Detente seems to be in the air between China and America according to an opinion piece in Bloomberg. It describes several significant breakthroughs in meetings between Chinese and American officials, a far cry from the frosty silence of recent times. Perhaps most poignantly, President Joe Biden’s National Security Adviser Jake Sullivan recently gave a speech at The Brookings Institute where he appeared to be intent on making Cold War II less chilly. Moreover, the opinion piece argues that the Chinese economy may not live up to its great expectations, showing some signs of headwinds with China’s dire demographic prospects and over-leveraged and depressed real estate sector.
The CEO of one of the largest gaming companies in the world, Epic Games’ Tim Sweeney, has warned that the UK competition regulator risks betraying antitrust principles by allowing Google to continue charging high fees on its app store. Regulators worldwide are scrutinising Google and Apple’s app stores and fees on purchases, which have been described as akin to a tax. Last month, Britain’s Competition and Markets Authority (CMA) said Google had offered to allow developers to use alternative payment systems on its Android Play Store. However, the company would still be able to collect fees of up to 27%, down from 30%. The regulator is currently consulting on the proposals. Mr Sweeney has long campaigned against the app stores and the fees charged by Google and Apple, and both companies’ practices have been criticised by regulators and EU lawmakers, who are expected to force them to allow alternative app stores on their devices.
Data solutions company Safe Software has assured employees that AI will be used to help achieve company goals, not to replace workers. Co-CEOs and co-founders, Don Murray and Dale Lutz, said their “restaurant model”, which sees customers buying more than just products or services, meant the use of AI would enhance, rather than detract from, staff value. The co-founders have said they believe AI will enable the hiring of more employees. The Vancouver based company is assessing AI in terms of "how the technology can help companies enhance their own unique value proposition" and recently held an "innovations week" to explore AI applications.
The chances of the Federal Reserve raising interest rates next month have fallen from 36% to 18.6%, and some experts believe the central bank won't raise rates again in June. Wall Street had been betting on the latter scenario, after the Fed meeting earlier this month created hopes that it was done with rate hikes, but a slate of strong economic data last week led to some nerves. Key data points set for release before the June 14 rate decision include the April Personal Consumption Expenditures price index, the May jobs report, the May Consumer Price Index and the May Producer Price Index.
US-based semiconductor company Cadence has agreed to buy UK microchip design firm Pulsic at an undisclosed price. The move comes months after the UK government blocked a bid for the British company by Chinese firm Super Orange HK Holding on national security grounds. Cadence creates electronic design automation software used to manufacture microchips. Such software has been a battleground in the US-Chinese trade war and the US has imposed export restrictions on advanced EDA tools that may impact Cadence’s business with Chinese companies.
The success of Turkey's President Recep Tayyip Erdogan in the country's recent presidential election has challenged conventional political wisdom that under-performing incumbents will always "face electoral nemesis." Erdogan and other leaders, including Russia's Vladimir Putin and India's Narendra Modi, have appealed to citizens who feel threatened by the changes to the economy, technology and social mores that have accompanied globalisation, and who long for the stability and glory of the past, according to Bloomberg Opinion's Pankaj Mishra.
Foreign buying of Japanese stocks has surged over the past month, with investors buying a net $44bn worth of securities since the beginning of April. Investors are now questioning whether this is the start of a new bull market. Goldman Sachs recently suggested that Japan is nearing a once-in-a-decade bull market. Warren Buffet, who recently increased his investment in Japan’s five largest trading houses, is also proceeding with caution as he considers adding to his investments. Although he views Japan as a safe place to put money, it might not necessarily mean a sustained bull market. The current froth in the market could fall if the Bank of Japan (BoJ) ever undertakes normalization, as Japan’s demographic problems and rapidly shrinking workforce will cause multiple challenges, particularly to tech and auto giants.
The poor performance of JD.com and Alibaba gives little indication of any Chinese economic revival, despite one hedge fund expecting to benefit from China's consumer economy being at its nadir and tripling stakes in JD.com on that basis. The revenue of JD.com increased 1.4% for the March period and Alibaba's 2%, whereas the international games division recorded a far-stronger 10.7% increase while online advertising climbed 17%. While advertising is a leading indicator that statistical evidence of recovery may emerge, cutbacks in marketing expenditure are also expected.
Chinese banks have kept their benchmark lending rates unchanged for a ninth consecutive month. The one-year loan prime rate remains at 3.65%, while the five-year rate was also held steady. The central bank, the People’s Bank of China, maintained its one-year policy earlier this month, as it also pumped more liquidity into the financial system.
Pimco has said it sees long-term opportunities in Asia's bond markets following the recent banking sector problems and economic downturn in the US, although geopolitical issues and concerns about moderating growth in China could prove risky. Pimco's Chief Investment Officer, Daniel Ivascyn, said the US economic downturn is not expected to be as severe as the one which followed the global financial crisis, however, setting portfolios up for something worse is still sensible. With China remaining one of the few markets globally without an inflation problem, there is potential for monetary easing as it looks to avoid a slowdown. Ivascyn added that Asia’s bond market would benefit if the Federal Reserve eased monetary policy, as this would spark a rally in the region’s currencies, reducing the cost to fund investments.
US memory chip maker Micron Technology has been banned from selling its products in China to the country's critical information infrastructure operators, according to the nation's cybersecurity review office. In a statement over the weekend, the office said Micron's products failed a cybersecurity review and posed a national security risk. This effectively restricts the access of the world's fourth-largest semiconductor firm to the Chinese market, and influences sales to an array of entities from banks to telecoms operators. Micron generated 11% of its $30.8bn revenues last year from China, mostly through sales of DRAMs, NAND flash memory and solid-state drives.
China's local government debt has been making investors increasingly nervous and will be a potential drag on the economy for years to come. While the risk of default in municipalities in China is currently relatively low given Beijing’s implicit guarantee on the debt, the worry is that local governments may have to make painful spending cuts or divert money away from growth-boosting projects to continue to repay their debt. The city of Hegang was China's first to be forced to undergo financial restructuring, with more set to follow, making the situation for President Xi Jinping an ominous one. Xi is looking to double income levels by 2035 while reducing income inequality, which is a key factor for social stability and his aim to rule the Communist Party for potentially the next decade or more.
Majority of China’s regions have a debt-income ratio over 120%, with most provinces exceeding the threshold to represent “high debt risks.” China’s total government debt is estimated to be $23tn, a figure that includes the hidden borrowing of thousands of financing companies set up by provinces and cities. Hegang has debt of more than double its fiscal income and is suffering from leadership’s belt-tightening measures, including a lack of heating in freezing winter temperatures and the cutting of public-sector wages.
Without loan extensions, more than two-thirds of Chinese localities won’t be able to repay their debt on time. Cities like Liaoning and Inner Mongolia, with large amounts of bond interest payments that are close to breaching the threshold, need to tread carefully in addressing their debt. In trying to curtail the implications of China’s local government debt problem from spreading throughout the country, Beijing has sought to ease public concerns by saying local government finances are generally “stable.”
Japan's benchmark stock index, the Nikkei 225, has hit a 33-year high but technical analysts believe an overbought market and currency distortions make it a risky buy for investors. The index has been rallying this year, leading investors to suggest Japan is outpacing the rest of the world, but the market's historic difficulties rising above the 1989 peak mean the currency may remain the fundamental point of concern. However, a combination of "stronger GDP growth, higher inflation, negative interest rates and the weak yen" will aid Japanese risk assets if the Bank of Japan ends bond yield caps, but keeps interest rates low to stimulate inflation to reach its 2% target, according to Syed Mansoor Mohi-Uddin, chief economist of the Bank of Singapore. He adds: "the BOJ's dovish stance on interest rates is likely to keep supporting risk assets this year in Japan".
China has warned operators of key infrastructure against buying US-based Micron Technology's goods, claiming cybersecurity risks were identified in the products and could affect national security. The move comes amid escalating tensions over semiconductor trade between China and the US, and follows a month-long Chinese investigation into the US's largest memory-chip maker. Shares for Micron's most significant industry rivals, Samsung Electronics and SK Hynix, increased in Seoul, while Chinese chip stocks, including Semiconductor Manufacturing International Corp. and Hua Hong Semiconductor, rose more than 3% in Hong Kong. Analysts suggest the decision will have a small impact on Micron, as most of its memory chips sold in China are used in consumer electronics rather than data centres and cloud computing.
Luxury lodgings in Japan are seeing an uptick in business according to research firm MSCI Real Assets, with investors from abroad putting more money into Japanese hotels at a rate not seen since 2014. The trend comes amid dozens of luxury hotels being built in Japan with nightly room rates often exceeding ¥100,000 ($735); worldwide hotel chains are making their first forays into that market, and overseas backers account for almost half of the ¥494.3 billion in hotel deals made over the past year. Tetsuya Kaneko, of property firm Savills Japan, said he estimated the average worth of members the new wave of inbound travellers with the means to spend hundreds per night on accommodation will be “much higher than the pre-pandemic average”. Worldwide, income inequality has risen during the pandemic, with some wealthy individuals seeing their net worth rise by billions and others losing jobs.
Swiss seed giant Syngenta Group's 65bn yuan ($9.26bn) IPO on the main board of the Shanghai Stock Exchange, the world's potentially largest this year, could boost foreign fund interest in China. The nation's recent simplification of fundraising from equity sales by expanding a registration-based system has drawn closer to foreign markets, and Syngenta moving to the main board "makes sense as it provides access to a more mature market and larger liquidity base” said Ben Harburg, managing partner at Magic Stone Alternative Investment Ltd. There will be an appetite from global investors, particularly larger players who are already active in China and Hong Kong, says CEO Sandy Mehta of Value Investment Principals Ltd.
Goldman Sachs has reduced its forecast for China's yuan over the coming three months, predicting that it will see more drops, reaching 7.1 to the dollar in the near-term, amid a combination of the trade war with the US and domestic policy moves from Beijing. Mitul Kotecha, head of emerging markets strategy at TD Securities, argued that China’s policymakers may benefit from a devaluation of the currency, given that it could fuel the economy, but added that this would only be a short-term effect. Other analysts are also anticipating the yuan to weaken further, with Citigroup eyeing up a decline to 7.2 USD on the back of weak economic data. Nomura, meanwhile, predicts an equivalent value by mid-July.
China's Foreign Ministry has doubted the sincerity of the Biden administration, as the US continues to push for high-level diplomatic talks with Beijing while also imposing technology sanctions on the country. “The US side asks for communication on the one side, yet on the other, suppresses and contains China by every possible means,” said Chinese Foreign Ministry spokeswoman Mao Ning at a regular briefing in Beijing. There are hints of two-track policy with some success already achieved in terms of diplomatic meetings between high ranking officials while at the same time the US campaign to contain China's military aspirations continues. According to a Bloomberg report US officials have made more than nine requests for a call between Chinese Vice President Wang Qishan and Joe Biden, however the White House has so far refused to comment on the status of the request.
China may see up to 65 million Covid-19 cases a week peaking towards the end of June, according to the country's senior health adviser. XBB is fuelling this resurgence in cases, with an estimated 40 million Covid-19 cases expected by the end of May, before climbing to 65 million by the end of June, says respiratory disease specialist Zhong Nangan, providing rare insight into how the much-anticipated second wave may play out. Meanwhile, China is preparing to roll out new vaccines to target the latest omicron variants, including three vaccines that Zhong says will be cleared soon and will "lead the pack internationally in developing more effective vaccines".
As Tesla and BYD step up electric vehicle production, the chief executives of five Japanese automakers have released a unified message encouraging the need for a diverse approach to powertrains and alternative fuels to achieve more environmentally responsible vehicles. Japan's largest passenger car exporter, the Japan Automobile Manufacturers Association (JAMA), exhibited a range of hydrogen and carbon neutral fuel vehicles throughout the recent G7 summit alongside EVs. JAMA's united voice is in contrast to that of the European Automobile Manufacturers' Association, which in 2020 lost several members for failing to agree on the best way to tackle climate change.
