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September 22 2020

Commentary by Eoin Treacy

Email of the day on journalistic independence.

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

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

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

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

Eoin Treacy's view -

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



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September 18 2020

Commentary by Eoin Treacy

Chapter 6: The Big Cycle of China and Its Currency

This chapter of Ray Dalio’s evolving book “The Changing World Order” will be of interest to anyone monitoring China’s evolution. Here is a section:

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

Eoin Treacy's view -

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



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September 15 2020

Commentary by Eoin Treacy

China Gives Markets Just Enough Support, Lets Yuan Strengthen

This article from Bloomberg News may be of interest to subscribers. Here is a section:

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

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

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

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

Eoin Treacy's view -

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



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September 14 2020

Commentary by Eoin Treacy

The Age of Disorder

Thanks to a subscriber for this report by Jim Reid from Deutsche bank. Here is a section:

Eoin Treacy's view -

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

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

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



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September 09 2020

Commentary by Eoin Treacy

India, China agree to hold Corps Commander level talks

This article from the Times of India may be of interest to subscribers. Here is a section:

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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September 03 2020

Commentary by Eoin Treacy

China Can Easily Cut Off More of Australia's Commodities Exports

This article from Bloomberg may be of interest to subscribers. Here is a section:

Iron Ore
While the state-linked Global Times earlier this year raised the possibility that Australian iron ore supply could be targeted, it’s likely to be low on the list of possibilities. The country dominates China’s iron ore supply, accounting for more than 60% of its imports, with next-biggest supplier Brazil making up less than 20% so far this year.​

In fact, the trade is booming, with China importing a record amount of Australian iron ore in July. Still, investors will keep a close eye on any sign of tensions spilling over as even small moves to restrict the movement of Australia’s most valuable commodity -- worth about A$100 billion this fiscal year -- would send a powerful signal.

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

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

Eoin Treacy's view -

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



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September 01 2020

Commentary by Eoin Treacy

Shippers' ocean freight budgets 'about to explode' as rates hit new highs

This article from theloadstar.com may be of interest to subscribers. Here is a section:

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

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

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

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

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

Eoin Treacy's view -

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

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



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August 17 2020

Commentary by Eoin Treacy

PBOC Adds Cash to Ease Liquidity Stress With Rate Unchanged

This article from Bloomberg may be of interest to subscribers. Here is a section: 

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

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

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

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

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

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

Eoin Treacy's view -

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



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August 11 2020

Commentary by Eoin Treacy

On Target August 2020

Thanks to Martin Spring for this edition of his ever-interesting letter. Here is a section on the coronavirus:

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

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

Eoin Treacy's view -

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



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July 31 2020

Commentary by Eoin Treacy

'An absolute necessity' Why this expert says China desperately needs a digital currency

This article by Veta Chan for Fortune.com may be of interest to subscribers. Here is a section:

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

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

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

Eoin Treacy's view -

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

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

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



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July 29 2020

Commentary by Eoin Treacy

Five Eyes alliance could expand in scope to counteract China

Thanks to a subscriber for this article by Peter Wintour for the Guardian may be of interest. Here is a section:

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

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

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

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

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

Eoin Treacy's view -

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



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July 29 2020

Commentary by Eoin Treacy

Tencent Sogou Deal Brings China U.S. Exits to $12 Billion

This article by Anson Tam and Irene Huang for Bloomberg may be of interest to subscribers. Here is a section:

 

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

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

Eoin Treacy's view -

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



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July 24 2020

Commentary by Eoin Treacy

Panic Selling Grips Chinese Stocks After U.S. Tensions Worsen

This article from Bloomberg may be of interest to subscribers. Here is a section:

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

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

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

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

Eoin Treacy's view -

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



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July 21 2020

Commentary by Eoin Treacy

Hong Kong Bourse Soars on Ant's Dual Listing With Shanghai

This article by Kiuyan Wong for Bloomberg may be of interest to subscribers. Here is a section:

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

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

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

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

Eoin Treacy's view -

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



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July 17 2020

Commentary by Eoin Treacy

Chapter 4: The Big Cycle of the United States and the Dollar, Part 1

This is the most recent instalment of Ray Dalio’s book on big cycles. Here is a section:

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

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

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

Eoin Treacy's view -

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



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July 09 2020

Commentary by Eoin Treacy

Email of the day on China's ascendency:

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

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

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

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

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

Eoin Treacy's view -

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



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July 08 2020

Commentary by Eoin Treacy

China Has Already Declared Cold War on the U.S

This article by Niall Ferguson for Bloomberg may be of interest to subscribers. Here is a section:

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

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

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

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

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

Eoin Treacy's view -

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



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July 06 2020

Commentary by Eoin Treacy

Chinese Stocks Surge as Individual Investors Pile Into Market

This article from the Wall Street Journal may be of interest to subscribers. Here is a section:

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

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

Eoin Treacy's view -

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

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



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July 03 2020

Commentary by Eoin Treacy

Hong Kong Files First Charges Under New Law, Bans Rallying Cry

This article by Iain Marlow and Natalie Lung for Bloomberg may be of interest to subscribers. Here is a section:

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

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

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

Eoin Treacy's view -

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



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July 01 2020

Commentary by Eoin Treacy

Musings from the Oil Patch June 30th 2020

Thanks to a subscriber for this report by Allen Brooks for PPHB. Here is a section on Chinese and Indian coal demand:

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

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

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

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

Eoin Treacy's view -

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

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



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June 30 2020

Commentary by Eoin Treacy

China Opens Wealth Tap to Hong Kong Amid Political Crackdown

This article from Bloomberg may be of interest to subscribers. Here is a section:

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

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

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

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

Eoin Treacy's view -

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



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June 29 2020

Commentary by Eoin Treacy

Australian lawmaker says he isn't a suspect in China probe

This article by Rod McGuirk for APNews may be of interest. Here is a section:

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

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

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

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

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

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

Eoin Treacy's view -

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



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June 23 2020

Commentary by Eoin Treacy

Alpha: Made in China

Thanks to a subscriber for this article from the Man Institute. Here is a section:

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

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

Eoin Treacy's view -

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



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June 16 2020

Commentary by Eoin Treacy

Beijing Shuts Schools to Stem Virus as Cases Spread Beyond City

This article from Bloomberg news may be of interest. Here is a section:

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

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

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

Eoin Treacy's view -

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



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June 09 2020

Commentary by Eoin Treacy

Shell's CEO Worries About a Disorderly Energy Transition: Q&A

This interview of Shell CEO Ben van Beurden for Bloomberg may be of interest. Here is a section:

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

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

Eoin Treacy's view -

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



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June 04 2020

Commentary by Eoin Treacy

U.K. on Collision Course With China From Hong Kong to Huawei

This article by Alan Crawford for Bloomberg may be of interest to subscribers. Here is a section:

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

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

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

Eoin Treacy's view -

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



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June 01 2020

Commentary by Eoin Treacy

Hong Kong Stocks Rally After Trump Holds Fire on Retaliation

This article by Jeanny Yu for Bloomberg may be of interest to subscribers. Here is a section:

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

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

Eoin Treacy's view -

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



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May 27 2020

Commentary by Eoin Treacy

U.S. Says Hong Kong's Autonomy Is Gone, Sowing China Trade Doubt

This article by Nick Wadhams for Bloomberg may be of interest to subscribers. Here is a section:

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

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

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

 

Eoin Treacy's view -

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



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May 22 2020

Commentary by Eoin Treacy

China Abandons Hard Growth Target, Shifts Stimulus Focus to Jobs

This article from Bloomberg news may be of interest to subscribers. Here is a section:

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

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

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

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

Eoin Treacy's view -

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



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May 21 2020

Commentary by Eoin Treacy

China's Got a New Plan to Overtake the U.S. in Tech

This article from Bloomberg news may be of interest to subscribers. Here is a section:

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

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

Eoin Treacy's view -

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



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May 21 2020

Commentary by Eoin Treacy

The Big Cycles Over The Last 500 Years

This article by Ray Dalio may be of interest to subscribers. Here is a section:

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

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

Eoin Treacy's view -

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



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May 20 2020

Commentary by Eoin Treacy

What Kind of Regime Does China Have?

This article by Francis Fukuyama for the American Interest may be of interest to subscribers. Here is a section:

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

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

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

Eoin Treacy's view -

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



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May 19 2020

Commentary by Eoin Treacy

Chips and Geopolitics

This article by Ben Thompson may be of interest to subscribers. Here is a section:

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

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

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

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

Eoin Treacy's view -

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



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May 15 2020

Commentary by Eoin Treacy

The Case for Deeply Negative Interest Rates

This article by Kenneth Rogoff for Project Syndicate may be of interest to subscribers. Here is a section:

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

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

Eoin Treacy's view -

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



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May 04 2020

Commentary by Eoin Treacy

Leave no dark corner

Thanks to a subscriber for this article by Matthew Carney for Australia’s ABC news. Here is a section:

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

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

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

Liu Hu is just one of them.

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

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

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

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

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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May 04 2020

Commentary by Eoin Treacy

India Offers Land Twice Luxembourg's Size to Firms Leaving China

This article by Shruti Srivastava for Bloomberg may be of interest to subscribers. Here is a section: 

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

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

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

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

Eoin Treacy's view -

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



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April 29 2020

Commentary by Eoin Treacy

China Rolls Out Pilot Test of Digital Currency

This article by Jonathan Cheng for the Wall Street Journal may be of interest to subscribers. Here is a section:

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

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

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

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

Eoin Treacy's view -

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



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April 17 2020

Commentary by Eoin Treacy

China Suffers Historic Economic Slump With Hard Recovery Ahead

This article from Bloomberg new may be of interest to subscribers. Here is a section:

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

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

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

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

Eoin Treacy's view -

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



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April 08 2020

Commentary by Eoin Treacy

China Urbanization 2.0

Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

April 07 2020

Commentary by Eoin Treacy

Welcome to the $1.5 Trillion Minefield of Defaulted Chinese Debt

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

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

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

Eoin Treacy's view -

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



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March 31 2020

Commentary by Eoin Treacy

Copper Rises on China, Trimming Big Quarterly Slump

This article from Bloomberg news may be of interest. Here is a section:

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

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

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

Eoin Treacy's view -

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



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March 10 2020

Commentary by Eoin Treacy

Xi Jinping visits Wuhan, in major show of confidence as China turns corner on coronavirus

This article by James Griffiths for CNN may be of interest to subscribers. Here is a section:

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

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

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

Eoin Treacy's view -

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



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March 06 2020

Commentary by Eoin Treacy

Covid-19 and Global Dollar Funding

Thanks to a subscriber for this edition of Zoltan Pozsar and James Sweeney’s report for Credit Suisse on the plumbing of the global financial sector. Here is a section:

Eoin Treacy's view -

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

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

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



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March 05 2020

Commentary by Eoin Treacy

The Coronavirus Hunter Is Racing for Answers in a Locked Lab

This article by Robert Langreth for Bloomberg may be of interest to subscribers. Here is a section:

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

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

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

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

Eoin Treacy's view -

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



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March 05 2020

Commentary by Eoin Treacy

Coronavirus Spread in China Slows Sharply But Doubt Remains

This article from Bloomberg may be of interest to subscribers. Here is a section:

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

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

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

Eoin Treacy's view -

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



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March 04 2020

Commentary by Eoin Treacy

Nobody Knows II

Thanks to a subscriber for this memo from Howard Marks which may be of interest. Here is a section:

Eoin Treacy's view -

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

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



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March 03 2020

Commentary by Eoin Treacy

Treasury 10-Year Yield Sets Record Below 1% on Virus Fears

This article by Liz Capo McCormick for Bloomberg may be of interest to subscribers. Here is a section:

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

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

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

Eoin Treacy's view -

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

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



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February 28 2020

Commentary by Eoin Treacy

Lead Indicators of Recession

Eoin Treacy's view -

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



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February 27 2020

Commentary by Eoin Treacy

Eye on the Market February 2020

Thanks to a subscriber for this report from JPMorgan. Here is a section:

Eoin Treacy's view -

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

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

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



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February 26 2020

Commentary by Eoin Treacy

Brazil Confirms Coronavirus Case, the First in Latin America

This article by Simone Iglesias and Fabiola Moura for Bloomberg may be of interest to subscribers. Here is a section:

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

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

Eoin Treacy's view -

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



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February 24 2020

Commentary by Eoin Treacy

Gilead Surges After WHO Comments on Coronavirus Drug Testing

This article by Drew Armstrong and Bailey Lipschultz for Bloomberg may be of interest to subscribers. Here is a section:

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

Eoin Treacy's view -

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



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February 21 2020

Commentary by Eoin Treacy

Japan Limits Large Gatherings to Thwart Coronavirus

This article by Alastair Gale for the Wall Street Journal may be of interest to subscribers. Here is a section:

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

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

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

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

Eoin Treacy's view -

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



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February 17 2020

Commentary by Eoin Treacy

China's Coffers Are Depleted Just as Virus Spurs Spending

This article from Bloomberg news may be of interest to subscribers. Here is a section:

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

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

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

 

Eoin Treacy's view -

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



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February 13 2020

Commentary by Eoin Treacy

China's Record Car-Sales Slump Throws a Curve Ball on Palladium

This article by Justina Vasquez for Bloomberg may be of interest to subscribers. Here is a section:

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

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

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

Eoin Treacy's view -

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



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February 12 2020

Commentary by Eoin Treacy

All Your Favorite Brands, From BSTOEM to ZGGCD

This article by John Herrman for the New York Times may be of interest to subscribers. Here is a section:

Almost half of top Amazon sellers — those selling more than $1 million in the U.S. — are in China; about a third of Amazon’s Chinese sellers overall are estimated to be in Shenzhen. (This according to Marketplace Pulse, which tracks e-commerce marketplaces.)

Amazon shuttered its Chinese store, Amazon.cn, in 2019, after it failed to crack a market dominated by domestic giants like JD and Alibaba.

But it has been much more successful in recruiting Chinese entrepreneurs to sell abroad, opening “cross-border e-commerce parks,” where sellers can get assistance with logistics, branding, and navigating Amazon’s platform. For the last five years, the company has also hosted summits for Chinese cross-border sellers. Last year’s conference, held in Shanghai, was attended by more than 10,000 sellers, many of whom see, in Amazon, an alternative to increasingly saturated domestic platforms like Taobao.

A seller in America might start with a brand idea and need to figure out how to get it manufactured; a seller connected to a factory in China’s manufacturing capital needs to figure out how to sell to Americans, which Amazon has been working hard to facilitate.

Eoin Treacy's view -

The vast majority of household and personal use products sold in Wal-Mart, Amazon, Target and elsewhere are manufactured in China. Most of the electronics, clothing, and jewellery in stores come from Guangdong. The majority of paper bags, nuts and bolts, toys and other small items come from Zhejiang which is just outside the quarantine area. Manufacturing is also spread over the rest of the country. That suggests the ability of companies to fulfil orders is going to be spotty if they don’t get back to work soon.



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February 11 2020

Commentary by Eoin Treacy

3 Trillion Can't Buy China Out of Virus Trouble

This article by Sanjit Das for Bloomberg may be of interest to subscribers. Here is a section:

Finally, the economic model underlying the reserves creates a complex financial interdependence between Asian central banks and advanced economies, termed the “fatal embrace” by the late Paul Volcker, former chairman of the Federal Reserve. Foreign-exchange reserves represent advances allowing the importing country to buy the exporter’s goods and services on credit. Withdrawing support would risk destroying the value of existing investments and damaging the borrowers’ real economy and export demand.

The interdependence runs deeper. Since 2009, the growth of developing-country reserves is highly correlated to the growth of the balance sheets of advanced-economy central banks, which has been driven by quantitative easing. Attracted by higher returns than available at home, investors moved capital into emerging markets, which in turn supported demand and economic activity in developed economies. This is evident in the increased reliance of many North American, European and Japanese businesses on emerging economies for growth and earnings.

Unfortunately, this cheap capital encouraged rapid rises in debt and increased the risk of future financial instability in many emerging countries. The solution lies in international co-operation to create a new international monetary system and for surplus countries to boost domestic demand.

In a world of rising political tensions, trade wars and adherence to debt and export driven economic models, the prospects for that may appear bleak. Still, this is unfinished business the world will have to return to — once it has got past the economic shock of the coronavirus epidemic.

Eoin Treacy's view -

The strength of the US Dollar over the last ten sessions is at odds with the efforts by the US government and Federal reserve to increase the supply of the currency relative to just about all others. That suggests both repatriation of funds invested overseas as well as the proceeds of carry trades being invested in the USA are supporting the currency. This trend coupled with continued fears about the knock-on effects of the virus scare on economies dependent on China is weighing on Asian markets.



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February 07 2020

Commentary by Eoin Treacy

Email of the day on the coronavirus:

You will have plenty to read on this subject. But this does scare me:

Chinese financial shock gathers steam as world holds its breath on coronavirus

A major slowdown in China could trigger recession and defaults in other parts of the world

By Ambrose Evans-Pritchard

https://www.telegraph.co.uk/business/2020/02/07/china-contract-europe-near-recession-world-holds-breath-coronavirus/

Eoin Treacy's view -

Thank you for this article which highlights the acute risk to market, particularly in Europe, which rely on Chinese demand. That is as true of the automotive sector as it is of luxury goods. Here is a section:

The disturbing feature is that the European Central Bank’s emergency rate cut and renewed quantitative easing in September have gained so little traction. While it was not literally the ECB’s ‘last throw of the dice’ there is precious little left to play with.

There must now be a serious risk that China’s coronavirus crisis - if prolonged - will push Germany, Italy, and perhaps France into a technical recession, and in so doing expose both the ECB’s credible limits and the eurozone inability to launch meaningful fiscal stimulus under its deflationary ideology and spending laws.

Markets have not yet looked so many moves ahead on the global financial chess board but they might do so within two or three weeks if the corona fever is not broken, and traders tend to shoot first and ask questions later once fear takes hold.

Everything depends on the spread rate and the doubling rate, 2.68 per case and 6.4 days respectively, according to a Lancet study last week. If these figures improve markedly (and can be believed), the storm should blow over. If they do not materially change, the global recessionary dynamic may become unstoppable within weeks.



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February 06 2020

Commentary by Eoin Treacy

Wall Street Warnings Grow Louder for Investors Defying Virus

This article by Cecile Gutscher and Anchalee Worrachate for Bloomberg may be of interest to subscribers. Here is a section:

“Pretty much every client we talk to wants to buy the dip,” wrote Tobias Levkovich, Citigroup Inc.‘s chief U.S. equity strategist in a note. “And that is not comforting.”

The S&P 500 edged higher Thursday, extending the week’s gains to more than 3.5%, as the Stoxx Europe 600 Index climbed to a record and stocks soared in Asia. A gauge of European credit risk hit its lowest since 2007.

Yet the battle against the virus could suffer a setback as factories reopen in China in the coming days and more people come into contact with each other. On the other hand, if factories fail to reopen, the economic impact could prove much more severe.

At Robeco, money manager Jeroen Blokland is eyeing the rally warily. The head of multi-asset funds at the Rotterdam-based firm recently cut an overweight allocation to stocks to neutral because of the spread of coronavirus. He says it’s not yet time to dive back in.

“Every investor is looking for the bottom and wants to find it a little bit earlier than his neighbor,” he said. “We need a little bit more confirmation that the outbreak will be contained before moving again.”

Eoin Treacy's view -

The stock market responds to liquidity because that has an influence on all asset prices and regardless of other short-term factors the Treasury yield is below that of the S&P500 which is generally supportive of the buy the dip strategy. Nevertheless, the stresses coming to bear as a result of the Wuhan Acute Respiratory Syndrome (WARS) are significant and need to be taken seriously.



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February 06 2020

Commentary by Eoin Treacy

Japan Seen Needing U.S. Help to Check China's Digital Yuan

This article by Yuko Takeo, Emi Urabe and Toru Fujioka for Bloomberg may be of interest to subscribers. Here is a section

“We sense the digital yuan is a challenge to the existing global reserve currency system and currency hegemony,” said Nakayama, a top member of the ruling party group that drafted the proposals. “Without the U.S., we cannot counter China’s efforts to challenge the existing reserve currency and international settlement system.”

The comments indicate the heightened concern among policy makers in Japan over the likely impact of a digitized yuan expected for later this year. China’s plan and Facebook’s efforts to launch its own Libra currency have sparked central banks around the world to get up to speed on how digital currencies would function and what their impact could be.

“There are 1.4 billion people in China, so within the one belt, one road digital economic framework, the digital yuan has a high likelihood of becoming the standard within that digital economy,” 

Eoin Treacy's view -

There is no telling just yet how serious China is about setting up a digital currency system but the security and supply elasticity in how it is set up, together with how much it is used on the mainland will be determining factors is whether it is ultimately a success.



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February 06 2020

Commentary by Eoin Treacy

Goldman's Currie Likes Palladium on Potential Deficit in China

This article by Elena Mazneva, Francine Lacqua and Tom Keene for Bloomberg may be of interest to subscribers. Here is a section:

Palladium could be an interesting trade given potential supply disruptions to China because of the coronavirus, Jeffrey Currie, head of global commodities research at Goldman Sachs, told Bloomberg TV.

“The one I like right now that we are watching in the commodity market is palladium -- when palladium gets so tight that you actually start to shut down auto manufacturing.”

Yet, “you don’t know when you hit one of these physical shortages until you actually hit them.”

NOTE: Spot palladium traded near $2,412/oz Thursday, heading for a ~5% weekly gain after dropping a week earlier from record highs.

Currie said last month he sees the potential for palladium to test $3,000/oz, then slide.

Eoin Treacy's view -

With auto manufacturers shutting down production because of a lack of Chinese manufactured intermediate parts, the most bullish forecasts for palladium are being questioned.



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February 03 2020

Commentary by Eoin Treacy

China Cuts Rates, Injects Liquidity as Mainland Markets Sink

This article by Tian Chen, Yinan Zhao and Miao Han for Bloomberg may be of interest to subscribers. Here is a section:

“We are fully capable and confident to minimize the impact of the epidemic on the economy.”

Lian also said that while the government would work to ensure the coronavirus didn’t spread further, it would encourage major projects and enterprises in good condition to resume work and production. Policy makers will also roll out measures to soften the impact of the epidemic on a case-by-case basis, especially to try to help industries that have been hit hard, Lian said.

Vice Commerce Minister Wang Bingnan said at the same press conference that many exporters in China have been resuming production, and local governments have been issuing policies to help small and medium-sized companies.

Authorities have pledged to provide abundant liquidity and there seems to be more easing measures in the pipeline. In an interview with the PBOC’s Financial News newspaper, central bank adviser Ma Jun said he expects the PBOC to push the interest rate for new loans lower and to also cut the rate for medium-term funding in February if it uses that facility mid-month, as it usually does.

If that were to happen, it would be a change to a “rather strong” easing bias for the central bank, according to Peiqian Liu, China economist at Natwest Markets Plc in Singapore.

Eoin Treacy's view -

The Chinese CSI300 Index opened down 9.1% today with the majority of issues down the 10% limit. While this is a headline grabbing phenomenon, which draws parallels with the pullback in 2015 and also in 2007, the reality is the mainland market is just catching up with the H-Shares in Hong Kong following an extended break to trading.



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February 03 2020

Commentary by Eoin Treacy

Saut Strategy February 4th 2020

Thanks to a subscriber for this report which may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

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

The impeachment argument was indeed a source of worry for the media but the market never seemed to pay it much attention for the simple reason the Republicans have a solid majority in the Senate. Therefore, the entire spectacle was nothing more than crowd pleasing electioneering which did little more than to further emphasise the trend of political polarisation



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January 31 2020

Commentary by Eoin Treacy

China Says U.S. Response Harmful; Flights Halted: Virus Update

This summary of today’s news from Bloomberg may be of interest. Here is a section:

Chinese officials took issue with U.S. comments about the country’s response to the coronavirus outbreak, and promised they would bring the infection under control.

“U.S. comments are inconsistent with the facts and inappropriate.” Chinese Ministry of Foreign Affairs Spokeswoman Hua Chunying said in statement posted online Friday. The World Health Organization “called on countries to avoid adopting travel bans. Yet shortly afterward, the U.S. went in the opposite direction, and started a very bad turn. It is so unkind.”

U.S. officials said this week that they had difficulty getting specialists from the Centers for Disease Control and Prevention to the front lines of the outbreak in China, and late Thursday the State Department advised Americans traveling in China to come home. Commerce Secretary Wilbur Ross on Thursday also said the outbreak may help bring jobs back to the U.S.

China’s ambassador to the United Nations, Chen Xu, said during a press conference in Geneva that the country had been transparent about the disease.

“We have conducted our business in an open and transparent manner with the outside world,” he said.

Xu said that China would work with the World Health Organization to bring the disease under control, following a declaration by the WHO that the outbreak was an international emergency. The declaration will “not only coordinate global prevention control measures but enables us to mobilize international resources to respond to the epidemic,” he said.

Eoin Treacy's view -

“Official” figures are just below 10,000. This Lancet article suggests 76000 infections. The death toll is reported at around 200 but if that is the case why are crematoria running 24/7? The biggest challenge the Chinese administration has is their claims of full disclosure are being met with doubt because they have such a poor record of reporting accurate facts about any part of the economy. Little wonder that other countries are taking more forceful measures to isolate the country until the infection rate peaks and begins to decline.  



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January 31 2020

Commentary by Eoin Treacy

Amazon Set to Break Record for One-Day Gain in Market Cap

This article by Brandon Kochkodin for Bloomberg may be of interest to subscribers. Here it is in full:

If its pre-market trading holds up, Amazon Inc. is about to break a bigger record than just its own peak share price.

The largest U.S. e-commerce company saw its shares jump by more than 10% after Thursday’s earnings report crushed Wall Street estimates. If that gain stands through Friday’s close of trading, the company could see its market capitalization surge by more than $90 billion, and push the total value above $1 trillion -- a level the stock has flirted with intraday, but never held through the market close. The company’s market capitalization gain stood at $91.7 billion as of 9:30 a.m. in New York when trading began.

That’d be the biggest single-day gain on record for a U.S. company, according to data compiled by Bloomberg. The previous record was $78 billion, set by Alphabet Inc. on July 26, after its shares surged on its own strong results and a $25 billion share-buyback program.

To be sure, with markets near all-time highs, marks such as this are bound to be challenged. But it’s also not every day that one of the largest companies in the world gains 10% or more in a single session. Over the last five years, the six companies in the S&P 500 Index with current market caps exceeding $500 billion have had just 10 such days combined. Today would be the 11th such occurrence, and the fourth time Amazon has done so, the most of any company in the group.

Even if it doesn’t break the market value record today, the company has already set another new high-water mark for itself. Shares opened trading $181 above Thursday’s closing price, its biggest ever gain in dollars per share.

Eoin Treacy's view -

Amazon has been a notable laggard as both mega-caps and the equal weight S&P500 have broken on the upside over the course of the last month. Last night’s surprisingly good results highlight the robust position of the US consumer in the 4th quarter and Amazon’s success in implementing 1-day delivery.



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January 30 2020

Commentary by Eoin Treacy

Carnival Ship in Italy Lockdown as Suspect Virus Traps 7,000

This article by Alberto Brambilla and Jonathan Levin for Bloomberg may be of interest to subscribers. Here is a section:

The ship was bound for La Spezia in the Liguria region, with 1,000 crew and 6,000 passengers, 750 of whom came from China, a port spokesman said.

Eoin Treacy's view -

It is looking like the ill person did not in fact have the coronavirus but the fact that 1/8th of the passengers are from China highlights just how influential Chinese tourists are for the global sector. The cancelling of flights both to and from China is going to have a material effect on all tourist destinations and the longer it lasts the greater the impact will be.



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January 29 2020

Commentary by Eoin Treacy

January 28 2020

Commentary by Eoin Treacy

China Pledges Liquidity, Asks for Rational Investor Reaction

This article by Christopher Anstey and Claire Che for Bloomberg may be of interest to subscribers. Here is a section:

China pledged to provide abundant liquidity for money markets and urged investors to evaluate the impact of the coronavirus objectively, as the nation prepared for a potentially tumultuous resumption of trading next Monday.

Along with a potential sell-off in Chinese stocks, which haven’t traded onshore since Jan. 23, there’s a “large amount of funds” coming due Feb. 3, the People’s Bank of China said in a statement. It will conduct operations “to provide abundant liquidity in a timely manner to maintain reasonable and sufficient liquidity in the banking system,” it said.

China’s top securities regulator separately told brokerages to prepare for off-site trading as the country’s market infrastructure girds for strained conditions as a result of measures aimed at containing the coronavirus epidemic.

Eoin Treacy's view -

The question of what would be required for China to kickstart meaningful stimulus again now appears to have been answered. The coronavirus and the economic shutdown it has necessitated are going to result in a meaningful hit to growth in the first quarter. With the extension of its holiday season into early February, China is taking advantage of the break to announce market calming measures aimed at averting a crash once the market opens up again. That means a significant stimulus infusion to allay growth fears.



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January 27 2020

Commentary by Eoin Treacy

Email of the day on corona virus outbreak.

Two aspects of the current outbreak I find especially concerning, speaking as a retired veterinarian of some fifty years’ experience. I understand the symptoms can vary from barely perceptible with no fever to severe and fatal Some. people with the virus may be unaware they have it but may be very infectious to others, acting as symptomless carriers. My experience with animals which are subject to lockdown on account of infectious disease is that they tend to become very stressed and anxious, this in turn tends to make them more liable to spread infection on account of diminished resistance. I would suggest bottling up millions of Chinese in these cities has its own hazards regarding virus spread.

Eoin Treacy's view -

Thank you for this insight which I believe will be of interest to other subscribers. The reaction of the Chinese administration to the speed of the outbreak has been panicky. The long gestation period where no symptoms are evident but where transmission is possible represents a significant challenge to containment. That was the reason for the quarantine but it is impossible to corral that many people. On top of that 5 million left the city before the quarantine and very little comment has been made on how migrant workers are counted.



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January 21 2020

Commentary by Eoin Treacy

China Virus Spreads to U.S. With Health Officials on High Alert

This article from Bloomberg may be of interest to subscribers. Here is a section:

The new virus “could be No. 2 or 3, that’s the concern,” Heymann said in an interview. “We need enough information to make a proper risk assessment.”

Despite the worries, the new virus is likely less deadly than SARS, said University of Sydney associate professor Adam Kamradt-Scott.

“It’s important to stress that this virus at the moment has been causing mild illness in the vast majority of people that have been affected,” he said in an interview on Bloomberg TV. “There’s around 10% of cases that have ended up in critical condition and there’s been deaths, but the vast majority of the 200-plus people infected have resulted in mild illness.”

Eoin Treacy's view -

The Chinese New Year Holiday begins Friday evening and lasts about a week. Internally, it is a time for families to get together but the length of the break affords many people the opportunity to travel abroad which is why there is so much concern being expressed at present. The reality however is that there are probably about 300 confirmed cases and perhaps triple that which have gone unreported, but there will be hundreds of thousands of people travelling abroad over the next couple of weeks. There is obviously risk of further contagion but it is unlikely to represent the pandemic many fear.



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January 17 2020

Commentary by Eoin Treacy

Fiat Chrysler and Foxconn plan Chinese electric vehicle joint venture

This article from Reuters may be of interest to subscribers. Here is a section: 

Fiat Chrysler and Foxconn plan Chinese electric vehicle joint venture - This article from Reuters may be of interest to subscribers. Here is a section:

FCA last month reached a binding agreement for a $50 billion tie-up with France’s PSA (PEUP.PA) that will create the world’s No. 4 carmaker. FCA said that the proposed cooperation was initially focused on the Chinese market.

It “would enable the parties to bring together the capabilities of two established global leaders across the spectrum of automobile design, engineering and manufacturing and mobile software technology to focus on the growing battery electric vehicle market,” it said.

FCA said it was in the process of signing a preliminary agreement with Hon Hai, aiming to reach final binding agreements in the next few months.

However, it added there was no assurance that final binding agreements would be reached or would be completed in that timeframe.

Foxconn has been investing heavily in a variety of future transport ventures for several years, including Didi Chuxing, the Chinese ride services giant, and Chinese electric vehicle start-ups Byton and Xpeng.

Foxconn also has invested in Chinese battery giant CATL and a variety of other mostly Chinese transportation tech start-ups.

Eoin Treacy's view -

This is an example of the most profound change batteries are bringing to the automotive sector. They are rapidly commoditizing the car. The difference between an Apple, Samsung or Google phone is less about what is on the inside than familiarity with the brand, ease of operation. software, the app ecosystem and the camera. Other than that, they all have pretty much the same internal composition with some minor differences in the design of the chips while manufacturing is outsourced to a third party.  



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January 15 2020

Commentary by Eoin Treacy

U.S. and China Sign Phase One of Trade Deal

This article by Shawn Donnan, Josh Wingrove, and Saleha Mohsin for Bloomberg may be of interest to subscribers. Here is a section:

The U.S. and China signed what they’re billing as the first phase of a broader trade pact on Wednesday amid persistent questions over whether President Donald Trump’s efforts to rewrite the economic relationship with Beijing will ever go any further.

The deal commits China to do more to crack down on the theft of American technology and corporate secrets by its companies and state entities, while outlining a $200 billion spending spree to try to close its trade imbalance with the U.S. It also binds Beijing to avoiding currency manipulation to gain an advantage and includes an enforcement system to ensure promises are kept.

Eoin Treacy's view -

The most important point about the trade deal is the stock market did not sell off immediately following the signing. Considering the rally that has been underway for the last three and half months there is clear risk of some consolidation on a buy the rumour to sell the news, but no evidence it has started just yet.



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January 14 2020

Commentary by Eoin Treacy

China Iron Ore Imports Surge to Near Record as Shipments Swell

This article by Krystal Chia for Bloomberg may be of interest to subscribers. Here is a section:

Iron ore imports by China surged in December to the second-highest volume on record as mills boosted purchases ahead of the earlier Lunar New Year and Australian supply picked up.

Inbound shipments totaled 101.3 million tons last month, just shy of the record 102.8 million tons in September 2017, according to customs data. The end-of-year surge saw full-year imports increase 0.5% to 1.07 billion tons.

Eoin Treacy's view -

The ramping up of the Chinese steel production sector is a positive development for the argument supporting the global reflation theme.

This report from Bloomberg highlights the capacity buildout for industrial robot, semiconductor and increasing demand for 5G enabled products is potentially one of the primary drivers behind renewed demand for Chinese steel.



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January 13 2020

Commentary by Eoin Treacy

China's Strengthening Yuan Is Smashing Every Key Level in Sight

This article from Bloomberg news may be of interest to subscribers. Here is a section:

While analysts say the exchange rate is being driven by improving market sentiment as China’s economy steadies and trade tensions ease, the recent bout of strength comes at a pivotal time for U.S.-China negotiations. Chinese Vice Premier Liu He is expected to sign the long-awaited phase one agreement in Washington Wednesday.

Some now predict the currency will touch 6.8 per dollar within three months -- a level not seen since May last year.

“Having a stronger currency is one way to show good will,” said Mitul Kotecha, a senior emerging-markets strategist at Toronto-Dominion Bank in Singapore. “Signs of a gradual, as opposed to rapid, slowdown in China’s economy and limited decline in China rates will provide support to the currency.”

Eoin Treacy's view -

I did not think we were going to see the Renminbi trade stronger than the trend mean but it is now clearly breaking out. That is as much about the willingness of China to tolerate a stronger currency as it is about the supply of Dollars resulting from the ongoing repo operations.



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January 09 2020

Commentary by Eoin Treacy

China's Steadying Inflation Leaves Door Open for Monetary Easing

This article from Bloomberg News may be of interest to subscribers. Here is a section:

“The PBOC is likely to continue to use interest rate and liquidity tools to loosen monetary conditions in 2020, though the easing will probably be less pronounced than last year,” David Qu, a China economist at Bloomberg Economics in Hong Kong, wrote in a note. “We expect the PBOC to stick to a stance of measured easing to counter the economic slowdown.”

For the year, consumer inflation for 2019 stood at 2.9%, in line with the government-set target of 3%, while producer prices declined 0.3%. Core inflation, which removes the more volatile food and energy prices, stabilized at 1.4% in December, signaling ongoing weakness in the broader economy.

China’s economy has shown signs of recovery in recent months as global demand steadies and trade tensions ease. As commodity prices rise and factories start restocking, PPI deflation is set to continue to moderate and some see it turning positive as soon as January.

Eoin Treacy's view -

The outlook for the Chinese economy represents the lynchpin for the global reflation trade and the prospects of steadying growth and continued stimulus are helping aid in the positivity surrounding the hiatus in the trade war.



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January 02 2020

Commentary by Eoin Treacy

China Approves New GMO Soybeans in Positive Sign Amid U.S. Talks

This article from Bloomberg News may be of interest to subscribers. Here is a section:

China approved a new strain of genetically modified soybeans developed by a U.S. company, a move that could bolster looming trade talks.

The variety approved for import is an insect-resistant soybean from Dow AgroSciences LLC, according to a list published by China’s agriculture ministry on Monday. The nation also approved a new type of GMO papaya and renewed permits for 10 crop varieties, including corn and canola.

China and the U.S. are gearing up to sign the first phase of a trade deal, with the South China Morning Post reporting Chinese Vice Premier Liu He is set to lead a delegation to Washington on Jan. 4. The countries agreed to speed up the approval process for imports of GMO crops as part of efforts to boost bilateral trade.

“The news helps confirm China’s opening of its market to U.S. GMO products and dropping additional non-tariff barriers,“ said John Payne, senior futures and options broker at Daniels Trading in Chicago.

GMO crops have been a source of tension with the U.S. arguing China’s stance isn’t based on science and has been used as a non-tariff barrier. In 2013, China rejected several cargoes of corn and distillers dried grain from the U.S. due to the presence of a GMO variety that took the Asia nation almost five years to approve, said Darin Friedrichs, a senior analyst at INTL FCStone in China.
 

Eoin Treacy's view -

The Phase 1 agreement to at least usher in a hiatus in the trade war means China will be buying a lot more US agricultural products. The challenge is that will bring the total to a record and there are questions about how sustainable that is with the USA’s current production figures. The move to accept more genetically modified grain is reflective of the efforts under way to lower barriers to additional imports.



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December 24 2019

Commentary by Eoin Treacy

David Hume & The PBOC: He Who Laughs Last

Thanks to a subscriber for edition of Russell Napier’s letter which may be of interest. Here is a section:

Eoin Treacy's view -

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

The control the Chinese government holds over the banking sector and the various modes of production afford it a great deal of leeway in dealing with the massive build up of debt over the last decade which has fuelled continued growth in the economy. The only way that system is sustained is by containing domestic savings within the financial system. Capital flight is the biggest threat to the status quo in China’s economy which is why the government is investing so heavily in every imaginable form of control. Nevertheless, it is next to hear impossible to stop motivated individuals from moving capital overseas.



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December 23 2019

Commentary by Eoin Treacy

China Denies Report of Forced Labor Over Tesco Christmas Cards

This article by Corinne Gretler for Bloomberg may be of interest to subscribers. Here is a section:

Such notes have been discovered in products sold by brands like Walmart Inc. and Saks Inc. in the past decade as western companies’ reliance on Chinese production has meant exposure to chains of sub-contractors that reportedly make use of prison labor. Low-cost sourcing in China has been a double-edged sword for companies caught up in questions over the provenance of the goods they sell.

Eoin Treacy's view -

Prison labour is widespread in China but it would seem to be a major lapse in judgement to use prisoners in a facility warehousing English speaking journalists who could narrate messages to inmates.



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December 20 2019

Commentary by Eoin Treacy

Longtime China Watchers Predict What's Next for Slowing Economy

This article by Enda Curran and April Ma for Bloomberg may b of interest to subscribers. Here is a section:

Michael Pettis, a finance professor at Peking University and former Bear Stearns Cos. banker

My best call was probably to insist, even in 2015-16 when the market strongly expected otherwise, that as quickly as debt was rising, China was unlikely to experience a financial crisis and a sharp depreciation of the currency. I think the market didn’t understand that these are mainly balance sheet events, and as long as China’s financial system was closed and its regulators powerful, Beijing could easily extend and restructure liabilities so as to prevent a crisis.

My worst call was to propose that Beijing would recognize the extent of investment misallocation and the inexorable rise in debt by 2015-16, and would begin to lower the GDP growth target rapidly after that. I did not recognize how politically difficult this would prove, and that it couldn’t happen until Xi Jinping and the people around him had done a lot more to consolidate political power.

Every historical precedent -- and the logic of the growth dynamics -- suggests it will be another Japan. GDP growth rates will drop consistently every year until China is growing at below 3%, and the longer it takes to get there, the more debt it will have to work off and the greater the macroeconomic financial distress costs it will have to absorb.

Eoin Treacy's view -

China trades on very low multiples for many of the same reasons Russia does. It’s about governance. There is no mystery to how China has been able to maintain a high growth rate over the last decade despite increasing authoritarianism and tighter government control. The answer is debt.



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December 12 2019

Commentary by Eoin Treacy

China to Unveil Plan to Make Macau Finance Hub, Reuters Says

This article by Jihye Lee and Jinshan Hong for Bloomberg may be of interest to subscribers. Here is a section:

The policies include establishing a yuan-denominated stock exchange, accelerating a yuan settlement center which is currently being developed and allocating land for Macau, Reuters said, citing unidentified government officials and company executives. The measures were intended to mark the 20th anniversary of the former Portuguese colony’s return to Chinese rule, an event that will bring Xi to Macau, the report said.

The bourse would focus on bond trading first to encourage local and mainland companies to issue debt in the city, Reuters said. The exchange would also focus on startups and target companies from Portuguese-speaking countries to avoid direct competition with Hong Kong or Shenzhen, it reported, citing six Macau executives and Chinese officials.

Xi will also announce Macau’s decision to join the Beijing-based Asian Infrastructure Investment Bank. Future priorities will include tourism and finance, and for Macau to be used as venue to host international meetings like Singapore, an official told Reuters.

Eoin Treacy's view -

This is a none too subtle signal to Hong Kong that unless it gets its act together there is clear intention to excise the city from the broader plan to create a unified coastal economy which is to include Macau, Shenzhen and Guangzhou. The problem is that today some effort to offset reliance on Hong Kong’s dominance of the financial services sector is largely inevitable regardless of what happens because evidence of disruption is already in existence.



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December 10 2019

Commentary by Eoin Treacy

The Great Moscow Bank Shakedown

This is an interesting article by Anna Baraulina, Evgenia Pismennaya and Irina Reznik for Bloomberg. Here is a section:

Cherkalin’s case highlights the economic footprint of the security apparatus forged during Vladimir Putin’s 20 years in power. While it doesn’t show up in official statistics or reports, the reach of the FSB and other law enforcement agencies extends across the business landscape, distorting markets and sapping investment. The vast sums of money at stake go a long way toward explaining why Putin hasn’t followed through on years of pledges to rein in the appetites of his powerful security underlings. “They’ve become one of the key elements of the economy,” says Oleg Vyugin, a former senior official at the Bank of Russia and the Ministry of Finance. “Unfortunately, they’re an element that’s an obstacle to its normal development.”

For years the banking sector was a gold mine for the security services, combining huge, often-illicit flows of cash with plenty of leeway for officials to either turn the screws or look the other way. The numbers are big even by oil-rich Russian standards. Regulators—including the central bank—say managers stole some 7 trillion rubles ($110 billion) in assets from their banks in the past decade, and the central bank has spent more than 5 trillion rubles on bailouts or to pay off depositors at those that didn’t survive, according to Fitch Ratings. Bankers fleeing the country as their institutions failed have become such a problem that Bank of Russia Governor Elvira Nabiullina asked Putin for the power to stop them at the border. He hasn’t granted it.
 

Eoin Treacy's view -

This is a well written, engaging informative piece providing facts and figures relating to the corruption of Russia’s regulatory infrastructure by the security forces. It provides a testament to how low standards of governance in Russia are and how important it is for companies to be on the winning side of an internal divisions that arise.



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December 04 2019

Commentary by Eoin Treacy

China Uses DNA to Map Faces, With Help From the West

This article from the New York Times may be of interest to subscribers. Here is a section:

The technology, which is also being developed in the United States and elsewhere, is in the early stages of development and can produce rough pictures good enough only to narrow a manhunt or perhaps eliminate suspects. But given the crackdown in Xinjiang, experts on ethics in science worry that China is building a tool that could be used to justify and intensify racial profiling and other state discrimination against Uighurs.

In the long term, experts say, it may even be possible for the Communist government to feed images produced from a DNA sample into the mass surveillance and facial recognition systems that it is building, tightening its grip on society by improving its ability to track dissidents and protesters as well as criminals.

Some of this research is taking place in labs run by China’s Ministry of Public Security, and at least two Chinese scientists working with the ministry on the technology have received funding from respected institutions in Europe. International scientific journals have published their findings without examining the origin of the DNA used in the studies or vetting the ethical questions raised by collecting such samples in Xinjiang.

Eoin Treacy's view -

This article from the Wall Street Journal details how the capturing facial recognition data is now mandatory when purchasing a new phone. Here is a section:

The new regulation gives the Chinese state, which backs the country’s three main telecom providers, the ability to better track people based on ethnicity and other factors, said Ben Cavender, Shanghai-based managing director at China Market Research Group.



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November 29 2019

Commentary by Eoin Treacy

China Financial Warning Signs Are Flashing Almost Everywhere

This article from Bloomberg news may be of interest to subscribers. Here is a section:

From rural bank runs to surging consumer indebtedness and an unprecedented bond restructuring, mounting signs of financial stress in China are putting the nation’s policy makers to the test.

Xi Jinping’s government faces an increasingly difficult balancing act as it tries to support the world’s second-largest economy without encouraging moral hazard and reckless spending. While authorities have so far been reluctant to rescue troubled borrowers and ramp up stimulus, the costs of maintaining that stance are rising as defaults increase and China’s slowdown deepens.

Policy makers are attempting to do the “minimum necessary to keep the economy on the rails,” Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs Group Inc., said in a Bloomberg TV interview.

Among China’s most vexing challenges is the deteriorating health of smaller lenders and regional state-owned companies, whose financial linkages risk triggering a downward spiral without support from Beijing. A landmark debt recast proposed this week by Tewoo Group, a state-owned commodities trader, has raised concerns about more financial turbulence in its home city of Tianjin.

Concerns have popped up across the country in recent months, often centered around smaller banks. Confidence in these institutions has waned since May, when regulators seized control of a lender in Inner Mongolia and imposed losses on some creditors. Authorities have since intervened to quell at least two bank runs and orchestrated bailouts for two other lenders.

Eoin Treacy's view -

Two years ago China’s central banks Zhou Xiaochuan gave a speech where he talked about the risk of a Minsky Moment and what could be done to avoid it. A Minsky Moment is when asset prices experience a sharp reversal following a long and prolonged advance. That kind of risk evolves from deploying procyclical policies for a prolonged period.



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November 26 2019

Commentary by Eoin Treacy

China Draws Bumper Demand for Multi-Tranche Dollar Bond

This article for Bloomberg may be of interest to subscribers. Here is a section:

With the latest sale, China will have dollar securities outstanding with maturity dates ranging from 2022 to 2096 (the result of a small century bond sold in the 1990s). There will be an increasing variety of maturities off which Chinese corporate debt can price, with sovereign benchmarks at maturities from 2022 to 2048 of at least half a billion dollars each.

The total Chinese dollar bond market now tops $740 billion, according to data compiled by Bloomberg, and issuance so far this year has run at a record pace. On a single day in early November, some six property developers were selling dollar securities.

Earlier this month, China also sold euro debt, the first time since 2004 that it issued in that currency. That deal saw blowout demand, with a majority orders coming from European funds in a region that’s been beset by negative-yielding securities.

Eoin Treacy's view -

The rapid growth of the China Dollar bond market was one of the primary reasons the Chinese central bank expressed worry about local government funding mechanisms in 2018. They quickly moved into a curtail the practice but that effort now appears to be over with demand for overseas debt increasing once more. 



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November 25 2019

Commentary by Eoin Treacy

Hong Kong's Pro-Democracy Forces Win Landslide, Rebuking China

This article by Julia Fioretti, Iain Marlow and Fion Li for Bloomberg may be of interest to subscribers. Here is a section:

Pro-democracy candidates won 86% seats of the 444 seats counted as of 9 a.m., official results showed, with eight seats still up for grabs. In the last election in 2015, they had won about a quarter of all seats. The pro-government camp won about 12% of seats this time around, versus 65% four years ago. The vote saw record turnout of 71%, with more than 2.94 million people casting ballots -- roughly double the number in the previous election.

The vote came at a time of unprecedented political polarization in the city, with divisions hardening as the protests become more disruptive and the government refuses to compromise. While the district councils are considered the lowest rung of Hong Kong’s government, the results will add pressure on the government to meet demands including an independent inquiry into police abuses and the ability to nominate and elect the city’s leader, including one who would stand up to Beijing.

“The government respects the results of this election,” Chief Executive Carrie Lam said in a statement on Monday. “I am aware there’s lots of analysis about the results among the community, which said the results are a reflection of the public’s dissatisfaction towards the current situation and deep-seated problems in society. The government will listen to the public’s feedback with humility and reflect on it.”

Eoin Treacy's view -

The success of pro-democracy candidates in the Hong Kong election puts to rest any argument the protests were not widely supported by the community. The challenge for protestors now is the absence of any real power for those elected.



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November 20 2019

Commentary by Eoin Treacy

U.K. Accuses China of Torturing Ex-Hong Kong Consulate Worker

This article by Iain Marlow and Lucille Liu for Bloomberg may be of interest to subscribers. Here is a section:

The intervention comes after Simon Cheng -- a Hong Kong resident who worked for the consulate’s business-development team before he went missing in mainland China for 15 days in August -- said on Wednesday he was beaten and forced to confess while detained by Chinese agents, who pressed him for information on participants in the city’s protests.

“Simon Cheng was a valued member of our team,” U.K. Foreign Secretary Dominic Raab said in a statement. “We were shocked and appalled by the mistreatment he suffered while in Chinese detention, which amounts to torture.” Raab said he summoned the Chinese ambassador in London to demand an investigation into the “brutal and disgraceful treatment of Simon in violation of China’s international obligations.”

Eoin Treacy's view -

China claims anyone with Chinese heritage as its own, regardless of where they were born or what passport they hold. It’s what forms the basis for the greater China argument and is used to back up their territorial claims well beyond their land border. It also ensures that people who look Chinese tend to be treated as if they are Chinese when in custody. It’s questionable whether Simon Cheng would have been treated the same were he Caucasian.



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November 19 2019

Commentary by Eoin Treacy

What future? It's the end of Hong Kong as we know it

This article by Alex Lo for the South China Morning Post may be of interest to subscribers. Here is a section from the conclusion:

I get something else, too. If there is no hope, there is only the present. Things you do today will have no consequences. That, actually, can be a liberating realisation. If there is no tomorrow, then anything is possible, nothing is prohibited.

Violence is its own liberation – an ecstatic orgy of destruction alongside your comrades. It’s not a means but an end in and of itself. But you are not doing it because you are fighting for freedom and democracy, or against tyranny. You only say you are.

Maybe we self-serving old-timers have robbed our children of their future. But they are helping us dig our own graves. It’s not: “If we burn, you burn with us.” It’s: “We are all burning together.”

Well, dear young people, you now have your wish: we can all self-destruct together. It’s the end of Hong Kong as we know it, and many local people are fine with it.

Eoin Treacy's view -

Hong Kong is the subject of a major transition. The great Pearl River Delta is the focus on a major industrial hub where Hong Kong has long acted as an interlocutor for international trade. The future as outlined by the central government is that the cities of Shenzhen, Guangzhou, Hong Kong and Macau will form unified trading and financial hub aimed at rivalling the Bay Area in California. For Hong Kong that represents a major change because it is more a marriage of equals at best or at worst it represents the terminal decline of the island economy in preference to the mainland.



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November 14 2019

Commentary by Eoin Treacy

Sputtering China Growth Underscores Need for Trade Reprieve

This article from Bloomberg news may be of interest to subscribers. Here is a section:

The investment data shows how cautious private companies have become, with their spending in the first 10 months of the year at the lowest level since 2016. The continued stability in spending by state-owned firms’ is preventing an even stronger drop in the headline data.

Investment in the property market is one bright spot, with spending by the manufacturing sector barely above the record low recorded in September. Infrastructure investment growth continued to bounce along around 4% as it has all year.

“I’m quite concerned with property investment, the only stable element in fixed-asset investment now,” according to Xue Zhou, analyst at Mizuho Securities Asia Ltd in Hong Kong. “Monetary policy needs to be more supportive on economic growth and there should be more cuts to banks’ reserve ratios to help smaller banks.”

Eoin Treacy's view -

The first couple of months of the year are when the Chinese financial system gets its annual quota for lending and generally makes its full allocation by around Chinese New Year. That sends a surge of liquidity into the market in January and February but the broader question is how much of that is already priced in considering it is so predictable.



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November 14 2019

Commentary by Eoin Treacy

Luckin Coffee's Stock Shoots Up After Revenue Rises Above Expectations

This article from Marketwatch may be of interest to subscribers. Here is a section:

Shares of Luckin Coffee Inc. (LK) shot up 7.6% in premarket trading Wednesday, after the China-based coffee seller reported wider third-quarter loss but revenue that rose above expectations. The net loss was RMB531.9 million ($74.4 million), or RMB3.60 per American Depository Share, after a loss of RMB484.9 million, or RMB2.24 per ADS a year ago. Excluding non-recurring items, the adjusted per-ADS loss was RMB2.08, compared with the FactSet consensus for loss per ADS was RMB2.75. Revenue rose to RMB1.54 billion ($219.6 million) from RMB240.8 million, to beat expectations of RMB1.47 billion. Average monthly items sold were 44.2 million, up from 7.8 million a year ago, while the average monthly transacting customers grew to 9.3 million from 1.9 million. "During the third quarter, sales from freshly-brewed coffee drinks continued to maintain very strong growth, and we believe we will reach our goal to become the largest coffee player in China by the end of this year," said Chief Executive Jenny Qian. The stock. which went public on May 17, has tumbled 22.7% over the past three months, while the S&P 500 has gained 5.7%.

Eoin Treacy's view -

I wanted to try a Luckin Coffee while in Guangzhou over the summer but I was voted down by my daughters who could not get enough of boba tea. Since they discovered smores frappacinos the two alternatives are more balanced but they will always still choose a boba tea over a trip to Starbucks.



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November 13 2019

Commentary by Eoin Treacy

Photos: Hong Kong police and students are fighting a war in one of the city's top universities

This article by Mary Hui for Quartz may be of interest. Here is a section:

Continuing on from the hours-long siege yesterday (Nov. 11), when police fired tear gas at the school and made arrests on campus, protesters took their positions again this morning as they faced off with police stationed on a bridge just outside the school grounds. Shortly after 3pm local time, riot police charged onto the hilly tree-lined campus, deploying round after round of tear gas continuously for at least a quarter of an hour.

Just after sunset, police finally appeared to retreat as university vice-chancellor Rocky Tuan addressed a crowd after speaking with students and police separately. But tear gas was again fired soon after, breaking the momentary cease fire. Another attempt by pro-vice-chancellor Dennis Ng to broker a deal, with the school official speaking on the phone to the police commander as a student relayed the message in real time over a microphone to the crowd, similarly faltered. Clashes stretched late into the night, as students and police battled it out on a bridge that connects to campus from across a harbor.

Eoin Treacy's view -

There is no sign the protests in Hong Kong are moderating. In fact, the trend is towards further intensification which is obviously a challenge to Beijing’s policy to date of waiting it out. When schools are closed there are tens of thousands of students with nothing to do so many find themselves on the street. In such an emotional volatile situation there is ample scope for further escalation.



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November 07 2019

Commentary by Eoin Treacy

China, U.S. Agree to Tariff Rollback If Trade Deal Reached

This article from Bloomberg news may be of interest. Here is a section:

“If China, U.S. reach a phase-one deal, both sides should roll back existing additional tariffs in the same proportion simultaneously based on the content of the agreement, which is an important condition for reaching the agreement,” Gao said.

Such an understanding could help provide a road-map to a deal de-escalating the trade war that’s cast a shadow over the world economy. China’s key demand since the start of negotiations has been the removal of punitive tariffs imposed by Trump, which by now apply to the majority of its exports to the U.S.

Eoin Treacy's view -

The US Presidential election is less than a year away. The time to prime the pump so growth is humming by the time people vote is now. China might have suffered more from the tariffs, because it has more to lose, but it is also well aware of the electoral timing the Trump administration is pressured by. That suggests a deal is likely to be signed and it is likely to be valid for at least a year.



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November 06 2019

Commentary by Eoin Treacy

On Target November 6th 2019

Thank to Martin Spring for this edition of his letter which may be of interest. Here is a section on the Dollar:

Are we about to see a “currency pact” between the US and China? Investment bank Jefferies’ Hong Kong-based Christopher Wood sees it as a possible significant development in the difficult ongoing trade negotiations between the two countries.

It could give Donald Trump “a face-saving ‘out’ in terms of declaring victory in negotiations, where he has clearly over-estimated his leverage, for the simple reason that the Chinese leader has more tolerance to take pain than does America’s.”

A currency agreement based on a Chinese commitment not to engage in a competitive devaluation of its renminbi makes sense as both Washington and Beijing want the same thing. Neither wants a stronger dollar and a weaker yuan.
Beijing may see such an agreement as a way at least to end an escalation of the trade war or even to end it. It has no desire to see a major devaluation against the dollar. That would encourage accelerating capital outflow – “the Achilles heel of China’s command economy” -- at a time when such pressures are rising because wealthy citizens are keen to achieve international diversification. The outflow reached about $240 billion in the 12 months to the second quarter.

Devaluation would also make Chinese consumers poorer in dollar terms, undermining the policy of seeking to make the economy more driven by domestic consumption. And it would undermine the current successful policy of attracting foreigners to invest in China’s stock and bond markets.

“The last thing China needs right now is a further sharp appreciation of the US dollar – and that also seems the last thing Trump wants.”  

Eoin Treacy's view -

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

China has to manage capital flight risk. The drop below the psychological CNY 7 area earlier this year was a catalyst both for a breakout by the gold price for Chinese investors and the desire to become globally diversified.



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October 30 2019

Commentary by Eoin Treacy

Fed Cuts Rates by Quarter Point, Hints It May Be Done for Now

This article by Christopher Condon for Bloomberg may be of interest to subscribers. Here is a section:

Federal Reserve officials reduced interest rates by a quarter-percentage point for the third time this year and hinted they may be done loosening monetary policy, at least for one meeting.

The Federal Open Market Committee altered language in its statement following the two-day meeting Wednesday, dropping its pledge to “act as appropriate to sustain the expansion,” while adding a promise to monitor data as it “assesses the appropriate path of the target range for the federal funds rate.”

As with the September statement, the FOMC cited the implications of global developments in deciding to lower the target range for the central bank’s benchmark rate to 1.5% to 1.75%.

Treasuries weakened on the Fed’s announcement, pushing the 10-year yield up briefly to 1.81% from 1.80%. Stocks were little changed and the U.S. dollar gained. Traders also pared wagers on a fourth consecutive rate cut in December.

Eoin Treacy's view -

The Fed has been of the opinion we are in the midst of a mid-cycle slowdown. I think we can think of that as a best-case scenario which is why there is so much uncertainty about the outlook for rates amid the surge in bond prices. Let’s see what the charts tell us.



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October 15 2019

Commentary by Eoin Treacy

Inside a Brazen Scheme to Woo China: Gifts, Golf and a $4,254 Wine

This article from the New York Times may be of interest to subscribers. Here is a section:

The bank gave a Chinese president a crystal tiger and a Bang & Olufsen sound system, together worth $18,000. A premier received a $15,000 crystal horse, his Chinese zodiac animal, and his son got $10,000 in golf outings and a trip to Las Vegas. A top state banking official, a son of one of China’s founding fathers, accepted a $4,254 bottle of French wine — Château Lafite Rothschild, vintage 1945, the year he was born.

Millions of dollars were paid out to Chinese consultants, including a business partner of the premier’s family and a firm that secured a meeting for the bank’s chief executive with the president. And more than 100 relatives of the Communist Party’s ruling elite were hired for jobs at the bank, even though it had deemed many unqualified.

This was all part of Deutsche Bank’s strategy to become a major player in China, beginning nearly two decades ago when it had virtually no presence there. And it worked. By 2011, the German company would be ranked by Bloomberg as the top bank for managing initial public offerings in China and elsewhere in Asia, outside Japan.

Eoin Treacy's view -

If anyone knows of an alternative route to building a business in China, I’d like to hear it.



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October 11 2019

Commentary by Eoin Treacy

U.S., China Said to Reach Partial Deal, Could Set Up Trade Truce

This article by Jenny Leonard for Bloomberg may be of interest to subscribers. Here is a section:   

The U.S. and China reached a partial agreement Friday that would broker a truce in the trade war and lay the groundwork for a broader deal that Presidents Donald Trump and Xi Jinping could sign later this year, according to people familiar with the matter.

As part of the deal, China would agree to some agricultural concessions and the U.S. would provide some tariff relief. The pact is tentative and subject to change as Trump prepares to sit down with China’s Vice Premier Liu He later Friday.

Stocks jumped Friday after the news. Equities had advanced globally earlier in the day amid growing conviction that the U.S. and China would negotiate a trade truce. Trump tweeted earlier Friday that “good things” were happening in the meetings -- and that if the countries did reach an agreement, he would be able to sign it without a lengthy congressional approval process.

On Thursday and earlier Friday, Liu and U.S. Trade Representative Robert Lighthizer held the first senior-level discussions between Washington and Beijing since a previous agreement fell apart in May and tariffs were raised in the months after. The world’s two biggest economies have been trying for the past year and a half to settle their trade dispute.

Eoin Treacy's view -

The words from Bill Clinton’s early ‘90s election campaign must be ringing in President Trump’s ears, “It’s the economy, stupid”. There is a clear rationale for pressuring China on trade but is it worth losing the election for? The hardest hit parts of the US economy just about all voted for President Trump in the last election and have been specifically targeted by Chinese tariffs. Little wonder then that agricultural imports are front and centre in whatever deal is to be announced. With the election less than 13 months away it’s time to at least put the trade war on hold and let animal spirits loose. 



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October 10 2019

Commentary by Eoin Treacy

Market Internals

Eoin Treacy's view -

I have to admit I don’t look at the internals of the market all that often because it is the trend rather than the day to day moves which lend some insight into the health of the market. I thought it might be useful to look at some of the most common measures to discern if any clues to market direction are evident.

The Total Number of New 52 Week Highs on the NYSE Index is coming back down towards the lows December 2018 and towards the end of 2015. The significant spike on the upside in late 2017 was an anomaly suggesting a period of underperformance ahead, but generally lows are better predictors of market bottoms than spikes are of tops.



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October 01 2019

Commentary by Eoin Treacy

Xi Says China's Rise Unstoppable in Face of Protests, Trade War

This article by Annie Lee, Peter Martin and James Mayger for Bloomberg may be of interest to subscribers. Here is a section:

President Xi Jinping declared that no force could stop China’s rise, exuding confidence during a key
anniversary as he faced unprecedented challenges from protesters in Hong Kong and Donald Trump’s trade war.

Speaking at the start of grand parade marking 70 years since the founding of the People’s Republic, Xi called for stability in Hong Kong, unity among Chinese ethnic groups, and the “complete unification” of the country. Xi delivered the remarks at the site where late Communist Party patriarch Mao Zedong proclaimed the nation’s founding on Oct. 1, 1949.

“Today, a socialist China is standing in the east of the world and there is no force that can shake the foundation of this great nation,” Xi told a crowd of carefully vetted guests under smoggy skies in the center of the capital. “No force can stop the Chinese people and the Chinese nation forging ahead.”
Xi’s rallying cry came before an hours-long pageant showcasing China’s industrial and scientific achievements, including sophisticated weaponry such as DF-17 ballistic missiles believed capable of circumventing U.S. defense systems.

The closely scripted proceedings sought to reinforce the strength of a party facing multiple threats, from the slowest economic growth in decades to violent unrest in one of Asia’s top financial hubs.

Eoin Treacy's view -

Sometimes I feel like a broken record always repeating the same point about China, but governance is everything. The ranks of apologists for tyranny continue to advocate strongly for China despite its record on human rights, the environment, intellectual property, corruption, censorship and a host of additional factors.

The one thing China has going for it, is its economic expansion. Investors will be willing to give it the benefit of the doubt provided the expansion persists. It will an entirely different narrative if China has a recession.



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September 27 2019

Commentary by Eoin Treacy

White House Weighs Limits on U.S. Portfolio Flows Into China

This article by Jenny Leonard and Shawn Donnan for Bloomberg may be of interest to subscribers. Here is a section:

The arguments for action inside the Trump team vary from simply enforcing U.S. transparency laws and creating a level of reciprocity, to raising national-security concerns with some of the Chinese companies that American pension funds are exposed to, according to people familiar with the conversations.

Some of those companies are firms that the U.S. government has identified as bad actors or has imposed sanctions against. The argument continues that Americans would unlikely want to invest in those companies if they had the choice.

The market capitalization of the 156 Chinese companies, including at least 11 state-owned firms, listed on the three-largest U.S. exchanges — the NASDAQ, New York Stock Exchange and NYSE American — stood at a collective $1.2 trillion as of late February, according to a report by the U.S.-China Economic and Security Review Commission.

China earlier this month removed a $300 billion cap on overseas purchases of Chinese stocks and bonds meaning global funds no longer need to apply to purchase quotas to buy the assets. The move is designed to lure more foreign capital into Chinese markets.

Eoin Treacy's view -

The removal of the cap on QFII investments was largely moot since only about a third of the allocation was being used anyway. The point I have been making for years is the only incentive China has to open up its financial sector is to diversify its risk. Today’s most of the risk resides domestically. The only way China can expect to receive assistance from the rest of the world during a crisis is if that risk is shared. That is the only reason for opening up to the financial sector to overseas investment. Risk pooling is the most basic factor in insurance planning and that is what China is doing. It therefore makes logical sense to question whether it is wise to buy what they are now so desperate to sell?



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September 27 2019

Commentary by Eoin Treacy

13.5 tons of gold found in Chinese Ex Mayor's Basement

This article from crimerussia.com may be of interest to subscribers.

Police of the PRC searched the house of Zhang Qi, 57, the former mayor of Danzhou and found a large amount of cash, as well as 13.5 tons of gold in ingots in a secret basement of his home, reported local media.

In addition to the mayor’s post, the official held others, such as the Secretary of the Communist Party. According to unofficial reports, in addition to the gold, cash worth 268 billion yuan was discovered.

Luxurious real estate with a total area of ​​several thousand square meters, which the former city manager had been hiding for a long time, became the cherry on the cake for the Chinese Anti-Corruption Committee.

Eoin Treacy's view -

One of the most memorable quotes I’ve heard in China was back in 2011 when the communist official from a small town a couple of hours north of Beijing said to me “I’m only a small guy so I’m only a little corrupt”. His boss was the county head and the gift to attend his daughter’s wedding was a stack of CNY100 notes six inches tall. They were counting the money in cubic metres. Then think about the head of the head of a province like Hainan which is being developed as “China’s Hawaii”. From that perspective the monopoly money sums are still huge but do help to highlight just how engrained corruption is.



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September 26 2019

Commentary by Eoin Treacy

Chinese Tech Companies Turn to Financial Services

This article by Stella Yigan Xie for the Wall Street Journal may be of interest to subscribers. Here is a section:

Hao Jianyu, 26, who works at Google in Beijing and owns a Xiaomi phone, says he holds credit cards from China’s four biggest banks but prefers taking out loans from Xiaomi Finance to fund his daily spending. He says daily interest on what he borrows is 0.065%, an annualized rate of 23.4%. That’s higher than the interest rate on his credit cards, Mr. Hao says, but he has been able to increase his credit limit much faster with Xiaomi. The more often he uses Xiaomi’s short-term loans and repays on time, the bigger his credit line, which now exceeds the limits on his credit cards. He says his credit limit from Xiaomi has increased to 60,000 yuan from a few thousand yuan over two years.

In a stock-exchange filing last year before Xiaomi went public, the Beijing-headquartered company said its finance business had a “highly advanced and customized credit assessment and risk management approach” that was built on its big database of users. The company said its proprietary risk-assessment model is used to preapprove individuals for certain amounts of credit. Xiaomi said in reporting its results for the second quarter of this year that revenue from its fintech business grew 63% from a year earlier to 792 million yuan ($112 million) in the three months through June.

Eoin Treacy's view -

China is attempting to implement countercyclical monetary policy. There is a bubble in the housing market and 50 million homes are vacant. Their consumer sector, particularly younger upwardly mobile generations have taken to credit like just about all new consumers in other countries before them.



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September 24 2019

Commentary by Eoin Treacy

Financial Services Exports

I found this graphic from howmuch.net to be particularly interesting. The obvious point is the UK’s financial services is a major component of the global sector; second only to the USA.