
MarketWatch
May 23, 2020
By Chris Matthews and Sunny Oh
https://www.marketwatch.com/story/an-emerging-market-debt-crisis-could-be-the-next-front-in-us-china-conflict-2020-05-22?siteid=yhoof2&yptr=yahoo
China seeks to collect Belt-and-Road debt payments as other G20 countries announce a moratorium
Rising tensions between the U.S. and China over culpability for the coronavirus pandemic have helped reignite debates over trade, technology transfer and whether Chinese companies should be able to raise money in public U.S. markets, but the next front in the conflict between the world’s two largest economies could be over a brewing emerging-market debt crisis.
As a deepening global economic downturn threatens the ability of poorer nations to service sovereign debt, the G20 group of wealthy nations agreed in April to freeze loan repayments on bilateral loans, China is trying to make sure that its Belt and Road Initiative that has driven at least $350 billion in infrastructure loans to poorer nations is not threatened, according to Benn Steil, director of international economics at the Council on Foreign Relations .
“China signed on to the G-20 pledge, but later said that loans that are issued by China’s Export-Import Bank were not part of it,” Steil told MarketWatch, pointing to statements by Song Wei, a Chinese Ministry of Commerce Official in the Global Times, a newspaper aligned with the Communist Party of China. “You would have to be expert enough to know that Exim bank is effectively the piggy bank for BRI.”
U.S. Secretary of State Mike Pompeo criticized China’s lending policy with respect to Africa in particular in a recent telephone press conference. “There’s an enormous amount of debt that the Chinese Communist party has imposed on African countries all across the region,” he said adding that African nations should seek relief “on some deals that have incredibly onerous terms that will impact the African people for an awfully long time.”
Meanwhile, a group of 16 Republican Senators issued a letter to Pompeo and U.S. Treasury Secretary Steve Mnuchin calling on them to “pressure Chinese institutions to renegotiate the underlying debt of developing countries without a political quid pro quo,” and alleging that BRI loans are not made based on economic considerations alone, but for political leverage, calling the program “debt-trap diplomacy”
The senators cited the example of the takeover of the Sri Lankan Port of Hambantota by a state-owned Chinese firm under a 99-year lease after the country was unable to “repay over $1 billion of Chinese debt” related to its construction.
Others argue that the BRI program is a benign effort to boost economic growth at home and in the Greater China region, and that most of these deals are mutually beneficial. Deborah Bräutigam, director of the China Africa Research initiative at Johns Hopkins University has argued that China has long welcomed foreign investment and expertise, and Belt and Road is simply China exporting the very same tools to poorer countries around the world.
“BRI slots neatly into low-income countries’ development aspirations. China has excess foreign exchange, construction capacity, and mid-level manufacturing and needs to send all of these overseas,” she wrote in the American Interest. “The developing countries of Asia alone require infrastructure investments of about $1.7 trillion per year to maintain growth, reduce poverty, and mitigate climate change. In Africa, on the periphery of the BRI, the African Development Bank estimates annual infrastructure requirements to be $130 to $170 billion.”
Total emerging and frontier market debt has risen from roughly 75% of GDP to more than 100% in 2020, according to the International Monetary Fund, at the same time that credit ratings for issuers have fallen and the share of foreign owners of emerging market debt has risen.
“A majority of low-income economies were moving to a high risk of debt distress toward the end of last year, so it just stands to reason that any strain — let alone the kind of economic shock that we expect from this crisis — would lead to a reckoning of some sort,” Scott Morris, senior fellow at the Center for Global Development told MarketWatch.
After the onset of the most recent economic downturn, $100 billion in capital has fled emerging-market economies, while remittances from wealthy countries to poor is expected to fall another $100 billion over the course of the year, according to the IMF.
These dynamics have caused the interest rates at which poorer countries can borrow money to skyrocket and raised concerns over a looming emerging market debt crisis. Interest rates investors demand for emerging market debt have risen in recent months, with the spread between the yield on the JP Morgan Emerging Market Bond index and 10-year U.S. Treasury note TMUBMUSD10Y, 0.660% rising from 2.9% in December to 5.4% Thursday, according to Bloomberg.
China’s One Belt One Road Project has been a major driver of emerging market debt, particularly in Africa, according to Andrew Davenport, chief operating officer of international affairs consulting firm RWR Advisory Group.
Davenport said that the ongoing coronavirus epidemic could be a moment of truth for BRI. “What China doesn’t want to have happen, even if attributed to the virus, is for these countries to be unable to repay their debts, and that be seen as the epilogue to the Belt and Road experiment,” he said.
”The U.S. has long said that these loans weren’t driven by market principles, were not constructive, and in many instances, were serving the strategic power projection purposes of Beijing,” he added. “The inability of some of these countries to repay their Chinese loans could be seen as legitimizing that message. That’s the narrative China is anxious to avoid.”
Harvard University economist Kenneth Rogoff said, however, that to view the coming emerging-market debt crisis through the lens of U.S.-China power politics is to underestimate the scope of the problem. While the G20 moratorium on emerging market debt was a start, even if China engages in widespread BRI loan restructuring, more will have to be done, including by U.S.-led institutions like the World Bank.
“This is an opportunity” for the U.S. to counter China’s “agenda of projecting world power,” he said, by taking the lead on this issue and making a massive push for debt restructuring by governments, multinational institutions and private lenders.
“There’s so little recognition in Washington there may need to be massive humanitarian relief around the world. We see all these trillion dollar budgets, but I’ve seen nothing about foreign aid,” Rogoff added. “We’re almost certainly looking at the great depression in emerging markets.”
<<<
>>> China urges local companies to list in London in renewed global push
Reuters
By Abhinav Ramnarayan, Julie Zhu and Michelle Price
https://finance.yahoo.com/news/rpt-china-urges-local-companies-230100969.html
LONDON/HONG KONG/WASHINGTON, May 18 (Reuters) - China is urging domestic companies to look at listing in London, several sources told Reuters, as the country aims to revive deals under a Stock Connect scheme and strengthen overseas ties in the wake of the coronavirus crisis.
The Shanghai-London Stock Connect scheme, which began operating last year, aims to build links between Britain and China, help Chinese companies expand their investor base and give mainland investors access to UK-listed companies.
The original plan was for several companies to take part in the scheme in the first couple of years, but so far only one company -- Huatai Securities -- made the trip from Shanghai to London last June.
But now Chinese authorities have given the go-ahead for China Pacific Insurance and SDIC Power to move ahead with their London-listing plans, the sources said, after both deals were halted last year.
They also gave the nod to China Yangtze Power to begin preparations for a secondary listing on the London Stock Exchange, the sources said, speaking on condition of anonymity as the matter is confidential.
The China Securities Regulatory Commission, the Shanghai Stock Exchange and China Pacific Insurance did not immediately respond to Reuters' requests for comment. SDIC Power and China Yangtze Power declined to comment. The London Stock Exchange declined to comment.
Under the London-Shanghai Connect Scheme, first announced in 2018, Chinese companies are allowed to add a secondary listing of Global Depositary Receipts in Britain that would be linked to shares in Shanghai.
The sources, including officials from banks, government and exchanges, said that the aim was to push for a resumption of listings under the Stock Connect scheme as China seeks to improve ties with the outside world and help to fund its post-lockdown recovery.
"In the second half of this year, we could see one or maybe two Chinese companies list in London," said one of the sources, who is closely involved in the process.
"China is among the first countries to come out of lockdown, and is keen to get back on track with plans to improve trade relations with the UK," he added.
Anti-China sentiment in the United States on several fronts and the troubles surrounding U.S.-listed Chinese coffee chain Luckin Coffee may have made the route to New York harder to navigate.
PIPELINE BUILDS
In London-Shanghai listings pipeline, China Pacific Insurance is likely to be the first Chinese company to make its London debut this year, seeking to raise between $2 billion and $3 billion, and it could price the sale in September or October this year, a second source said.
China Yangtse Power is another sizable listing, which could raise about $2.5 billion from a deal that will equal about 5% of its share capital, the second source said.
The share listings will not necessarily be an easy sell in the current environment, a third source said, who is a London-based banker involved in some of the transactions.
"The IPO market is like to remain shaky for a good while yet, and these are not 'need to own' assets. Investors will already be busy supporting the companies in their portfolio and are likely to be selective," he said.
The market for initial public offerings (IPOs) has been all but shut since the outbreak of COVID-19 across the world, which has hit global economic growth, wreaked havoc on stocks and pushed market volatility to its highest in years.
Many companies have been raising funds in the secondary markets to keep businesses going through the lockdowns imposed in much of the world. But there were only eight new listings in the first quarter of 2020, the lowest number since 2009, Refinitiv data showed.
<<<
>>> Nio Is a Solid Bet for the Chinese Electric Vehicle Space
InvestorPlace
Louis Navellier and the InvestorPlace Research Staff
May 15, 2020
https://finance.yahoo.com/news/nio-solid-bet-chinese-electric-172557397.html
Beijing is doubling down on its commitment to electric vehicles and considering the size and potential of the Chinese economy. That’s worth taking note. And one of the best ways to bet on the Chinese EV market is with Nio (NYSE:NIO) and NIO stock.
Shanghai-based Nio, which is often called China’s answer to Tesla (NASDAQ:TSLA), manufactures smart, electric, and autonomous vehicles.
Like Tesla, it positions itself as a futuristic automotive company with a heavy emphasis on lifestyle. Nio even has a fashion line which it says is inspired by its Nio EP9 vehicle.
Carrying the analogy further, Nio founder William Ben Li is even called the “Elon Musk of China,” although there’s no indication that Nio’s founder is following Musk’s more eccentric ways.
While there’s no guarantee that designer clothes will help Nio vault past rivals like Tesla, Ford (NYSE:F) or the Warren Buffett-backed BYD Company, NIO is making inroads that cannot be ignored.
China Represents a Huge Opportunity
If you are looking for a growth story, there are few opportunities as compelling as the Chinese EV market.
China is one of the largest and fastest-growing emerging markets in the world. People made a big deal about China’s GDP falling below 7% in 2018 and 2019, but keep in mind that any other country would love growth that robust.
By comparison, GDP growth in the U.S. was 2.9% in 2018 and was 2.3% in 2019. Not surprisingly, experts expect China’s economy to overtake the U.S. sometime this decade.
And China is embracing electric vehicles like no other country. While the global automotive market continues to shrink, sales of electronic vehicles are on the rise.
True, the Chinese EV market took a hit in 2019 when Beijing reduced subsidies, helping send NIO stock down by 37%. But now China seems to be all-in on supporting the industry once again as it seeks to reduce dependence on foreign oil.
Beijing has stated its goal of increasing the share of electric vehicles from 5% to 25%. To do that, it extended new EV subsidies and tax breaks until the 2022 fiscal year. Meanwhile, anyone who buys an internal combustion vehicle in China will pay a 10% tax.
And China also put 2.7 billion yuan into battery charging infrastructure, which should make the decision to buy an electric vehicle a lot more appealing.
Before the pandemic, Nio’s two vehicles, the ES6 and the ES8, were selling well and there was a surge of demand in China for electric vehicles. That trend should return as China comes out of the pandemic.
NIO Stock at a Glance
While it has a market capitalization of more than $3 billion, Nio stock can be had for cheap. Currently priced at less than $4 per share, NIO is a long way from it’s all-time high of $10 set last year.
Year-to-date, Nio is down about 14% as the novel coronavirus pandemic weighed on the stock’s shares.
But the worst seems to be over. Li, in a call with reporters, said the pandemic will affect first-quarter numbers but the company is seeing a rebound in the second quarter. NIO won’t adjust its annual forecast, he said.
On May 6, the company reported that it delivered 3,155 vehicles in April, an increase of 105% from March and an 180% increase year-over-year.
Nio also seems to have solved its cash crunch. The company started 2020 with a cash balance of only $161.7 million, but it is getting an infusion of 7 billion yuan ($1 billion) from investors as part of a plan to establish the company’s China headquarters in Hefei.
The Bottom Line on NIO Stock
It’s impossible to size up NIO without considering the competitors. Tesla’s gigafactory in Shanghai makes 3,000 vehicles per week, just a year after the company broke ground.
Ford China launched its first China EV last year and has plans to introduce 10 new models over the next three years.
And then there’s Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), which owns 25% BYD, a Chinese manufacturer of electric vehicles, solar panels, and rechargeable batteries. BYD and Toyota (NYSE:TM) announced plans to launch a joint venture this month for the EV business in China.
But NIO has a home field advantage that you can’t ignore. Instead of being supported by U.S. and Japanese companies, Nio is headquartered in Shanghai and is a Chinese company. And China always exercises extremely tight control over its markets, which makes it hard for international companies to compete.
For instance, China is expressing support for sales of vehicles with swappable batteries. Nio has pursued the technology, and even offers a free battery-swap service.
Nio is a solid bet for investors wanting to get in on the ground floor of the electric vehicle market in a country that is expected to overtake the U.S. soon.
NIO stock gets a “B” rating in my Portfolio Grader right now.
<<<
>>> China: More Bark Than Bite
BY JAMES RICKARDS
MAY 6, 2020
https://dailyreckoning.com/china-more-bark-than-bite/
China: More Bark Than Bite
I’ve made many visits to China over the past thirty years and have been careful to move beyond Beijing (the political capital) and Shanghai (the financial capital) on these trips.
My visits have included Chongqing, Wuhan (the origin of the coronavirus outbreak), Xian, Nanjing, new construction sites to visit “ghost cities,” and trips to the agrarian countryside.
My trips included meetings with government and Communist Party officials and numerous conversations with everyday Chinese people.
In short, my experience with China goes well beyond media outlets and talking heads. In my extensive trips around the world, I have consistently found that first-hand visits and conversations provide insights that no amount of expert analysis can supply.
These trips have been supplemented by reading an extensive number of books on the history, culture and politics of China from 3,000 BC to the present. This background gives me a much broader perspective on current developments in China.
An objective analysis of China must begin with its enormous strengths. China has the third largest territory in the world, with the world’s largest population (although soon to be overtaken by India).
China also has the fifth largest nuclear arsenal in the world with 280 nuclear warheads, about the same as the UK and France, but well behind Russia (6,490) and the U.S. (6,450). China is the largest gold producer in the world at about 500 metric tonnes per year.
Its economy is the second largest economy in the world, behind only the U.S. China’s foreign exchange reserves (including gold) are the largest in the world.
By these diverse measures of population, territory, military strength and economic output, China is clearly a global super-power and the dominant presence in East Asia.
Yet, these blockbuster statistics hide as much as they reveal.
China’s per capita income is only $11,000 per person compared to per capita income of $65,000 in the United States. Put differently, the U.S. is only 38% richer than China on a gross basis, but it is 500% richer than China on a per capita basis (of course the massive economic fallout from the coronavirus will have an impact).
China’s military is growing stronger and more sophisticated, but it still bears no comparison to the U.S. military when it comes to aircraft carriers, nuclear warheads, submarines, fighter aircraft and strategic bombers.
Most importantly, at $11,000 per capita GDP, China is stuck squarely in the “middle income trap” as defined by development economists.
The path from low income (about $5,000 per capita) to middle-income (about $10,000 per capita) is fairly straightforward and mostly involves reduced corruption, direct foreign investment and migration from the countryside to cities to pursue assembly-style jobs.
The path from middle-income to high-income (about $20,000 per capita) is much more difficult and involves creation and deployment of high-technology and manufacture of high-value-added goods.
Among developing economies (excluding oil producers), only Taiwan, Hong Kong, Singapore and South Korea have successfully made this transition since World War II. All other developing economies in Latin America, Africa, South Asia and the Middle East including giants such as Brazil and Turkey remain stuck in the middle-income ranks.
China remains reliant on assembly-style jobs and has shown no promise of breaking into the high-income ranks.
To escape the middle income trap requires more than cheap labor and infrastructure investment. It requires applied technology to produce high-value added products. This explains why China has been so focused on stealing U.S. intellectual property.
China has not shown much capacity for developing high technology on its own, but it has been quite effective at stealing such technology from trading partners and applying it through its own system of state-owned enterprises and “national champions” such as Huawei in the telecommunications sector.
But now the U.S. and other countries are cracking down on China’s technology theft and China cannot generate the needed technology through its own R&D.
In short, and despite enormous annual growth in the past twenty years, China remains fundamentally a poor country with limited ability to improve the well-being of its citizens much beyond what has already been achieved.
And that has serious implications for China’s leadership…
China’s economy is not just about providing jobs, goods and services. It is about regime survival for a Chinese Communist Party that faces an existential crisis if it fails to deliver.
It is an illegitimate regime that will remain in power only so long as it provides jobs and a rising living standard for the Chinese people. The overriding imperative of the Chinese leadership is to avoid societal unrest.
If China’s job machine seizes, as parts of it did during the coronavirus outbreak, Beijing fears that popular unrest could emerge on a potentially scale much greater than the 1989 Tiananmen Square protests. This is an existential threat to Communist power.
President Xi Jinping could quickly lose what the Chinese call, “The Mandate of Heaven.”
That’s a term that describes the intangible goodwill and popular support needed by emperors to rule China for the past 3,000 years. If The Mandate of Heaven is lost, a ruler can fall quickly.
Even before the crisis, China has had serious structural economic problems that are finally catching up with it.
China is so heavily indebted that it is now at the point where more debt does not produce growth. Adding additional debt today slows the economy and calls into question China’s ability to service its existing debt.
Meanwhile, China’s real year-over-year growth tumbled 6.8% in the first quarter.
Besides the slowdown from the pandemic, China confronts an insolvent banking system and a real estate bubble.
Up to half of China’s investment is a complete waste. It does produce jobs and utilize inputs like cement, steel, copper and glass. But the finished product, whether a city, train station or sports arena, is often a white elephant that will remain unused. The Chinese landscape is littered with “ghost cities” that have resulted from China’s wasted investment and flawed development model.
Chinese growth has been reported in recent years as 6.5–10% but is actually closer to 5% or lower once an adjustment is made for the waste. Again, that was before the crisis.
Essentially, China is on the horns of a dilemma with no good way out. China has driven growth for the past eight years with excessive credit, wasted infrastructure investment and Ponzi schemes.
The Chinese leadership knows this, but they had to keep the growth machine in high gear to create jobs for millions of migrants coming from the countryside to the city and to maintain jobs for the millions more already in the cities.
The two ways to get rid of debt are deflation (which results in write-offs, bankruptcies and unemployment) or inflation (which results in theft of purchasing power, similar to a tax increase).
Both alternatives are unacceptable to the Communists because they lack the political legitimacy to endure either unemployment or inflation. Either policy would cause social unrest and unleash revolutionary potential.
The question is, will China pursue an aggressive posture against the U.S. to distract the people?
China does not want war at this time. But diverting the people’s attention away from domestic problems toward a foreign foe is an old trick leaders use to unite the people in times of uncertainty.
If China’s leadership decides that the risk of losing legitimacy at home outweighs the risk of conflict with the United States, the likelihood of war rises dramatically.
I’m not making a specific prediction, but wars have started over less. This is a very dangerous time.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> China, Iran Are on the March
BY JAMES RICKARDS
MAY 6, 2020
https://dailyreckoning.com/china-iran-are-on-the-march/
China, Iran Are on the March
There is so much focus on the COVID-19 pandemic right now that Americans can’t be blamed if they’re not spending much time studying other developments.
That’s understandable, but inattention may be as dangerous as the virus itself. That’s because America’s adversaries are taking advantage of the situation by challenging U.S. interests in a set of geopolitical hot spots.
They believe we’re too distracted by the virus containment effort to mount a firm response.
At the same time, geopolitical confrontation is a classic way to rally a population against an outside threat, especially when they’re still hurting from the pandemic and the economic consequences. It’s one of the oldest tricks in the books to get the people behind the government.
This appears to be the case with China and Iran right now.
China in particular is trying to divert attention away from its own cover-up of the pandemic, which allowed it to spin out of control. So it’s engaging in a global propaganda campaign to try to blame the U.S. for the spread of the virus.
Both China and Iran have lied about the damage caused by the virus in their own countries. China officially reported about 4,600 fatalities and Iran officially reported about 6,200. But reliable sources suggest that the actual count of fatalities may be at least 10 times greater in both countries.
This could put actual fatalities in China and Iran about equal to the U.S. (over 70,000 dead).
Meanwhile, the U.S. has been reeling economically, and there’s no reason to believe that China and Iran are feeling any less pain. Let’s first consider China…
Not surprisingly, China has tried to take advantage of the situation by acting aggressively in the South China Sea and threatening Taiwan.
The South China Sea is a large arm of the Pacific Ocean surrounded by China, Vietnam, the Philippines, Malaysia, Brunei and Indonesia.
All six countries have claims to exclusive economic zones that extend several hundred miles from their coastlines.
Parts of the sea are international waters governed by the Law of the Sea Convention and other treaties. All of the other nations around the South China Sea have rejected China’s claims. But they’ve been pushed back to fairly narrow boundaries close to their coastlines.
China has ignored all of those claims and treaties and insists that it is in control of the entire body of water including islands, reefs and underwater natural resources such as oil, natural gas, undersea minerals and fisheries.
China has also become even more aggressive by designating the South China Sea reefs as city-level administrative units to be administered by mainland China.
And China has pumped sand onto reefs to build artificial islands that have then been fortified with airstrips, harbors, troops and missiles.
China has said it will never seek hegemony, but that’s clearly not true. It most certainly seeks hegemony in the region.
And it’s willing to enforce it. Several encounters have happened lately where Chinese coast guard vessels have rammed and sunk fishing boats from Vietnam and the Philippines.
But China’s aggression in the South China Sea can also jeopardize U.S. naval vessels.
The U.S. operates “freedom of navigation” cruises with U.S. Navy ships to demonstrate that the U.S. also rejects China’s claims. It’s not difficult to envision an incident that could rapidly escalate into something serious.
It’s also fair to assume that a weakened U.S. Navy has emboldened Chinese actions recently.
The two aircraft carriers the Navy has in the western Pacific, the Theodore Roosevelt and Ronald Reagan, were both taken out of action due to outbreaks of the coronavirus among their crews. That’s been a dramatic reduction in power projection in the region.
But neither side will back down, as neither wants to appear weak. This makes warfare a highly realistic scenario. It’s probably just a matter of time.
Meanwhile, Iran has harassed U.S. naval vessels in the Persian Gulf, launched new missiles and continued its support of terrorism in Iraq, Yemen and Lebanon.
These actions are more signs of weakness than strength, but they are dangerous nonetheless.
In the past 10 years, we’ve been through currency wars, trade wars and now pandemic.
Are shooting wars next? Pay attention to China, Iran and, yes, North Korea. They haven’t gone away either.
The world is a dangerous place — and the virus has only made it more dangerous.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Italy joins China's New Silk Road project
BBC News
23 March 2019
https://www.bbc.com/news/world-europe-47679760
Italy has become the first developed economy to sign up to China's global investment programme which has raised concerns among Italy's Western allies.
A total of 29 deals amounting to €2.5bn ($2.8bn) were signed during Chinese President Xi Jinping's visit to Rome.
The project is seen as a new Silk Road which, just like the ancient trade route, aims to link China to Europe.
Italy's European Union allies and the United States have expressed concern at China's growing influence.
What is the Chinese project about?
The new Silk Road has another name - the Belt and Road Initiative (BRI) - and it involves a wave of Chinese funding for major infrastructure projects around the world, in a bid to speed Chinese goods to markets further afield. Critics see it as also representing a bold bid for geo-political and strategic influence.
China v the US: Not just a trade war
It has already funded trains, roads, and ports, with Chinese construction firms given lucrative contracts to connect ports and cities - funded by loans from Chinese banks.
The levels of debt owed by African and South Asian nations to China have raised concerns in the West and among citizens - but roads and railways have been built that would not exist otherwise:
- In Uganda, Chinese millions built a 50km (30 mile) road to the international airport
- In Tanzania, a small coastal town may become the continent's largest port
- In Europe too, Chinese firms managed to buy 51% of the port authority in Piraeus port near Athens in 2016, after years of economic crisis in Greece
What projects were signed in Rome?
On behalf of Italy, Deputy Prime Minister Luigi Di Maio, leader of the populist Five Star Movement, signed the umbrella deal (memorandum of intent) making Italy formally part of the Economic Silk Road and The Initiative for a Maritime Silk Road for the 21st Century.
Ministers then signed deals over energy, finance, and agricultural produce, followed by the heads of big Italian gas and energy, and engineering firms - which will be offered entry into the Chinese market.
China's Communications and Construction Company will be given access to the port of Trieste to enable links to central and eastern Europe. The Chinese will also be involved in developing the port of Genoa.
What's in it for Italy?
Italy is the first member of the G7 group of developed world economies to take money offered by China.
It is one of the world's top 10 largest economies - yet Rome finds itself in a curious situation.
The collapse of the Genoa bridge in August killed dozens of people and made Italy's crumbling infrastructure a major political issue for the first time in decades.
And Italy's economy is far from booming.
The country slipped into recession at the end of 2018, and its national debt levels are among the highest in the eurozone. Italy's populist government came to power in June 2018 with high-spending plans but had to peg them back after a stand-off with the EU.
Mr Di Maio told a news conference: "Italy has arrived first on the Silk Road and therefore other European countries at this moment have taken a stance on our trade decisions.
"They have taken a critical view and they have the right to this opinion."
"We do not want to override our European partners. We firmly remain in the Euro-Atlantic alliance and we remain allies of the United States in Nato," he added.
There is, however, dissent within the Italian government. Mr Di Maio's coalition partner, the other Deputy Prime Minister, Matteo Salvini, who heads the right-wing League, was conspicuously absent from all official ceremonies.
Mr Salvini has warned that he does not want to see foreign businesses "colonising" Italy.
"Before allowing someone to invest in the ports of Trieste or Genoa, I would think about it not once but a hundred times," Mr Salvini warned.
What's in it for China?
Italy's move is "largely symbolic", according to Peter Frankopan, professor of Global History at Oxford University and a writer on The Silk Roads.
But even Rome admitting the BRI is worth exploring "has a value for Beijing", he said.
"It adds gloss to the existing scheme and also shows that China has an important global role."
"The seemingly innocuous move comes at a sensitive time for Europe and the European Union, where there is suddenly a great deal of trepidation not only about China, but about working out how Europe or the EU should adapt and react to a changing world," Prof Frankopan told the BBC.
"But there is more at stake here too," he added. "If investment does not come from China to build ports, refineries, railway lines and so on, then where will it come from?"
Grappling with China's growing power
Explorer Marco Polo's travels along the Silk Road were immortalised in the "Book of Marvels"
The "made in Italy" label carries a reputation for quality worldwide, and is legally protected for products items processed "mainly" in Italy.
In recent years, Chinese factories based in Italy using Chinese labour have been challenging that mark of quality.
Better connections for cheap raw materials from China - and the return of finished products from Italy - could exaggerate that practice.
'Predatory' investment
The agreements signed in Rome come amid questions over whether Chinese firm Huawei should be permitted to build essential communications networks - after the United States expressed concern they could help Beijing spy on the West.
That was not part of the negotiations in Italy.
But a little over a week before the deal was due to be signed, the European Commission released a joint statement on "China's growing economic power and political influence" and the need to "review" relations.
As President Xi toured Rome, EU leaders in Brussels considered their approach for relations with China.
"Our aim is to focus on achieving a balanced relation, which ensures fair competition and equal market access," Donald Tusk, President of the European Council, said.
In March, US National Security Council spokesman Garrett Marquis pointed out that Italy was a major economy and did not need to "lend legitimacy to China's vanity infrastructure project".
<<<
>>> “Mandate of Heaven” in Jeopardy
BY JAMES RICKARDS
FEBRUARY 17, 2020
https://dailyreckoning.com/mandate-of-heaven-in-jeopardy-2/
“Mandate of Heaven” in Jeopardy
The U.S. markets are closed today for Presidents Day. If you have the day off, I hope you’re enjoying your long weekend.
But one event is taking center stage in the world that affects not only basic survival for millions of people, but the health of the global economy overall.
Of course, I’m talking about the coronavirus outbreak currently playing out before our eyes in China.
China’s economy was slowing substantially before the outbreak of the highly contagious and deadly virus last fall. This slowing was the predictable result of excessive debt levels, Trump’s retaliation in the trade wars, and China’s encounter with what development economists call the “middle-income trap.”
Developing economies can grow at double-digit rates as they move from low-income (about $3,000 annual per capita income) to middle-income (about $10,000 annual per capita income).
The main requirements are limits on corruption, a large pool of available labor, and an attractive legal environment for foreign direct investment. Once investment is used for infrastructure and labor is mobilized, large-scale basic manufacturing can commence.
This powers growth and the accumulation of hard currency reserves from export earnings.
The difficulty begins when an economy tries to move from middle-income to high-income (about $18,000 annual per capita income). That move requires more than cheap labor and infrastructure investment. It requires applied technology to produce high-value added products.
Only Taiwan, South Korea and Singapore have made this transition, (excluding Japan after World War II, and oil-exporting nations).
This explains why China has been so focused on stealing U.S. intellectual property.
Trump has been closing that avenue. China cannot generate the needed technology through its own R&D. China is stuck in the middle-income trap and a slowdown in growth is the inevitable result.
The story gets worse for China.
As of Friday, the total reported number of people infected by the coronavirus was 64,435. And the death toll was up to 1,383, including three people outside of China.
Those figures are official statistics released by China and other countries around the world where the virus has spread.
However, there is substantial medical, anecdotal, and model-based evidence that the actual infection rate and death rate may be ten to twenty times higher than those official statistics.
Over 60 million Chinese in several major cities are under “lock-down” where individuals are confined to their homes and may only leave once every three days to buy groceries.
Streets are empty, stores are closed, trains and planes are not moving, and factories are shut. The Chinese economy is slowly grinding to a halt.
This not only affects China’s economy as a whole, but the contagion filters down into individual companies that are dependent on China both for supply chain inputs and final sales.
And it will have a rippling effect on the U.S. economy also. This story has a long way to run.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Coronavirus may have originated in lab linked to China's biowarfare program
The Washington Times
By Bill Gertz
January 26, 2020
https://www.washingtontimes.com/news/2020/jan/26/coronavirus-link-china-biowarfare-program-possible/
The deadly animal-borne coronavirus spreading globally may have originated in a laboratory in the city of Wuhan linked to China’s covert biological weapons program, said an Israeli biological warfare analyst.
Radio Free Asia last week rebroadcast a Wuhan television report from 2015 showing China’s most advanced virus research laboratory, known the Wuhan Institute of Virology. The laboratory is the only declared site in China capable of working with deadly viruses.
Dany Shoham, a former Israeli military intelligence officer who has studied Chinese biological warfare, said the institute is linked to Beijing’s covert bio-weapons program.
“Certain laboratories in the institute have probably been engaged, in terms of research and development, in Chinese [biological weapons], at least collaterally, yet not as a principal facility of the Chinese BW alignment,” Mr. Shoham told The Washington Times.
Work on biological weapons is conducted as part of dual civilian-military research and is “definitely covert,” he said in an email.
Mr. Shoham holds a doctorate in medical microbiology. From 1970 to 1991, he was a senior analyst with Israeli military intelligence for biological and chemical warfare in the Middle East and worldwide. He held the rank of lieutenant colonel.
China has denied having any offensive biological weapons, but a State Department report last year revealed suspicions of covert biological warfare work.
A Chinese Embassy spokesman did not return an email seeking comment.
Chinese authorities said they do not know the origin of the coronavirus, which has killed at least 80 and infected thousands.
Gao Fu, director of the Chinese Center for Disease Control and Prevention, told state-controlled media that initial signs indicated the virus originated from wild animals sold at a seafood market in Wuhan.
One ominous sign, said a U.S. official, is that false rumors circulating on the Chinese internet claim the virus is part of a U.S. conspiracy to spread germ weapons. That could indicate China is preparing propaganda outlets to counter any charges that the new coronavirus escaped from one of Wuhan’s civilian or defense research laboratories.
The World Health Organization is calling the microbe novel coronavirus 2019-nCoV. At a meeting Thursday in Geneva, the organization stopped short of declaring a public health emergency of international concern.
China has deployed military forces to Wuhan to halt all travel out of the city of 11 million people in an effort to contain the outbreak of the virus, which causes pneumonialike symptoms.
The Wuhan institute has studied coronaviruses including the strain that causes severe acute respiratory syndrome (SARS), H5N1 influenza virus, Japanese encephalitis and dengue. Researchers at the institute also have studied the germ that causes anthrax, a biological agent once developed in Russia.
“Coronaviruses [particularly SARS] have been studied in the institute and are probably held therein,” Mr. Shoham said. “SARS is included within the Chinese BW program, at large, and is dealt with in several pertinent facilities.”
It is not known whether the institute’s coronaviruses are specifically included in China’s biological weapons program but it is possible, he said.
Asked whether the new coronavirus may have leaked, Mr. Shoham said: “In principle, outward virus infiltration might take place either as leakage or as an indoor unnoticed infection of a person that normally went out of the concerned facility. This could have been the case with the Wuhan Institute of Virology, but so far there isn’t evidence or indication for such incident.”
After researchers sequence the genome of the new coronavirus, they might be able to determine or suggest its origin or source.
Biological weapons convention
Mr. Shoham, now with the Begin-Sadat Center for Strategic Studies at Bar Ilan University in Israel, said the virology institute is the only declared site in China known as P4 for pathogen level 4. That status indicates the institute uses the strictest safety standards to prevent the spread of the most dangerous and exotic microbes being studied.
The former Israeli military intelligence doctor also said suspicions were raised about the Wuhan Institute of Virology when a group of Chinese virologists working in Canada improperly sent to China samples of what he described as some of the deadliest viruses on earth, including the Ebola virus.
In a July article in the journal Institute for Defense Studies and Analyses, Mr. Shoham said the Wuhan institute was one of four Chinese laboratories engaged in some aspects of biological weapons development.
He said the secure Wuhan National Biosafety Laboratory at the institute was engaged in research on the Ebola, Nipah and Crimean-Congo hemorrhagic fever viruses.
The Wuhan virology institute is under the Chinese Academy of Sciences, but certain laboratories within it “have linkage with the PLA or BW-related elements within the Chinese defense establishment,” he said.
In 1993, China declared a second facility, the Wuhan Institute of Biological Products, as one of eight biological warfare research facilities covered by the Biological Weapons Convention, which China joined in 1985.
The Wuhan Institute of Biological Products is a civilian facility but is linked to the Chinese defense establishment. Mr. Shoham said it is thought to be involved in the Chinese Biological Weapons Convention program. China’s vaccine against SARS is probably produced there.
“This means the SARS virus is held and propagated there, but it is not a new coronavirus unless the wild type has been modified, which is not known and cannot be speculated at the moment,” he said.
The annual State Department report on arms treaty compliance stated last year that China engaged in activities that could support biological warfare.
“Information indicates that the People’s Republic of China engaged during the reporting period in biological activities with potential dual-use applications, which raises concerns regarding its compliance with the BWC,” said the report, adding that the United States suspects China failed to eliminate its biological warfare program as required by the treaty.
“The United States has compliance concerns with respect to Chinese military medical institutions’ toxin research and development because of the potential dual-use applications and their potential as a biological threat,” the report said.
The biosafety lab is about 20 miles from the Hunan Seafood Market, which reports from China say may have been the origin point of the virus.
Rutgers University microbiologist Richard Ebright told London’s Daily Mail that “at this point there’s no reason to harbor suspicions” that the lab may be linked to the virus outbreak.
<<<
>>> The Top 5 China ETFs for 2020
Investopedia
By NATHAN REIFF
Updated Dec 13, 2019
https://www.investopedia.com/top-china-etfs-for-2018-4580541
Friday the 13th was a lucky day in December 2019 for investors and market analysts anxiously watching the U.S.-China trade war. The news officially broke of a limited trade agreement that would roll back American levies on some Chinese goods to 7.5% (from 25%) and cancel an impending new set of tariffs. The phase-one deal also included China's commitment to buy more U.S. agricultural products, to protect U.S. firms operating in China, and to strengthen laws regarding intellectual property and technology and currency exchange.
Trade tensions or not, many U.S. exchange-traded funds (ETFs) remain interested in investing in China; in fact, a number of ETFs are focused exclusively on Chinese equities. For many of these funds, the fallout from the U.S.-China trade war has been disastrous (after 50% returns in 2017, they ended 2018 in the red), and the future could still be unsettled, despite this recent news. In this article, we take a closer look at some of the best—or in many cases, the least bad—ETF performers investing in Chinese companies right now.
All data is current as of Dec. 13, 2019.
KEY TAKEAWAYS
Despite the U.S.-China trade war, some ETFs focused on Chinese stocks are performing well.
Some potential plays include the iShares China Large-Cap ETF, the SPDR S&P China ETF, the iShares MSCI China ETF, and the KraneShares Bosera MSCI China A Share ETF.
For a bearish play, the Direxion Daily CSI 300 China A Share Bear 1X Shares ETF is a possibility.
iShares China Large-Cap ETF (FXI)
In contrast to CHAD, the iShares China Large-Cap ETF (FXI) is one of the largest funds invested in China in the world, with assets of $4.27 billion and an average trading volume of nearly 24 million.
After a robust 2017, FXI faltered in 2018 (returns were a negative 12.41%) but it's up 6.05% YTD. Its NAV is $41.44 and it's yielding 2.13%.
FXI tracks 50 of the largest Chinese stocks traded on the Hong Kong Stock Exchange. It focuses on H-shares, P-chips, and Red Chips, as well as A-shares and other Chinese large-cap names, with over 45% of the portfolio weighted in financial services. The fund's three largest holdings are China Construction Bank Corp. (with a weight of close to 9%), Tencent Holdings (8.83%), and Ping An Insurance (8.01%).
SPDR S&P China ETF (GXC)
With $1.18 billion in assets under management (AUM), the SPDR S&P China ETF (GXC) focuses on a broad index of Chinese shares, seeking to mirror the performance of the S&P China BMI Index. GXC does not focus on market size, although the fund is cap-weighted, with large-caps receiving the largest share. Unsurprisingly, 2018 was rough—the fund lost 18.67%— but it's up 14.86% year-to-date. On a NAV of $99, it's yielding 2.06%.
GXC focuses on consumer cyclical, financial services, and communication services stocks. The fund's largest holding is the Alibaba Group, with a weight of 13.62% of the portfolio. Next up is Tencent Holdings, with 10.77%. A distant third is China Construction Bank Corporation, weighing in at 3.52%.
iShares MSCI China ETF (MCHI)
Like GXC, the iShares MSCI China ETF (MCHI) tracks an index—specifically, the MSCI China Index—of investable Chinese shares covering all market-cap sizes. Similarly, MCHI is also cap-weighted, although it tends to focus its investments on financials and technology.
It's worth noting that MCHI is about four times larger than GXC, asset-wise: It has over $4 billion in AUM. It too posted a loss in 2018 but is returning 15.88% so far in 2019. Its NAV is $61 and it has a yield of 1.48%.
The fund emphasizes the sectors as GXC, and in fact, MCHI's top three holdings are exactly the same as those of GXC, although they are weighted somewhat differently. Alibaba Group comes in first at just over 17%, followed by Tencent Holdings at 12.30%, then China Construction Bank Corporation at 3.87%.
KraneShares Bosera MSCI China A Share ETF (KBA)
As its name implies, the KraneShares Bosera MSCI China A Share ETF (KBA) tracks the MSCI China A Index (not to be confused with the aforementioned MSCI China Index), focusing on large- and mid-cap Chinese equities listed on the Shenzhen or Shanghai Stock Exchanges. It holds net assets of $533.54 million. KBA's strategy has netted it a 26.93% return this year—a nice bounceback from its 2018 loss of 26.25%—and a yield of 1.68%. The NAV is currently $31.
More varied than its fellow funds', KBA's portfolio focuses on the financial services, consumer defensive, industrial, and technology sectors. Top holdings include Kweichow Moutai Co. (5.23% weight), Ping An Insurance Group (3.34%), and China Merchants Bank (2.74%).
Direxion Daily CSI 300 China A Share Bear 1X Shares (CHAD)
When it's been a bad year for stocks, that probably means it's been a good year for inverse ETFs, which use various derivatives to profit from a decline in the value of an underlying benchmark. As the "bear" in the name suggests, holders of inverse exposure funds like the Direxion Daily CSI 300 China A Share Bear 1X Shares ETF (CHAD) see positive returns when stocks decrease in price. That is, the fund seeks to profit from the inverse of the performance of the CSI 300, an index comprised of the largest and most liquid stocks in the Chinese A-share stock market.
CHAD stands out for being the only China-focused ETF to win double-digit gains in 2018—the opposite of its fellow funds. Not surprisingly, as they've bounced back, its performance in 2019 has been rockier—it's down 24.37% year to date, though it's rallied a bit in November and December. On a NAV of $29, its yield is currently 3.41%.
CHAD is still a relatively small fund, with total net assets of just $20.86 million and an average volume of 12,309. With over one-third of the portfolio weighted towards the financial sector, the fund's top three holdings include Ping An Insurance Co. of China (7.62% of the portfolio), Moutai (4.66%), and Merchants Bank (2.89%).
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>>> China’s Worst Rout in Years Has 3,257 Stocks Falling by Daily Limit
Bloomberg News
February 3, 2020
https://www.bloomberg.com/news/articles/2020-02-03/trading-china-s-worst-rout-in-years-with-3-257-stocks-limit-down?srnd=premium
Many traders unable to exit positions fast enough at reopen
CSI 300 Index plunged as much as 9.1% intraday as selling hit
China’s stock market opened to the most savage wave of selling in years, with thousands of shares falling by the daily limit after just minutes of trading.
Though investors turned on computers hours early to tee up their sell orders, many of them couldn’t exit the market fast enough. All but 162 of the almost 4,000 stocks in Shanghai and Shenzhen recorded losses, with about 90% dropping the maximum allowed by the country’s exchanges. Health-care shares comprised most of Monday’s gainers on speculation they will benefit from the virus outbreak.
“The sell-off was so quick and intense,” said Li Changmin, managing director at Snowball Wealth in Guangzhou. “We’ll be busy dealing with risk controls and even liquidation pressure if stocks keep falling.”
China index loses two key support levels within minutes
While it was always going to be brutal for China’s $7.5 trillion stock market as investors caught up with losses worldwide, Monday’s declines were particularly severe. The CSI 300 Index sank as much as 9.1% -- a slump rarely seen in its almost 15-year history. The huge number of stocks trading limit down means it could take days for investors to execute their orders, prolonging the sell-off.
“I was anxious before the market opened, and had made plans on what to sell and by how much last Friday,” said Bruce Yu, a fund manager with Franklin Templeton SinoAm Securities Investment Management Inc. in Taipei. “Some of my trades weren’t made today -- we’ll see if we can sell them tomorrow.”
Making matters even more difficult for mainland-based traders was that many couldn’t trade from the office, and some had to do it with a reduced working force. Some of the country’s largest cities -- including Shanghai -- extended the Lunar New Year holiday until the end of the week, while Beijing’s government encouraged residents to work from home.
It was the first chance mainland investors had since Jan. 23 to trade, due to the extended Lunar New Break. Officials urged investors to evaluate objectively the impact of the coronavirus, which has killed more than 360 and spread to more than 17,000 people in China alone.
The sell-off was widespread on Monday: commodity futures from iron ore to crude sank by the daily limit, and the yuan weakened past a key level against the dollar.
Fund managers hit the phones to calm investors, seeking to avoid the kind of redemptions and forced selling seen as recently as 2018. China’s securities regulator took steps to support the stock market, telling some brokerages that their proprietary traders aren’t allowed to be net sellers of equities this week, according to people familiar with the matter.
“My biggest concern was that investors would rush to redeem their holdings in private and mutual funds,” said Jiang Liangqing, a money manager at Ruisen Capital Management in Beijing whose team is working from home across China. “A key task for us is to reassure our fund holders and ask them to stay calm.”
Some avoided the market altogether, deciding there was no point trying to get orders through if it meant selling at such a deep discount.
“I had a look at stocks at the open, grabbed my fishing pole right after and left home,” said Yin Ming, Shanghai-based vice president of investment firm Baptized Capital. “What else can you do? I knew the market would be ugly today but didn’t expect a drop of this magnitude.”
Others were brave enough to buy, keeping their cool as China attempted to stem the panic. The central bank took its first concrete steps to cushion the economy and plunging markets from the blow of the coronavirus, providing short-term funding to banks and cutting the interest rate it charges for the money. Investors purchased $2.6 billion worth of onshore stocks on Monday through exchange links with Hong Kong, the second-largest amount on record.
“Buying is all I’m doing,” said Hou Anyang, a partner at Shenzhen Frontsea Asset Management, who was one of four working Monday out of a team of 20. “I’ve been through the circuit-breaker of 2016 and other big routs -- as a professional investor, this is a huge opportunity.”
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>>> Lighthizer Scores Trifecta of Wins for Trump’s Trade Agenda
Bloomberg
By Jenny Leonard
December 15, 2019
https://www.bloomberg.com/news/articles/2019-12-15/lighthizer-scores-a-trifecta-of-wins-for-trump-s-trade-agenda?srnd=premium
U.S. trade chief just had a big week delivering key priorities
More talks needed to rebalance China relationship: Lighthizer
It’s almost like Christmas came early for U.S. Trade Representative Robert Lighthizer.
Last week, he delivered on two of President Donald Trump’s most important economic priorities after months of tense discussions, and notched a win far from Washington on an issue of global importance that he himself had angled to get for decades.
Within days, the trade representative announced an agreement with House Democrats on the renegotiated North American Free Trade Agreement, finalized the terms of a partial deal with China and brought to a standstill the appeals process at the World Trade Organization.
“Friday was probably the most momentous day in trade history, ever,” Lighthizer said in an interview with CBS’s “Face the Nation” broadcast on Sunday.
Lighthizer, 72, who became Trump’s chief trade adviser in 2017 with the goals of getting strong Democratic support for trade agreements and rebalancing the economic relationship between the world’s two largest economies, hailed both the China deal and the new Nafta as historic achievements.
While many analysts saw these steps as more incremental than monumental, the week’s results surprised skeptics who thought neither was possible in a bitterly partisan environment.
“With all the chaos, it’s easy to lose sight of Lighthizer’s consistency in his China approach,” said Derek Scissors, a China expert at the American Enterprise Institute. “USMCA wasn’t easy but those are actually good trade partners. China will take much longer and Lighthizer has worked the two negotiations the way they need to be worked: finish USMCA as fast as possible and be patient on China.”
China Talks
On Friday, the U.S. and China announced that they agreed to an 86-page text detailing the first phase of a broader trade agreement. It will involve reduced tariffs in exchange for more Chinese purchases of American farm goods such as soybeans and pork as well as commitments on intellectual property, forced technology transfer and currency markets.
Critics and supporters of the China agreement will have to wait a few more weeks until they can analyze the fine print. It’s expected to be signed by Lighthizer and his counterpart, Vice Premier Liu He, in early January in Washington and released publicly then.
While it will take months or maybe years to assess whether the deal actually works as advertised, some opponents were quick to judge it, arguing that the president had sold out because the limited agreement doesn’t resolve all the big issues.
Lighthizer acknowledged to reporters Friday that “a huge amount” is outstanding and has to be resolved in future negotiating phases. But the hardest thing was to get the first deal on paper, in his view.
“But I’m not Pollyanna. I know integrating these two systems is going to be a very long-term issue,” he said. “No one would have thought we could have done what we did. We’ll find out whether we can.”
The trade chief also responded to doubts that Beijing will never make good on its promises.
“A skeptic would say ‘we’ll see’ and that’s probably a wise position to take,” Lighthizer said. “But our expectation is that they keep their obligations and in any event, they’re enforceable.”
The enforcement piece, if it works as described, will be the biggest difference from previous bilateral dialogues. A “specific mechanism” will ensure commercial consequences such as tariffs or other remedial measures will follow if a party doesn’t abide by the agreement, according to USTR.
New Nafta
On Dec. 10, as the U.S. and China were on the brink of their negotiations, Lighthizer flew to Mexico City to sign a separate trade deal with Mexico and Canada. The three countries inked amendments to a free-trade agreement they first reached more than a year ago and that Lighthizer helped to unlock approval for from House Speaker Nancy Pelosi.
In securing the overhaul of Nafta, now called the U.S.-Mexico-Canada Agreement, Lighthizer managed to bring together an unlikely group of allies that rallied behind the deal he struck with House Democrats. AFL-CIO President Richard Trumka, Democratic Senator Sherrod Brown and others -- who for decades existed on the fringes of the trade debate -- last week came out to support the agreement.
Lighthizer for years advocated for more worker-oriented trade policies. That history helped him at the negotiating table because stronger labor provisions were one of the key demands of Democratic lawmakers.
But the path there wasn’t easy. The months-long negotiations with Mexico and Canada, and the subsequent talks with Democrats, threatened to fall apart more than once. The president and his advisers who mistrusted Pelosi complicated the process, said people involved in the talks.
“The renegotiated USMCA that will be voted on is improved despite the president, not because of him,” said Michael Wessel, who works with the United Steelworkers union.
WTO Paralysis
The week in Washington was so eventful that it was easy to overlook a major development in Geneva. For many countries and supporters of the multilateral trading system, what happened to the WTO’s appellate body was an ominous sign. For Lighthizer, it was a long overdue win.
On Dec. 11, the WTO’s appellate body lost its quorum of members who can decide on appeals and thus became paralyzed, unable to take on new cases. The development wasn’t unexpected -- coming after two years of haggling with the Trump administration, which has accused the panel of judicial overreach, among other issues.
The criticism predates the current U.S. administration and in private, America heard much support for its views. But unlike previous administrations, this one set down an ultimatum, and here too, Lighthizer got his way. He pushed for the system to be dramatically reformed or dismantled. When it didn’t, the U.S. just blocked the appointment of new appellate members.
Looking back on the week, Dan DiMicco, the former CEO of Nucor Steel, said Lighthizer delivered on the centerpieces of the trade agenda they both helped craft for the Trump administration: Nafta, China and the WTO.
“He is the driver,” DiMicco said of Lighthizer. “Without him none of this would be possible.”
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>>> China Says Deal Agreed, U.S. to Roll Back Tariffs in Stages
Bloomberg News
December 13, 2019
https://www.bloomberg.com/news/articles/2019-12-13/china-says-deal-agreed-u-s-to-roll-back-tariffs-in-stages?srnd=premium
Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here.
China and the U.S. have agreed on the text of a phase one trade deal, which will see the removal of tariffs on Chinese goods in stages, Vice Commerce Minister Wang Shouwen said, as U.S. President Donald Trump announced some reduction in tariffs.
China will increase imports from the U.S. and other countries, Wang said at a briefing in Beijing Friday. The comments are China’s first response to a deal signed off by Trump on Thursday that would halt higher tariffs planned for Dec. 15 and represent the first phase in defusing the trade war that’s shaken the global economy.
Trump tweeted, “we have agreed to a very large Phase One Deal with China. They have agreed to many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods, plus much more. The 25% Tariffs will remain as is, with 7 1/2% put on much of the remainder...”
Donald J. Trump
?
@realDonaldTrump
We have agreed to a very large Phase One Deal with China. They have agreed to many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods, plus much more. The 25% Tariffs will remain as is, with 7 1/2% put on much of the remainder....
“The Penalty Tariffs set for December 15th will not be charged because of the fact that we made the deal. We will begin negotiations on the Phase Two Deal immediately, rather than waiting until after the 2020 Election. This is an amazing deal for all. Thank you!,” according to his Twitter post.
U.S. stocks rallied, with the S&P 500 Index jumping to a record, amid signs the tensions are easing between the world’s two largest economies. Washington and Beijing have been in trade war for about 18 months involving nearly $500 billion in products shipped between the two nations.
The text, which comprises nine chapters, includes sections on intellectual property, forced technology transfer, food and agricultural products, finance, currency and transparency, boosting trade, bilateral assessment and dispute resolution, according to the officials.
Both sides agreed to finish the final stages such as legal review and translation as soon as possible and work on arrangements for the final signing, said Wang.
First announced by Trump on Oct. 11, the interim deal with China offers a short-term political victory for the president and will allow him to claim that his tariffs have paid dividends, at the risk of being accused of postponing tougher issues like China’s industrial subsidies.
For Beijing, reducing even some of the tariffs that have been imposed since last year represents a win for President Xi Jinping, who is also facing pressure to not give in to the other side.
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>>> Trade Wars Just Getting Started
BY JAMES RICKARDS
DECEMBER 4, 2019
https://dailyreckoning.com/trade-wars-just-getting-started/
Trade Wars Just Getting Started
Markets are eagerly awaiting the conclusion of the so-called “phase one” trade deal between the U.S. and China.
Both parties are trying to reach a mini-deal involving simple tariff reductions and a truce on new tariffs along with Chinese purchases of pork and soybeans from the U.S.
The likely success or failure of the mini-deal has been a main driver of stock market action for the past year. When the deal looks likely, markets rally. When the deal looks shaky, markets fall.
A deal is still possible. But investors should be prepared for a shocking fall in stock market valuations if it does not. Markets have fully discounted a successful phase one, so there’s not much upside if it happens.
On the other hand, if phase one falls apart stock markets will hit an air pocket and fall 5% or more in a matter of days.
But even if the phase one deal goes through, it does not end the trade wars. Unresolved issues include tariffs, subsidies, theft of intellectual property, forced transfer of technology, closed markets, unfair competition, cyber-espionage and more.
Most of the issues will not be resolved quickly, if ever.
Resolution involves intrusion into internal Chinese affairs both in the form of legal changes and enforcement mechanisms to ensure China lives up to its commitments.
These legal and enforcement mechanisms are needed because China has lied about and reneged on its trade commitments for the past 25 years. There’s no reason to believe China will be any more honest this time around without verification and enforcement. But China refuses to allow this kind of intrusion into their sovereignty.
For the Chinese, the U.S. approach recalls the Opium Wars (1839–1860) and the “Unequal Treaty” (1848–1950) whereby foreign powers (the U.K., the U.S., Japan, France, Germany and Russia) forced China into humiliating concessions of land, port access, tariffs and extraterritorial immunity.
China has now regained its lost economic and military strength and refuses to make similar concessions today.
In order to break the impasse between protections the U.S. insists on and concessions China refuses to give.
This points to the fact that the “trade war” is not just a trade war but really part of a much broader confrontation between the U.S. and China that more closely resembles a new Cold War.
This big-picture analysis has been outlined in a speech given by Vice President Mike Pence in October 2018 and a follow-up speech delivered on Oct. 24, 2019. Both speeches are available on the White House website.
Secretary of State Mike Pompeo has also added his voice to the hawks warning that China is a long-term threat to the U.S. and that business as usual will no longer protect U.S. national security.
Pence and Pompeo have taken the lead in the public criticism of China by the Trump administration. In a series of speeches and interviews they have pointed out egregious human rights violations, blatant theft of intellectual property and threatening military advances that should cause the U.S. to treat China as more of a geopolitical adversary than a friendly trading partner.
The views of Pence and Pompeo, often captured under the heading of the Pence Doctrine, were neatly summarized by China expert Gordon G. Chang, author of The Coming Collapse of China, in a Wall Street Journal Op-Ed on Nov. 7, 2019, quoted below:
The Trump administration is heading for a fundamental break with the People’s Republic of China. The rupture, if it occurs, will upend almost a half century of Washington’s “engagement” policies. Twin speeches last month by Vice President Mike Pence and Secretary of State Mike Pompeo contained confrontational language rarely heard from senior American officials in public.
“America will continue to seek a fundamental restructuring of our relationship with China,” the vice president said at a Wilson Center event on Oct. 24 as he detailed China's disturbing behavior during the past year.
Some argue the vice president's talk didn't differ substantively from his groundbreaking October 2018 speech, but these observers fail to see that in the face of Beijing's refusal to respond to American initiatives, Mr. Pence was patiently building the case for stern U.S. actions.
Moreover, the vice president's thematic repetition was itself important. It suggested that the administration's approach, first broadly articulated in the December 2017 National Security Strategy, had hardened. That document ditched the long-used “friend” and “partner” labels.
Instead it called China — and its de facto ally Russia — “revisionist powers” and “rivals.”
At a Hudson Institute dinner last Wednesday, Mr. Pompeo spoke even more candidly: “It is no longer realistic to ignore the fundamental differences between our two systems and the impact… those systems have on American national security.” China's ruling elite, he said, belong to “a Marxist-Leninist party focused on struggle and international domination.” We know of Chinese hostility to the U.S., Mr. Pompeo pointed out, by listening to “the words of their leaders.”
The U.S.-China trade war is not the anomaly globalists portray. It’s not even that unusual viewed from a historical perspective. Retaliation from trading partners is all in the game.
Free trade is a myth. It doesn’t exist outside classrooms. France subsidizes agriculture. The U.S. subsidizes electric vehicles. China subsidizes a long list of national champions with government contracts, cheap loans and currency manipulation. Every major economy subsidizes one or more sectors using fiscal and monetary tools and tariffs and nontariff barriers to trade.
Trump’s tariffs on China in January 2018 were reputedly the start of a trade war, but the war was actually begun by China 24 years earlier when China devalued its currency (1994) and continued when China joined the WTO (2001) and immediately started to break WTO rules.
The trade battle is now joined, but no critical issues have been resolved and none will be in the near future. The U.S. cannot accept Chinese assurances without verification that intrudes on Chinese sovereignty.
China cannot agree to U.S. demands without impeding its theft of U.S. intellectual property. This theft is essential to escape the middle income trap that afflicts developing economies.
The EU is caught in the crossfire. The U.S. is threatening to impose tariffs on German autos and French agricultural exports as part of an effort to force an end to German and French subsidies to favored interests.
The U.S. will win the trade wars despite costs. China will lose the trade wars while maintaining advantages in intellectual property theft. Trade wars will continue for years, even decades, until China abandons communism or the U.S. concedes the high ground in global hegemony.
Neither is likely soon.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> Is Alibaba Really The Amazon Of China?
Forbes
9-24-19
https://www.forbes.com/sites/greatspeculations/2019/09/24/is-alibaba-really-the-amazon-of-china/#2d5586da12c0
Alibaba is often referred to as the ‘Amazon of China’ because of its growth trajectory being nearly identical to that of Amazon. Both companies started off as e-commerce platforms, but over the years evolved into much more diversified companies with a significant focus on technology. But are their business models really similar to each other?
Trefis attempts to answer this question by comparing the various revenue streams for Alibaba vs Amazon in an interactive dashboard. While Amazon is the larger of the two companies by a significant margin, both companies have quite similar revenue streams.
When comparing Commerce as well as Cloud revenues, Amazon’s revenues are nearly 15x that of Alibaba’s.
However, Alibaba’s advertising revenues are quite comparable to that of Amazon’s.
The gap between Subscription Revenues for both companies is likely to continue expanding on the back of Amazon’s wider and more local focused reach.
Despite the law of large numbers being against Amazon, the U.S. company’s reach is likely to remain an order of magnitude higher than that for the Chinese giant.
That said, a side-by-side comparison of the two companies shows that Alibaba’s title of ‘Amazon of China’ really does fit.
Alibaba vs Amazon
A Detailed Comparison Of Historical & Expected Trends In Revenues For Both Companies
Total Revenues
Amazon revenues:
2016 revenue $136 bn; 2018 revenue $232.9 bn; 2016-18 growth of 71.3%.
2020E revenue of $350.2 bn; 2018-20E growth of 50.4%.
Alibaba revenues:
2016 revenue $9.4 bn; 2018 revenue $23.2 bn; 2016-18 growth of 146.1%.
2020E revenue of $41.7 bn; 2018-20E growth of 79.9%.
Ratio of Amazon’s to Alibaba’s total revenues had reached from 14.5x in 2016 to 10.1x in 2018. Considering 2018-20E growth of 50.4% in Amazon’s total revenues versus expectations of 79.9% for Alibaba’s total revenues, we expect the ratio of revenues to narrow further to 8.4x by 2020.
Below, we summarize key trends from our detailed interactive dashboard comparing revenue streams for Alibaba vs Amazon
Commerce revenue
Ratio of Amazon’s to Alibaba’s commerce revenues have fallen from 33.6x in 2016 to 17.3x in 2018. Considering 2018-20E growth of 39.8% in Amazon’s commerce revenues versus expectations of 97.2% for Alibaba’scommerce revenues, we expect the ratio of revenues to shrink further to 12.2x by 2020.
Cloud revenue
Ratio of Amazon’s to Alibaba’s cloud revenues had reached from 32.6x in 2016 to 17.5x in 2018. Considering 2018-20E growth of 75.5% in Amazon’s cloud revenues versus expectations of 145.8% for Alibaba’s cloud revenues, we expect the ratio of revenues to reach 12.5x.
Advertising revenue
Notably, Alibaba’s advertising revenues have been larger than Amazon’s over 2016-17. But the ratio of Amazon’s to Alibaba’s advertising revenues flipped from 0.6x in 2016 to 1.1x in 2018. Given Amazon’s push into advertising over recent years, we expect the ratio of revenues to reach 1.7x by 2020 in Amazon’s favor.
Subscription revenue
Ratio of Amazon’s to Alibaba’s subscription revenues had reached from 6.6x in 2016 to 7.7x in 2018. Considering 2018-20E growth of 80.3% in Amazon’s subscription revenues (driven by the geographical expansion in Amazon Prime video offerings) versus expectations of 60.4% for Alibaba’s subscription revenues, we expect the ratio of revenues to reach 8.7x.
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>>> Trump Reaches 'Phase One' Deal With China and Delays Planned Tariffs
The New York Times
10-11-19
By Ana Swanson
https://www.msn.com/en-us/money/markets/trump-reaches-phase-one-deal-with-china-and-delays-planned-tariffs/ar-AAIDzQW?li=BBnb7Kz&ocid=mailsignout#page=2
WASHINGTON — President Trump said Friday that he had reached a “substantial” deal with China that will forestall a planned tariff increase on Oct. 15, providing a temporary détente in a yearlong trade war.
Mr. Trump, speaking from the Oval Office, said the two sides had reached a verbal “phase one” agreement that would take several weeks to write and could be signed by both sides in November.
The initial deal, which Mr. Trump said had been reached “in principle” would involve China buying $40 billion to $50 billion worth of American agricultural products, along with agreeing to guidelines on how it manages its currency. The agreement also includes some provisions on intellectual property, including forced technology transfer and would give American financial services firms more access to China’s market, the president said.
In exchange, the United States will not go ahead with plans to raise tariffs on $250 billion worth of Chinese goods to 30 percent next week. But the president has not made a final decision on whether to increase tariffs further on Dec. 15, as he has threatened.
Mr. Trump, who just weeks ago said he was looking for a “complete” China deal, said that the two sides would now break the agreement into phases.
“It’s such a big deal that doing it in sections, in phases, is really better,” Mr. Trump said during a meeting with Liu He, China’s vice premier. “So you’ll either have two phases or three phases.”
The first phase could be signed when Mr. Trump appears alongside his Chinese counterpart at a meeting of global leaders in Santiago, Chile, in November. The next phase would begin soon after, Mr. Trump said.
Despite the announcement, the deal has not been finalized and Steven Mnuchin, the Treasury secretary, said that more work remained.
“We have a fundamental agreement on the key issues,” Mr. Mnuchin said. “But there is a significant amount of work to do.”
The agreement, which came during the 13th round of negotiations, will help defuse a prolonged trade fight that has begun inflicting pain on the global economy and was set to escalate next week. In his quest to force China to acquiesce to America’s terms, Mr. Trump has already taxed $360 billion worth of Chinese products and was poised to tariff nearly every laptop, dresser and toy that China sells to the United States before year-end.
Stock and commodity prices climbed as investors anticipated a trade agreement that could help resolve economic concerns about ongoing damage from the dispute.
The S&P 500 rose 1.1 percent. The tech-heavy Nasdaq composite index rose 1.3 percent. The Russell 2000 index of small capitalization stocks, typically viewed as closely tied to the health of the American domestic economy rose 1.8 percent.
Crude oil prices rose as did prices for key industrial metals such as copper and iron ore, often looked to as a barometer of the outlook for China’s large industrial economy.
But the deal is far from the type of comprehensive agreement Mr. Trump has been pushing for and leaves many of the administration’s biggest concerns about China’s economic practices unresolved. Although exact terms of the agreement are still under discussion, the details Mr. Trump announced include many of the concessions that China has previously floated, including purchases of agricultural products and limits on Beijing devaluing its currency to gain a competitive advantage.
And it does not appear to address some of the thorniest issues that the two countries have been grappling over.
Mr. Mnuchin said on Friday that the United States would decide whether to rescind the designation of China as a currency manipulator in a future phase of negotiations.
In August, the Treasury Department formally designated China a currency manipulator for the first time since 1994 at the direction of Mr. Trump. The largely symbolic move came amid frustration among American officials that China was counteracting Mr. Trump’s tariffs by devaluing the renminbi.
And Robert Lighthizer, Mr. Trump’s top trade negotiator, said the deal did not resolve the fate of Chinese telecom giant Huawei, which has been placed on a United States blacklist, much to China’s dismay.
“In this agreement we’re not dealing specifically with Huawei. It’s not part of this agreement. That’s a separate process,” he said.
Still, any pause in future tariff increases and reduction in trade tensions will provide welcome relief to businesses, farmers, investors and others who have suffered financially from a bitter trade dispute that has dragged on for more than a year.
Mr. Lighthizer said that the deal would require China to make structural changes that would allow more American farm goods to flow there.
“It will be much easier now for American farmers to be able to ship to China,” he said. “And we’ve made some changes on our side too that will help the Chinese.”
Mr. Mnuchin said the United States and China had reached “almost a complete agreement” on both the currency issues, and China’s moves to open up to financial services firms.
“The banks and all of the financial services companies will be very, very happy with what we’ve been able to get,” Mr. Trump said, adding that the pact would be a “tremendous thing for banks and financial services companies.”
The stakes for an agreement were high with the trade war set to worsen if the two sides did not made progress and some of Mr. Trump’s biggest political constituencies — including farmers and small businesses — in the cross hairs. In addition to the October tariff increase, Mr. Trump had planned to impose another round of levies in December, at which point the United States would have taxed nearly every Chinese import.
Those additional tariffs have prompted concern from farmers and businesses, who say the levies Mr. Trump has already placed on more than $360 billion of Chinese goods are weighing on sales and investment. While the president and his advisers maintain that the trade war is having a limited impact on the economy, they have admitted that these tariffs could impact American consumers as the holiday season approaches.
Mr. Trump’s defenders say China’s concessions will generate positive momentum for future talks and result in more business for farmers and manufacturers as they continue to press China for a comprehensive pact to correct longstanding economic abuses. Critics say the move will go only partway toward resolving a crisis of the president’s own making, and that the trade war will continue to inflict pain across the global economy.
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China XD 'CXDC' today confirmed privatisation intention while announcing a $135 million extra USD financing. The initial offer was $5.24. Currently trading at $1.96
>>> NIO Is More China's WeWork Than Its Tesla Killer
This electric vehicle producer makes Elon Musk’s company look like a staid and sensible investment.
Bloomberg
By David Fickling
September 25, 2019
https://www.bloomberg.com/opinion/articles/2019-09-25/nio-is-more-china-s-wework-than-its-tesla-killer?srnd=premium
Selling cars at a loss isn't a technology innovation.
Haven’t we seen this play before?
NIO Inc., a Chinese electric-vehicle maker that was talked up as a potential Tesla Inc.-killer before its $1.15 billion initial public offering last year, is falling apart before our eyes.
The stock fell 20% in the U.S. on Tuesday after the company reported a 3.29 billion yuan ($462 million) net loss in the second quarter on a gross margin of minus 33%. Those sorts of figures make Elon Musk’s company look like a staid and sensible investment.
What’s most striking is that NIO is racking up these massive losses in spite of a business model that in theory ought to be far more efficient than conventional carmaking. In that sense, the better comparison isn’t Tesla, but WeWork – a company that pitched itself as a radically different technology play, only to be brought down to earth by the humdrum nature of operating in the real world.
One thing that makes NIO unusual is that, as my colleague Anjani Trivedi has explained, it doesn’t actually make cars. Instead it takes 45,000 yuan deposits from customers, provides a drive-train, and contracts out the rest of the build process to Anhui Jianghuai Automobile Group Corp. On top of that, it doesn’t have a dealership network, instead selling cars through an app and a web of slick WeWork-style clubs, known as NIO Houses.
Can't Be Fixed
Nio's sales as a percentage of tangible fixed assets are close to the worst in the industry -- an amazing performance for a company that doesn't own assembly plants
In principle, that could result in efficient deployment of capital, but things start to look dicey when theory comes up against the reality of NIO’s spending habits. If you compare revenue over the past year to NIO’s tangible fixed assets, it has some of the worst capital efficiency in the global car industry. For a company that doesn’t own assembly plants, that’s a heroically bad performance.
What’s going wrong? For starters, contract manufacturing isn’t as efficient as you might think. Even excluding the costs associated with recalling almost a fifth of the cars NIO has sold due to battery fires and overheating, the gross margin on vehicles was minus 4% in the second quarter.
Three Into One Won't Go
Per-vehicle costs at Nio are running at more than three times the level of revenues
Note: We've excluded "other revenue" and "other cost" as well as other smaller cost elements.
The real problems show up below the gross profit level, though. Given retail prices of around 450,000 yuan for the flagship ES8, the numbers are astonishing. Per-car R&D came to an additional 366,000 yuan; sales, general & administrative costs were 400,000 yuan on top of that. Together with its cost of sales, NIO is shelling out around 1.27 million yuan each for a vehicle that sells for barely a third as much.
If anything, that situation is likely to get worse in the months ahead. NIO’s answer to the Tesla Model 3 – a car aimed at a more mass-market audience, with a lower price that erodes what little margin its costlier predecessors could claim – went on sale in June in the form of the ES6, with prices starting at 360,000 yuan. Government subsidies that amounted to 67,500 yuan per car last year have been staged down to 11,520 yuan. The result is that an ES6 bought now is only marginally cheaper than a fancier ES8 purchased last year.
Going, Going
Nio shares have fallen by about two-thirds from the price of their initial public offering a year ago
How can NIO turn this around? R&D should be treated as a down payment on future sales, so it’s to be expected that it makes up an oversize share of costs at the startup stage. The same can’t be said of SG&A, though. You could buy a very nice car for the roughly $57,000 of overhead on each vehicle sold in the second quarter. Based on 2018’s annual results only about a fifth of that is going on marketing (another expense that might be abnormally high at the startup stage).
Eye-watering staff costs are a standout. NIO spent 4.11 billion yuan last year paying a workforce that reached 9,900 people in January. That averages out at compensation of 415,000 yuan per employee, more than three times the average white-collar salary in China’s tier-one cities. Plans to cut headcount to a target of 7,800 next week look like moving around the deckchairs on the Titanic.
NIO’s unique selling point has always been that it could provide luxury electric vehicles in China at a price well below foreign SUV competitors. The problem is, the discount doesn’t appear to come from operational efficiencies, but from losing money on every car.
The overhead is so immense that even were NIO to slash costs far more drastically than it’s anticipating and increase volumes dramatically – a bold bet, given the weakness in China’s car market and the reputational hit from its battery recall – there’s no clear path to profit. In the meantime, premium electric SUVs such as Daimler AG’s EQC and Volkswagen AG’s Audi e-tron will come to the market within months.
Like WeWork, NIO was never really the capital-efficient technology company it purported to be. Instead, it was a brief attempt to carve out a space in the middle of the market by the very old-fashioned technique of selling at a loss. The crash could now be coming sooner rather than later.
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>>> JD.com, Inc. (JD), through its subsidiaries, operates as an e-commerce company and retail infrastructure service provider in the People's Republic of China. It operates in two segments, JD Retail and New Businesses. The company offers home appliances; mobile handsets and other digital products; desktop, laptop, and other computers, as well as printers and other office equipment; furniture and household goods; apparel; cosmetics, personal care items, and pet products; women's shoes, bags, jewelry, and luxury goods; men's shoes, sports gears, and fitness equipment; automobiles and accessories; maternal and childcare products, toys, and musical instruments; and food, beverage, and fresh produce. It also provides gifts, flowers, and plants; nutritional supplements; books, e-books, music, movie, and other media products; and virtual goods, such as online travel agency, attraction tickets, and prepaid phone and game cards, as well as industrial products. In addition, the company offers an online marketplace for third-party sellers to sell products to customers; and transaction processing and billing, value-added fulfillment, and other services. Further, it provides online marketing services for suppliers, merchants, and other partners; supply chain and logistics services for various industries; and consumer financing services to individual customers. Additionally, the company offers online-to-offline solutions, as well as online and in-person payment options and customer services. JD.com, Inc. offers its products through its Website jd.com and mobile apps, as well as directly to customers. As of December 31, 2018, JD.com, Inc. operated fulfillment centers in 7 cities; and 550 warehouses in 81 cities covering various counties and districts. The company has strategic cooperation agreement with Tencent Holdings Limited. JD.com, Inc. is headquartered in Beijing, China.
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>>> Trade War or Not, U.S. Companies Follow the Consumer to China
Bloomberg
By Cecile Daurat
August 28, 2019
https://www.bloomberg.com/news/articles/2019-08-28/trade-war-or-not-u-s-companies-follow-the-consumer-to-china?srnd=premium
In the turmoil of the trade war, global American companies are moving to where the consumers are: China.
With fewer Chinese tourists visiting the U.S., Tiffany & Co. moved some of its most expensive jewelry to its Beijing and Shanghai stores last quarter, selling limited quantities of special Tiffany Keys diamond pendants and Tiffany Love Bugs. The New York-based retailer is also upgrading all three greater China flagships, including Hong Kong.
Ford Motor Co., which expects China to become the biggest market for its Lincolns in the next few years, has said it eventually plans to build locally most of the vehicles it sells in the country under that brand, avoiding tariffs. Tesla Inc. is focused on getting its plant in Shanghai running by the end of the year. Depending on the timing, the carmaker may manage to avoid the latest round of Chinese tariffs due to take effect in December.
President Donald Trump responded last week to the latest tit-for-tat tariff retaliation from China by tweeting that U.S. companies are “hereby ordered to immediately start looking for an alternative” to China. In reality, despite the current economic slowdown, China is where future growth is for many global companies facing saturated markets at home, and that makes the country the place to invest for the long term.
Take Starbucks Corp., which is pivoting toward China as it retrenches at home. China is becoming an increasingly important market for coffee retailers as the country’s middle-class tea drinkers develop a taste for java. Starbucks, which has more than a 50% share of the market, is opening one store every 15 hours in the country to stay ahead of a local rival that’s creating intense competition.
China is also the world’s largest aircraft market, and Boeing Co. opened its first 737 finishing plant there at the end of last year amid growing trade tensions. The facility, a joint venture with a local state-owned planemaker, is a rare industrial foray outside of the U.S. for Boeing.
From luxury to cheap items, the appetite in China for things American shows no sign of abating. Just this week, Costco Wholesale Corp.’s first outlet in China was so overrun on its opening day, with customers willing to fight over discounted products and wait hours to pay for purchases, that the Shanghai store had to suspend operations temporarily.
Seafood chain Red Lobster, which only has two locations in China today, also sees its future there.
“China is very likely to be our largest international market likely by a pretty wide margin over time.” Chief Executive Officer Kim Lopdrup said in an interview last week.
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>>> China: Paper Tiger
BY JAMES RICKARDS
AUGUST 12, 2019
https://dailyreckoning.com/china-paper-tiger/
China: Paper Tiger
China’s shock currency devaluation last week begs the following questions: Is China a rising giant of the twenty-first century poised to overtake the United States in wealth and military prowess? Or is it a house of cards preparing to implode?
Conventional wisdom espouses the former. Yet, hard evidence suggests the latter.
Your correspondent in the world famous Long Bar on the Bund in Shanghai, China. The Long Bar (about 50-yards long) was originally built in 1911 during the heyday of foreign imperialism in China just before the formation of the Republic of China (1912-1949). Bar regulars were divided into “tai-pans” (bosses who sat near the window), “Shanghailanders” (who sat in the middle), and “griffins” (newcomers who sat at the far end).
I made my first visits to Hong Kong and Taiwan in 1981 and my first visit to Communist China in 1991. I have made many visits to the mainland over the past twenty years and have been careful to move beyond Beijing (the political capital) and Shanghai (the financial capital) on these trips. My visits have included Chongqing, Wuhan, Xian, Nanjing, new construction sites to visit “ghost cities,” and trips to the agrarian countryside.
I spent five days cruising on the Yangtze River before the Three Gorges Dam was finished so I could appreciate the majesty and history of the gorges before the water level was lifted by the dam. I have visited numerous museums and tombs both excavated and unexcavated.
My trips included meetings with government and Communist Party officials and numerous conversations with everyday Chinese people, some of who just wanted to practice their English language skills on a foreign visitor.
In short, my experience with China goes well beyond media outlets and talking heads. In my extensive trips around the world, I have consistently found that first-hand visits and conversations provide insights that no amount of expert analysis can supply.
These trips have been supplemented by reading an extensive number of books on the history, culture and politics of China from 3,000 BC to the present. This background gives me a much broader perspective on current developments in China and a more acute analytical frame for interpretation.
An objective analysis of China must begin with its enormous strengths. China has the largest population in the world, about 1.4 billion people (although soon to be overtaken by India). China has the third largest territory in the world, 3.7 million square miles, that’s just slightly larger than the United States (3.6 million square miles), and only slightly behind Canada (3.8 million square miles).
China also has the fifth largest nuclear arsenal in the world with 280 nuclear warheads, about the same as the UK and France, but well behind Russia (6,490) and the U.S. (6,450). China is the largest gold producer in the world at about 500 metric tonnes per year.
China has the second largest economy in the world at $15.5 trillion in GDP, behind the U.S. with $21.4 trillion, and well ahead of number three Japan with $5.4 trillion. China’s foreign exchange reserves (including gold) are the largest in the world at $3.2 trillion (Hong Kong separately has $425 billion in additional reserves).
By way of contrast, the number two reserve holder, Japan, has only $1.3 trillion in reserves. By these diverse measures of population, territory, military strength and economic output, China is clearly a global super-power and the dominant presence in East Asia.
Yet, these blockbuster statistics hide as much as they reveal. China’s per capita income is only $11,000 per person compared to per capita income of $65,000 in the United States. Put differently, the U.S. is only 38% richer than China on a gross basis, but it is 500% richer than China on a per capita basis.
China’s military is growing stronger and more sophisticated, but it still bears no comparison to the U.S. military when it comes to aircraft carriers, nuclear warheads, submarines, fighter aircraft and strategic bombers.
Most importantly, at $11,000 per capita GDP, China is stuck squarely in the “middle income trap” as defined by development economists. The path from low income (about $5,000 per capita) to middle-income (about $10,000 per capita) is fairly straightforward and mostly involves reduced corruption, direct foreign investment and migration from the countryside to cities to purse assembly-style jobs.
The path from middle-income to high-income (about $20,000 per capita) is much more difficult and involves creation and deployment of high-technology and manufacture of high-value-added goods.
Among developing economies (excluding oil producers), only Taiwan, Hong Kong, Singapore and South Korea have successfully made this transition since World War II. All other developing economies in Latin America, Africa, South Asia and the Middle East including giants such as Brazil and Turkey remain stuck in the middle-income ranks.
China remains reliant on assembly-style jobs and has shown no promise of breaking into the high-income ranks.
In short, and despite enormous annual growth in the past twenty years, China remains fundamentally a poor country with limited ability to improve the well-being of its citizens much beyond what has already been achieved.
With this background and a flood of daily reporting on new developments, what do we see for China in the months and years ahead?
Right now, China is confronting social, economic and geopolitical pressures that are testing the legitimacy of the Communist Party leadership and may lead to an economic crisis of the first order in the not distant future.
In contrast to the positives on China listed above, consider the following negative factors:
Trade wars with the U.S. are escalating, not diminishing as I warned from the start in early 2018.
Trump’s recent imposition of 10% tariffs on the remaining $300 billion of Chinese imports not currently tariffed (in addition to existing tariffs on $200 billion of Chinese imports) will slow the Chinese economy even further.
China retaliated with a shock devaluation of the yuan below 7.00 to one dollar, a level that had previously been defended by the People’s Bank of China. Resorting to a currency war weapon to fight a trade war shows just how badly China is losing the trade war.
But, this currency war counterattack will not be successful because it will incite more capital outflows from China. The Chinese lost $1 trillion of hard currency reserves during the last round of capital flight (2014-2016) and will lose more now, despite tighter capital controls. The spike of bitcoin to $11,000 following the China devaluation is a symptom of Chinese people using bitcoin to avoid capital controls and get their money out of China.
The unrest in Hong Kong is another symptom of the weakening grip of the Chinese Communist Party on civil society. The unrest has spread from street demonstrations to a general strike and shutdown of the transportation system, including the cancellations of hundreds of flights.
This social unrest will grow until China is forced to invade Hong Kong with 30,000 Peoples’ Liberation Army troops now massed on the border. This will be the last nail in the coffin of the academic view of China as a good global citizen. That view was always false, but now even the academics are starting to understand what’s really going on.
International business is moving quickly to move supply chains from China to Vietnam and elsewhere in South Asia. Once those supply chains move, they will not come back to China for at least ten years if ever. These are permanent losses for the Chinese economy.
Of course, lurking behind all of this is the coming debt crisis in China. About 25% of China’s reported growth the past ten years has come from wasted infrastructure investment (think “ghost cities”) funded with unpayable debt. China’s economy is a Ponzi scheme like the Madoff Plan and that debt pyramid is set to collapse.
This cascade of negative news is taking its toll on Chinese stocks. This weakness began in late June 2019 when the summit meeting between U.S. President Trump and President Xi of China at the G20 Leaders meeting in Osaka, Japan failed to produce substantive progress on trade disputes.
Since then, the trade wars have gone from bad to worse and China’s economy has suffered accordingly. My expectation is that a trade war resolution in nowhere in sight and the trade war issues have been subsumed into a larger list of issues involving military and national security policy.
The new “Cold War” is here. Get used to it.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> Why China's a Paper Tiger
BY JAMES RICKARDS
AUGUST 12, 2019
https://dailyreckoning.com/why-chinas-a-paper-tiger/
Why China's a Paper Tiger
Markets are still digesting last week’s Chinese devaluation that sent the Dow crashing over 700 points last Monday.
And as everyone knows by now, the Trump administration labelled China a currency manipulator.
The ironic part of it is that China has been manipulating its currency to strengthen it against the dollar.
Here’s the dynamic you need to understand…
The Chinese yuan is softly pegged to the dollar. To maintain the soft peg, the People’s Bank of China (PBoC) sells dollars and buys yuan.
That props up the yuan. It’s basic supply and demand economics.
One of the primary reasons China tries to strengthen the yuan is to prevent capital flight out of the country. If the yuan depreciates too rapidly, massive amounts of Chinese money would look to flee abroad where it can get much higher returns.
After all, would you want to hold a rapidly deteriorating asset that constantly loses value? Or if you were a Chinese investor, would you try to convert your money into a currency that holds its value?
That’s the question Chinese investors have been facing.
A capital drain could devastate the Chinese economy, which badly needs the capital to remain in China to support its massive Ponzi schemes, ghost cities and overinvestment.
That’s why the PBoC has been trying to support the yuan, even though a cheaper yuan helps Chinese exports.
That’s the conundrum China faces. It wants a cheap yuan — but not too cheap.
I wouldn’t call last Monday’s devaluation the sort of “max devaluation” I’ve warned my readers about before. That would have been a devaluation of 5% or more in a single day, and that’s not what happened last week. I would classify it as a “red line” devaluation.
The yuan temporarily broke through the 7.00:1 “red line” dollar peg. It has since returned to normalized levels.
It’s actually ironic that China is being labelled a currency manipulator, if manipulating your currency means cheapening it.
That’s because China was manipulating its currency to strengthen it against the dollar. And when the yuan/dollar exchange rate crossed the 7.00:1 “red line,” that meant China temporarily stopped manipulating its currency higher.
If China didn’t manipulate the yuan higher, it would depreciate even more against the dollar. And the exchange rate stabilized last week when China resumed the manipulation. In other words, when China strengthened the yuan.
Welcome to the currency wars! They take on a logic all their own. In many ways it’s a race to the bottom.
I explained it all years ago in my 2011 book Currency Wars.
As soon as one country devalues, its trading partners devalue in retaliation and nothing is gained. China’s case is complicated by its desires for both a strengthened and weakened yuan.
But the ultimate reality is that currency wars produce no winners, just continual devaluation until they are followed by trade wars. That’s exactly what has happened in the global economy over the past 10 years.
Currency wars and trade wars go hand in hand. Often they lead to actual shooting wars, as I have repeatedly pointed out.
Let’s hope the currency wars and trade wars don’t turn into shooting wars as they have in the past.
But below, I show you why China is more of a paper tiger than an actual one. Why do I say that? Read on.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> China’s Built a Railroad to Nowhere in Kenya
Beijing is withholding the $4.9 billion needed to finish the project, once a flagship for Xi Jinping’s Belt and Road initiative.
Bloomberg
By David Herbling and Dandan Li
July 18, 2019
https://www.bloomberg.com/news/features/2019-07-19/china-s-belt-and-road-leaves-kenya-with-a-railroad-to-nowhere
Gleaming concrete sleepers run across a new railway bridge in Kenya, the latest stretch of a Chinese-built line from the coast all the way to Uganda.
Only, it doesn’t quite reach the border. Instead, the railroad ends abruptly by a sleepy village about 75 miles west of the Kenyan capital, Nairobi, the tracks laid but unused.
Construction of what was intended to be a flagship infrastructure project for Eastern Africa was halted earlier this year after China withheld some $4.9 billion in funding needed to allow the line’s completion. Beijing’s sudden financial reticence appeared to catch the governments of Kenya and Uganda off guard: Both may now be forced to reinstate a colonial-era line in a bid to patch the link and boost regional trade.
Kenya’s Railway to Nowhere
Construction of a Chinese-built line across East Africa has halted
The reason for China’s attack of cold feet may lie in the project’s high profile. Chinese state media repeatedly used the Mombasa-Nairobi Standard Gauge Railway (SGR) project as a showcase for President Xi Jinping’s Belt and Road Initiative. But with concerns rising globally that Belt and Road was loading poorer nations with unsustainable debt, Xi signaled in April that Beijing would exert more control over projects and tighten oversight.
That extra rigor is beginning to be felt worldwide. A planned light-railway system that was the most high profile belt and road project in Kazakhstan is on hold after the collapse of a local bank that handled Chinese funds. In Zimbabwe, a giant solar project hit a funding shortfall after the Export Import Bank of China backed out of providing financing due to the Zimbabwean government’s legacy debts, RWR Belt and Road Monitor reported this month. Kenya’s line may be next.
The Chinese “are adopting a more cautious approach to their debt exposure in Africa,” said Piers Dawson, a consultant at London-based investment consultancy Africa Matters Ltd. He cites “increased noise around its sustainability and potential default.”
China is now the single largest financier for infrastructure in Africa, funding one-in-five projects and constructing every third one, according to a Deloitte report. With infrastructure needs that the African Development Bank estimates at $130 billion to $170 billion yearly, governments are only too willing to take out Chinese loans to plug the funding gap.
The downside is that Kenya was one of three African countries identified in a March 2018 report by the Washington-based Center for Global Development as at risk of debt distress as a result of its Belt and Road participation. The others were Egypt and Ethiopia.
Belt And Road Initiative Bolsters China’s Africa Ties
“China has its own issues it’s dealing with, including perceptions that it is ‘trapping’ many of its Belt and Road partners by drowning them in debt,” said Jacques Nel, an economist at NKC African Economics. China’s government has “put the brakes on its external expansion plans, or has at least become more focused on the viability of projects due to its own corporate debt concerns,” he said.
The first half of the Kenya-Uganda railway, a 470-kilometer (290-mile) stretch between the port city of Mombasa and Nairobi, is operational but not yet making money. Beijing balked at funding the extension to Uganda amid concerns it may be a step too far beyond viability.
Kenya and landlocked Uganda had coordinated their plans for the new railway to reduce transport costs and the time it takes to move goods from the coast across each country and further into the eastern and central Africa hinterland. Yet with the realization that China may not release more funds, Kenyan President Uhuru Kenyatta has given the go ahead to link the line to a narrower-gauge railway that’s over 90 years old. Uganda, which had banked on Chinese funding too, has decided to refurbish the colonial-era line on its side of the border.
But that still means shouldering more debt at a time when the International Monetary Fund is urging spending restraint. China is already Kenya’s biggest external creditor, with some 22% of the country’s external debt as of December, according to Treasury data.
The situation doesn’t bode well for Kenyatta’s legacy, which he was building around the railroad as the nation’s single-biggest investment since Kenya attained self-rule over five decades ago. Knowing that alternative—and probably more expensive—debt could further widen Kenya’s deficit, Kenyatta is courting private investors to build the link between the new and old railroads. Uganda will meanwhile include the $205 million needed to rehabilitate its old tracks in the budget, but hasn’t said how it plans to raise the funds.
Back in 2013, when Kenyatta asked Beijing to fund the railway, a condition was that China supply the constructors. Export-Import Bank of China financed the $3.6 billion line to Nairobi, China Road and Bridge Corp. built it, and China Communications Construction Co. was picked as the operator. Revenue from the railway is supposed to repay the loan, but critics say the cost was too high and it won’t turn a profit for a long time.
ON HOLD - CHINESE INVESTMENT IN KENYA RAIL
They point to southern neighbor Tanzania, which in 2016 canceled $7.6 billion in Chinese funding for a 2,200-kilometer railway and contracted Yapi Merkezi Insaat Ve Sanayi of Turkey and Portugal’s Engenharie and Construcao Africa to build a shorter line at roughly half the cost per kilometer.
Beijing’s tighter scrutiny of Belt and Road projects comes as China shifts the program away from low-cost loans onto a more commercial basis involving its private sector. Clearer rules for state-owned enterprises and building overseas auditing and anti-corruption mechanisms were among other steps floated by officials at the time of the Belt and Road Forum in April.
China supports the Kenya railway project but requires a reasonable and sustainable financing plan, according to a person involved with the project. Because China now requires high-quality projects and a more thorough feasibility study, the process of approving loans has slowed in general, but it doesn’t mean the project is terminated, said the person, who asked not to be named as they are not authorized to speak publicly. Related parties in the Chinese government and banks are still deliberating financing options, the person said.
China’s Ambassador to Kenya, Wu Peng, was asked in May by local newspaper the Daily Nation about expectations President Kenyatta’s visit to China that month would secure funding for the missing section of the railway, to Kisumu by Lake Victoria.
“I really don’t know where those expectations came from,” Wu was cited as saying.
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>>> China Knows How to Buy Off Enemies
Multiple dynasties used bribes to win time until they could take on their foes. The U.S. should be wary.
Bloomberg
By Michael Schuman
July 13, 2019
https://www.bloomberg.com/opinion/articles/2019-07-14/china-will-be-happy-to-buy-off-u-s-for-trade-peace?srnd=premium
Past emperors paid off barbarians beyond the Great Wall.
Though China is playing coy for now, it’s likely to buy large quantities of American goods as part of any final trade deal with the U.S. in order to narrow the long-running imbalance between the two countries. The propriety of demanding such purchases is highly questionable. Punishing China with tariffs on its exports until it awards bigger orders to American companies and farmers is effectively extortion.
The Chinese, though, have faced this sort of blackmail many times over their history. And the way they’ve chosen to handle it holds lessons for the U.S. today. The biggest: Be careful what you wish for.
The history goes all the way back to 200 B.C., during the earliest years of China’s imperial age. The newly formed Han Dynasty (206 B.C.–220 A.D.) was threatened by the Xiongnu, who had forged a powerful confederation of tribes on the northern steppe. The founding Han emperor marched with an army to defend his empire, only to discover he was badly outmatched. Held under siege by the militarily superior nomads in the dead of winter, the emperor barely escaped with his life and what little remained of his frostbitten force.
In the wake of the humiliating defeat, the Han court decided, in essence, to pay off the Xiongnu. The Han agreed in a peace treaty to hand over large amounts of silk, grain and other goodies annually; in return the Xiongnu promised not to maul the Chinese empire. With their talent for colorful euphemisms, the Chinese described the exchange not as bribery but as “peace through kinship relations.”
The policy was controversial. Some Chinese officials argued it just made practical sense. The Han were not strong enough to beat the Xiongnu on the battlefield and the amount of money involved, though a mind-blowing windfall for the steppe nomads, was a bargain for the rich dynasty. Some argued further that the arrangement would eventually weaken the Xiongnu, by making them dependent on Chinese wealth.
Others, however, condemned the strategy as appeasement. Though the treaties ostensibly treated both parties as equal, the Chinese were in reality in an inferior position, paying a form of tribute. The situation was the reverse of the proper world order, in which the Chinese emperor’s rightful place was on top. One Han statesman described the arrangement as “a person hanging upside down.” Worse still, the Xiongnu were never satisfied. They persistently demanded larger payoffs, while continuing to raid Chinese territory anyway.
The Chinese lost patience. In the 130s B.C., the strengthened Han Dynasty, under a more militant emperor, shifted from “peaceful” relations to war, later eliminating the Xiongnu as a major threat to China’s security.
The Song Dynasty (960-1279 A.D.) inked similar agreements with different batches of northern invaders. One such arrangement, with the Khitan, generally kept the peace for about a century and allowed the Song to enjoy wealth both material and cultural. In fact, China experienced a near-industrial revolution in those years, with advancements in technology and production beyond anything taking place in Europe at the time.
The parallels with today should be clear. Once again, a Chinese government, confronted by a foreign foe, intends to use some of its ample wealth to preempt more dire outcomes. The amount of money involved is not significant to the Chinese; they have to import their soybeans and natural gas from somebody, so it might as well be the U.S. Meanwhile, among the barbarians -- in this case, the Americans -- the sum is being heralded as a veritable treasure, with President Donald Trump repeatedly boasting about the expected bonanza for U.S. farmers.
Beijing will almost certainly try to use the lure of these billions to wriggle out of more meaningful concessions. Chinese negotiators appear to be resisting the more critical reforms originally demanded by U.S. negotiators, such as scaling back China’s market-distorting industrial policies. If anything, the purchases could leave the U.S. in a weaker position by making American farmers and energy companies more reliant on Chinese customers.
If it works, buying soybeans will also buy China time to strengthen itself, just as it did during the old dynasties. The Chinese are perfectly willing to sacrifice a bit of money (and pride) today if it means they can become stronger in the future.
All the while, the Trump team is fostering ill-will among China’s leaders by pressing for bigger purchases. Thus the recent Chinese condition that the U.S. be “realistic” in its requests. The bitter taste left by humiliating “tribute” payments might come back to haunt the U.S., by offering Beijing yet another reason to hold a grudge against Washington.
The U.S. would be better served forgoing the payoffs and focusing on its original complaints: the torrent of subsidies the Chinese state lavishes on favored companies and the regulatory hurdles holding back foreign companies in China. Stripping away such unfair practices would give U.S. companies more freedom to do business in China and likely narrow the U.S. trade deficit on their own. There’s no reason to think extortion will work any better now than in the past.
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Michael Schuman, who is based in Beijing, is the author of "The Miracle: The Epic Story of Asia's Quest for Wealth" and "Confucius and the World He Created."
>>> Trump Relents on Huawei in China Truce, Reviving Stalled Talks
Bloomberg
By Shawn Donnan and Miao Han
June 29, 2019
https://www.bloomberg.com/news/articles/2019-06-29/xi-trump-agree-to-restart-trade-talks-china-says?srnd=premium
President says China to buy ‘tremendous’ amounts of farm goods
U.S. companies can supply Huawei despite blacklist, Trump says
President Donald Trump said he eased restrictions on China’s most prominent technology company as part of a trade truce with Beijing, removing an immediate threat looming over the global economy even as a lasting peace remains elusive.
Trump said Chinese President Xi Jinping had promised to buy “tremendous” amounts of U.S. agricultural products in exchange. “We’re going to give them a list of things we’d like them to buy,” Trump said at a news conference following the Group of 20 summit in Osaka, Japan.
But Chinese official media reports said only that the U.S. president hopes China will import more American goods as part of the truce.
After Trump and Xi met at the G-20 on Saturday, the two countries plan to restart trade talks that broke down last month. Trump told reporters he wouldn’t put additional tariffs on China for the “time being,” and that he’ll allow U.S. companies to supply Huawei Technologies Co. The Commerce Department last month blacklisted the company for national security reasons.
The Trump administration has been lobbying allies around the world not to buy Huawei equipment, which the U.S. says could be used for Chinese espionage. The company has denied the allegation. China has said it wanted Huawei removed from Commerce’s blacklist as soon as possible and has accused the U.S. of unfairly using state power to harass a private company.
“U.S. companies can sell their equipment to Huawei,” Trump said. “We’re talking about equipment where there’s no great national security problem with it.”
Huawei reacted positively to the news on its verified Twitter account: “U-turn? Donald Trump suggests he would allow #Huawei to once again purchase U.S. technology!”
The return to the negotiating table ends a six-week stalemate that has unnerved companies and investors, and at least temporarily reduces fears that the world’s two largest economies are headed into a new cold war. Still, it’s unclear whether they can overcome differences that led to the collapse of a previous truce reached at the G-20 in November.
‘Welcome’ Move
Trump and top officials in his administration alleged that Beijing had reneged on provisions of a tentative trade deal. It’s not clear if Xi agreed to return to previous agreements as part of the new truce.
Trump said he had not yet decided how to allow U.S. companies to continue selling to Huawei or whether to remove the tech giant from the Commerce Department’s entity list. He said he would meet with advisors next week to determine how to proceed.
“As for President Trump’s comments that some restrictions on Huawei will be removed, we will of course welcome this if those words are put into action,” Chinese diplomat Wang Xiaolong said at a briefing at the G-20.
The move to blacklist Huawei was seen as a major escalation that could hurt the company’s supply chain. It had also prompted lobbying from U.S. companies like Intel Corp. and Alphabet Inc.’s Google, worried about losing their sales to a major client.
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“I like our companies selling things to other people, so I allowed that to happen,’’ he said.
It was not clear how long the exemption would last. Trump said he had agreed with Xi to wait until the very end of trade talks to resolve broader issues around Huawei, including Washington’s lobbying campaign against allies buying its 5G equipment.
“Huawei is a complicated situation,” Trump said. “We’re leaving Huawei toward the end. We’ll see where we go with a trade agreement.”
Easing Pressure
The move is likely to draw criticism in Washington where national security hawks have urged Trump not to ease any pressure against Huawei. The company has long been the target of concern at the Pentagon and intelligence agencies in part over what the U.S. claims are its close ties to the Chinese military.
Trump said he didn’t discuss the case of Meng Wanzhou, the daughter of Huawei founder Ren Zhengfei, who has been under house arrest in Vancouver since being detained by Canadian authorities on Dec. 1 last year over a U.S. extradition request.
The U.S. has accused Meng of tricking banks into conducting more than $100 million worth of transactions for Huawei that may have violated U.S. sanctions on Iran. Meng faces multiple criminal charges in the U.S., including bank and wire fraud, money laundering and conspiring to obstruct justice, each of which carries a maximum sentence of 30 years in prison.
Since trade talks collapsed on May 10, Trump has raised tariffs on $200 billion of Chinese goods to 25% from 10%. He had indicated before the G-20 that the next step could be a 10% tariff on all remaining imports from China -- some $300 billion worth, from smartphones to children’s clothes.
‘Bullying’
Concern about the standoff has prompted investors to bet on central-bank easing and pile into havens. Treasury yields have tumbled to their lowest level in years. The Japanese yen, a traditional beneficiary of flight to quality, has gained, while the U.S. dollar has slipped across the board, including against China’s yuan. Stocks have seesawed on each new twist in the trade tug-of-war.
Xi spent much of the summit’s first day Friday promising to open up the Chinese economy, and chiding -- though not naming -- the U.S. for its attack on the global trading system.
In remarks to African leaders on Friday, Xi took a not-so-subtle swipe at Trump’s “America first” trade policy, warning against “bullying practices” and adding that “any attempt to put one’s own interests first and undermine others’ will not win any popularity.”
Xi also called out the U.S. over Huawei and said the G-20 should uphold the “completeness and vitality of global supply chains.” China insisted this week that Huawei must be removed from the blacklist under any deal.
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>>> Xi Fires Shots at U.S. Before Trump Meet, Without Mentioning Him
Peter Martin
Bloomberg
June 28, 2019
https://www.bloomberg.com/news/articles/2019-06-28/xi-fires-shots-at-u-s-before-trump-meet-without-mentioning-him?srnd=premium
Chinese president speaks at G-20 about ‘bullying practices’
As Chinese President Xi Jinping prepares for one of the most important meetings of his seven-year rule, he appears to have Donald Trump on the brain -- even if he won’t say
In conversations with other leaders ahead of his sit down tomorrow with the U.S. president on the sidelines of the Group of 20 summit in Japan, Xi spared no opportunity to paint the U.S. as the bad guy in China’s spiraling trade conflict, while avoiding the provocative step of naming Trump personally.
In remarks to African leaders this morning, Xi took a not-so-subtle swipe at Trump’s policy slogan, "America first." Warning against "bullying practices," Xi said that “any attempt to put one’s own interests first and undermine others’ will not win any popularity.”
Xi then used remarks on the digital economy to call for a "fair and equitable market environment" and the "completeness and vitality of global supply chains." It comes as Trump singles out Chinese tech giant Huawei Technologies Co., arguing its connections to the government mean it could allow Beijing to spy through its equipment, and urging countries to avoid the company while developing 5G networks.
Last night, Xi told South Korean President Moon Jae-in that he opposed protectionism as well as any "external” influence on the two countries’ relationship.
Xi’s verbal shadow-boxing with Trump underscores the delicate balance he needs to strike: He must avoid coming across at home as weak in dealing with the U.S. president but he also can’t risk worsening the trade war by provoking Trump’s personal ire. While Trump has hammered China with multiple rounds of tariffs, he maintains he enjoys a personal friendship with Xi and has spoken of the Chinese leader with admiration.
Read more: Xi’s G-20 Dilemma: How to Win Over Trump Without Changing China
"There’s a clear desire on the part of Xi and the Chinese side more generally to express their dissatisfaction with the way the U.S. side has handled negotiations," said Trey McArver, co-founder of Beijing-based research firm Trivium China. But "he’s still about to meet with the guy,” McArver added. "It speaks to the difficult position Xi is in: Wanting to get a deal done but also wanting to set some ground rules for negotiations."
Xi’s comments at the G-20 fit that broader pattern. Chinese state media has published defiant editorials blaming the U.S. for the trade impasse and proclaiming Chinese strength, but avoided citing Trump or other trade officials by name. Beijing has issued veiled threats about cutting off the supply of rare earths to the U.S., but officials have stopped short of specifics.
Read more: China’s Media Warns U.S. Not to Waste Xi-Trump Meeting Chance
It’s still unclear how much of a breakthrough may come tomorrow, or whether a fresh truce is even possible. China’s top trade negotiator Vice Premier Liu He met U.S. Trade Representative Robert Lighthizer today for talks at a hotel in Osaka, an official said.
Either way, past experience lends credence to Xi’s approach. On the campaign trail and in the White House, Trump has variously criticized opponents for being short, ugly and boring. After taking office, he described Kim Jong Un as "rocket man,” Canadian Prime Minister Justin Trudeau as "dishonest and weak,” and London Mayor Sadiq Khan as a "national disgrace.”
Xi has more often been the object of Trump’s verbal affections. Trump has called him a "great guy” and a "good man.” He described Xi as the "king of China” after Xi’s decision to abolish presidential term limits last year, has boasted of serving him ”the most beautiful chocolate cake” and had his grandchildren perform songs for the Chinese leader and his wife.
At times, Beijing has reciprocated with flattery of its own. At the G-20 meeting two years ago in Hamburg, a senior official said Chinese negotiators had "read with respect Mr. Trump’s books on the art of the deal.” Diplomats made early overtures to the First Family, inviting Trump’s daughter Ivanka and son-in-law Jared Kushner on trips to China at galas at the Chinese Embassy in DC.
Read more: Happy Talk of Trump-Xi Truce Masks Twisting Path to a Trade Deal
Still, Chinese officials have begun to harden their rhetoric as the trade war drags on. The foreign ministry recently accused Secretary of State Michael Pompeo of propagating "lies and fallacies,” while the Communist Party’s flagship People’s Daily newspaper described Republican Senator Marco Rubio -- who has proposed legislation to prevent Huawei from seeking damages in U.S. patent courts -- as an “anti-China clown.”
But for all that, Trump himself and his lead trade negotiators have been spared personal insult by Beijing. That’s even after the U.S. president officially defined China as a “strategic competitor” last year, hiked tariffs multiple times and stepped up efforts to kneecap flagship Chinese companies from Huawei to ZTE. China’s economy is already growing at its slowest pace since the 1990s.
As Xi prepares for his third high-stakes G-20 meeting with Trump, he may be asking himself once again: how much is a friendship worth?
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