January 13 – January 19, 2017

China’s maritime footprint. Judicial independence in China – don’t count on it. Music streaming to the rescue. 

Headlines

NYT – Samsung Heir Faces Arrest on Charges of Bribing South Korea’s President 1/15. It appears that no one is ‘safe’ if the arguably the most powerful person in the country can be taken down – it’s like watching House of Cards.

NYT – Earth Sets a Temperature Record for the Third Straight Year 1/18“The heat extremes were especially pervasive in the Arctic, with temperatures in the fall running 20 to 30 degrees Fahrenheit above normal…”

FT – China’s 2016 capital outflows estimated at over $700bn 1/18. A recent report from Standard Chartered puts the 2016 total at $728bn, slightly less than the record $744bn in 2015.

Briefs

  • Sue-Lin Wong and Lusha Zhang of Reuters highlighted the continued flow of credit by Chinese banks and the concerning increase in debt levels.
    • “China’s banks extended a record 12.56 trillion yuan ($1.82 trillion) of loans in 2016 as the government encouraged more credit-fueled stimulus to meet its economic growth target, despite worries about the risks of an explosive jump in debt.”
    • “In December alone, Chinese banks extended 1.04 trillion yuan in net new yuan loans, far more than economists had expected, central bank data showed on Thursday.”
    • “Analysts polled by Reuters had expected new lending would fall to 700 billion yuan from November’s 794.6 billion yuan.”
    • “New bank loans last year surpassed the levels of China’s massive credit-led stimulus during the global financial crisis in 2009, according to Reuters calculations based on central bank data. The 2016 total was some 8% above the previous all-time high of 11.72 trillion yuan set just the year before.”
  • Dexter Roberts of Bloomberg Businessweek brought attention to the crisis facing China’s aging rural poor.
    • “Unlike people in much of the rest of the world, China’s citizens spend less on their health as they grow older, not more, says Albert Park, an economist at the Hong Kong University of Science and Technology.”
    • Why, simply because they seek to avoid healthcare costs due to the cost relative to their incomes.“The average cost of a hospital visit is 50% of the annual income of a city dweller; for rural residents it’s 1.3 times annual income, according to Gerard La Forgia, the lead author of Healthy China: Deepening Health Reform in China, a joint report by the World Bank, the World Heath Organization, China’s finance ministry, and other government agencies.”
  • Onur Ant and Benjamin Harvey of Bloomberg Businessweek covered the purge that is paralyzing Turkey.
    • Following the failed coup in Turkey,“at least 100 media outlets have been closed and more than 36,000 suspected Gulenists detained.”
    • The markets are not amused.“The lira has tumbled more than 18% since the coup attempt, the largest depreciation among major currencies worldwide, data compiled by Bloomberg show. The Borsa Istanbul 100 index fell as much as 28% in dollar terms by early December.”
    • Further“on Dec. 12 the Turkish government released third-quarter numbers for gross domestic product, which contracted for the first time in seven years, by 1.8%.”
    • Bottom line, now is a terrible time to have any affiliation with Gulenists. If you do have any, be prepared to have assets seized.“If a seizure is endorsed by the courts, the Savings Deposit Insurance Fund, a government-backed fund that manages companies the government takes over, will prepare the underlying assets for sale. The fund estimates the collective value of all the companies seized to date at about $10 billion.”
    • As Sevket Pamuk, an economist at Bogazici University in Istanbul puts it“what I find most striking is how easily ownership rights are being ignored. Why would local businesses invest in such an environment?”
  • Art Patnaude of The Wall Street Journal illustrated the growing amounts of ‘dry powder’ being accumulated by real estate funds as for-sale supply has been limited.
    • “Investors are piling money into real-estate funds – but fund managers are finding it a challengeto spend it.”
    • “Global fund managers had a record $237 billion available to invest in commercial property at the end of last year, according to data firm Preqin, up from $229 billion at the end of 2015 and $136 billion at the end of 2012.”
    • “Global fund managers have raised $446 billion for commercial property in the last four years, on par with the total raised between 2015 and 2008 in the run-up to the global financial crisis, Preqin said.”
    • However, there simply has not been enough property to buy.  “One reason for the lack of property to buy: Landlords aren’t willing to sell. Their low debt levels and readily available bank financing have made it easy to hold on to properties longer in hopes of reaping bigger paydays later, analysts said.”
    • Another are the“potential returns down the road. Strong levels of demand now suggest that if they wait, the value of their property could rise even more.”
    • Further, don’t forget that if they do sell, then there are the taxes to pay and what to do with the proceeds?
  • Tom Hancock of the Financial Times highlighted a recent acknowledgement by a Chinese provincial governor that they had been falsifying fiscal data.
    • “The Chinese province of Liaoning fabricated fiscal data for four years, a senior official has admitted, the latest blow to the already shaky reputation of China’s economic statistics.”
    • “Fiscal revenues in the province were inflated by at least 20% from 2011 to 2014, said provincial governor Chen Qiufa, according to Communist party mouthpiece The People’s Daily.”
    • “Economists and investors have long expressed doubts about Chinese economic data, particularly gross domestic product figures.Compared with other countries, China’s inflation-adjusted GDP growth rates are remarkably stable from quarter to quarter.”
    • “Following Mr. Chen’s admission, respected Chinese financial publication Caijing said it had already exposed Liaoning’s fake data in a 2015 report… that report dated the falsification of the data back to 2009, earlier than the 2011 date given by Mr. Chen, who became provincial governor in 2015.”
  • Yuan Yang of the Financial Times covered that China’s housing boom appears to have ended now that prices have fallen in its top cities.
    • “House prices have fallen across most of China’s hottest property markets for the first time in almost two years, marking an end to the enormous growth that saw prices rise as much as 40% last year.”
    • “Prices of newly built residential properties dropped between 0.1 and 0.4% in December from the previous month in 12 out of 15 ‘hotspot’ cities, according to data released by the National Bureau of Statistics on Wednesday.”
    • “Although many analysts expect property prices to fall at most 5% year on year in the current downturn, local governments are ready to move to avoid sharper crashes.”

 Graphics

WSJ – Daily Shot: China’s credit-driven Growth Model 01/12

wsj_daily-shot-china-credit-driven-growth_1-12-17

WSJ – Forecasters See Upside Risks to Their Economic Outlooks at Highest in More Than Two Years – Josh Zumbrun 1/12

wsj_us-economic-projectsions_1-12-17

WSJ – Daily Shot: FRED Retail Department Store Sales 01/15

wsj_daily-shot_fred-us-dept-sales_1-15-17

FT – The problem with US healthcare in one chart – Federica Cocco 1/16

ft_life-expectancy-v-health-expenditure-oecd_1-16-17

NYT – How 2016 Became Earth’s Hottest Year on Record – Jugal K. Patel 1/18

nyt_global-monthly-temperatures_1-18-17

WSJ – Daily Shot: US Cost of Living Changes by Category 01/17

wsj_daily-shot_us-inflation-by-category_1-18-17

Featured

*Note: bold emphasis is mine, italic sections are from the articles.

How China rules the waves. James Kynge, Chris Campbell, Amy Kazmin, and Farhan Bokhari. Financial Times. 12 Jan. 2017.

“Investments into a vast network of harbors across the globe have made Chinese port operators the world leaders. Its shipping companies carry more cargo than those of any other nation – five of the top 10 container ports in the world are in mainland China with another in Hong Kong. Its coastguard has the globe’s largest maritime law enforcement fleet, its navy is the world’s fastest growing among major powers and its fishing armada numbers some 200,000 seagoing vessels.”

“China understands maritime influence in the same way as Alfred Thayer Mahan, the 19th century American strategist. ‘Control of the sea,’ Mr. Mahan wrote, ‘by maritime commerce and naval supremacy, means predominant influence in the world; because, however, great the wealth of the land, nothing facilitates the necessary exchanges as does the sea.”

ft_chinas-dual-use-of-commercial-and-naval-ports_1-12-17

“‘There is an inherent duality in the facilities that China is establishing in foreign ports, which are ostensibly commercial but quickly upgradeable to carry out essential military missions,’ says Abhijit Singh, senior fellow at the Observer Research Foundation in New Delhi. ‘They are great for the soft projection of hard power.’

“Beijing’s shipping lines deliver more containers than those from any other country, according to data from Drewry, the shipping consultancy. The five big Chinese carriers together controlled 18% of all container shipping handed by the world’s top 20 companies in 2015, higher than the next country, Denmark, the home nation of Maersk Line, the world’s biggest container shipping group.”

“In terms of container ports, China already rules the waves. Nearly two-thirds of the world’s top 50 had some degree of Chinese investment by 2015, up from about one-fifth in 2010, according to FT research.”

ft_chinese-investment-in-world-ports_1-12-17

“And those ports handled 67% of global container volumes, up from 42% in 2010, according to Lloyd’s List Intelligence, the maritime and trade data specialists.”

ft_chinese-container-traffic_1-12-17

“Rounding out a picture of China’s merchant fleet dominance is the country’s fishing fleet, which is by far the largest in the world, according to a recent paper by Michael McDevitt, a former rear admiral in the US navy and now a senior fellow a CNA Strategic Studies, a US think-tank.”

Bottom line, “analysts say that China’s naval strategy is aimed primarily at denying US aircraft carrier battle groups access to a string of archipelagos from Russia’s peninsula of Kamchatka to the Malay Peninsula in the South, a natural maritime barrier called the ‘first island chain’ within which China identifies its strategic sphere of influence.”

ft_china-defense-spending_1-12-17

China’s top judge denounces judicial independence. Lucy Hornby. Financial Times. 16 Jan. 2017.

“China’s top judge has fired a warning shot at judicial reformers by formally acknowledging that China’s court system is not independent of the Communist Party and rejecting attempts to make it so.”

“‘Bare your swords towards false western ideals like judicial independence,’ Mr Zhou told a gathering of higher court officials. Only two months before, he had said that party committees should not interfere in the judicial process.”

“‘This statement is the most enormous ideological setback for decades of halting, uneven progress toward the creation of a professional, impartial judiciary,’ said Jerome Cohen, an 86-year old American lawyer who has spent most of his career promoting legal exchanges between the US and China. ‘It has already provoked some of China’s most admirable legal scholars to speak out in defiance, and I fear not only for their academic careers but also for their personal safety.'”

“Mr. Zhou, once seen as a reformist, is one of the highest-ranking members of the Communist Youth League faction, which Mr. Xi moved to neutralize last summer ahead of a leadership reshuffle later this year.”

Further, “a crackdown on lawyers has intensified since 2015, ‘disappearing’ hundreds of lawyers. The most recent is Jiang Tianyong, a particularly active civil rights lawyer, who has been missing since November.”

How streaming saved the music industry. Anna Nicolaou. Financial Times. 16 Jan. 2017.

“Thanks to growth in Spotify and Apple Music, music streaming has passed the milestone of 100m paying subscribers worldwide, a feat few imagined possible a few years ago. The US music industry is on track to record a second consecutive year of growth – something that has not happened since 1999, the year Napster launched. Some analysts and executives are beginning to confidently predict a new golden age.”

ft_music-streaming-revenues_1-16-17

“It has been hard to imagine how the music industry could ever match its pre-Napster performance in the 1990s, when compact disc sales ruled. But now one monthly payment zaps 30m songs into your smartphone, tablet or desktop app, enabling artists like Drake to notch up streams by the billions. The Canadian rapper’s music was streamed more than 4.7bn times on Spotify alone last year. Every hour, his songs are streamed more than 500,000 times on the service.”

“Artists like Drake helped power Universal to profitability last year, earning the company $.1bn in streaming revenues in the first nine months – enough to offset the fall in sales of digital downloads and CDs.”

ft_music-revenue-splits_1-16-17

“In a research note called Music in the Air, Goldman Sachs projected that streaming will help revenues double to $104bn by 2030.”

“Each year more people are buying access to digital music; Americans streamed 431bn songs on demand in 2016.”

Doesn’t mean there aren’t detractors – i.e. Taylor Swift – but the format continues to gain momentum.

As to control of this pipeline, “the music groups hold the leverage. The source of their power is…through ownership of the rights to… master recordings, Vivendi-owned Universal, Warner Music and Sony together control 80% of all recorded music, with Universal having a one-third share.”

Further, “streaming is a high-margin business. The labels no longer face the costs of hauling truckloads of CDs to Walmart. Instead of ownership, they are selling access to a digital music fortress.”

“This compares well with television studios, which have lost some grip over content as video streaming services like Netflix make shows and offer a limited selection of programs. Music fans, though, expect streaming services to offer more comprehensive digital back-catalogues, forcing them to cut deals with the labels. As one label executive puts it: ‘TV and film studios have to coexist with Netflix now. We haven’t made that mistake.'”
ft_streaming-quantity-to-generate-revenues_1-16-17

However, the “one large thorn in the labels’ side is Google-owned YouTube, whose music draws more regular listeners than Spotify and Apple Music combined. Most music consumption on YouTube takes place on its free, ad-supported tier, a revenue stream vulnerable to the fortunes of the advertising market.”

ft_most-popular-streaming-services_1-16-17

At this point “streaming is the industry’s latest white knight but after decades of grappling with pirates, new technologies and evaporating sales, music executives know there will be twists to come.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – How smartphones are transforming healthcare 1/12

FT – Over half of China’s white-collar workers go without year-end bonus 1/12

FT – Toyota marks break from past with fund for tech investments 1/15

FT – US companies rush to reprice debt as higher rates loom 1/15

FT – China’s energy strategy: power and independence 1/15

FT – Fingerprint theft points to digital danger 1/16

FT – Saudi Arabia energy minister downplays US shale threat 1/17

FT – Mall staple Claire’s pulls IPO 1/17

FT – Capital Group chief says post-Trump change in markets ‘is real’ 1/17

NYT – With the Rain Comes Hope That 6-Year California Drought Is Ending 1/13

WSJ – Pulling Retirement Cash, but Not by Choice 1/16

WSJ – Mall Owners Find Relief From Unlikely Source: Online Retailers 1/17

WSJ – Mortgage-Rate Rise Hits Coastal Property Markets Hardest 1/18

 

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