“The 30-second television ad has been dethroned. As US television networks face growing digital competition for marketing dollars and viewers’ attention, they are selling shorter ads. The result? Thirty-second spots, long the industry standard, now make up fewer than half of all US TV commercials.”
“China’s seemingly insatiable demand for foreign assets has driven up prices for everything from U.S. Treasury bonds to global companies to luxury real estate. Now, a combination of market forces and capital controls are choking off the flow of Chinese cash. Asset markets around the world will have to adjust.”
“As Chinese exports boomed starting in the early 2000s and foreign investment flooded into the country, the central bank recycled these inflows into foreign government bonds, mostly Treasurys, to keep the yuan from rising. The buying persisted for over a decade, driving bond prices up and driving yields down globally.”
“The form of China’s foreign buying shifted in 2014, when the U.S. began exiting quantitative easing and China’s growth slowed. Ordinary Chinese feared that the yuan, which had steadily risen for years, would fall as growth slowed. Both individuals and companies rushed to get money out of China, snapping up trophy assets and luxury real estate around the world.”
“The China bid, or at least the expectation of one, sent prices of luxury properties soaring, fueled real estate bubbles from Vancouver to Sydney and pushed up prices of companies seen as desirable for Chinese buyers.”
“Alarmed by the outflow, Beijing began to tighten capital controls in 2015 and 2016, but the deal-making persisted until this year when the government cracked down on money transfers by individuals and discouraged companies from pursuing ‘irrational’ deals abroad. So far this year, outbound mergers and acquisitions by Chinese companies are down 27% from the same period a year earlier, according to Dealogic.”
“Now, pretty much the only thing the Chinese government encourages its companies to buy abroad are high-tech companies such as computer chip makers. But these strategic assets are precisely the kind that Western governments increasingly don’t want to fall into Chinese hands.”
“In real estate there is no way to say for sure how much Chinese buying drove up prices, but governments from Canada to Australia have moved to control foreign buying to rein in property bubbles.”
“Nor is China set to return as a big buyer of U.S. Treasurys. Indeed, if the Federal Reserve keeps tightening, China could be a seller of bonds as it fends off depreciation pressure on the yuan.”
“In the years ahead, financial markets around the world will have to live without the ever-present China bid. Whether China was a savvy investor or the dumb money, asset prices will likely be lower.”
“China achieved its economic miracle by unleashing the entrepreneurial private sector. With President Xi Jinping poised to further consolidate power at the Communist Party’s twice-a-decade leadership shuffle kicking off Oct. 18, the narrative of the next five years is becoming clear.”
“The state is pushing back.”
“The logic is straightforward. Nominally communist China relies on its vibrant private sector for growth, but state-owned companies are indispensable tools for political patronage, social control and economic policy. Any financial rot in the state sector could weigh on the economy and weaken the Communist Party’s grip.”
“With private business already commanding around 70% of the economy, Mr. Xi and his allies have decided to strengthen key state-controlled companies by boosting their market power and easing their debt burdens.”
“For investors, the implications are significant: higher global goods prices because state-owned companies are notoriously inefficient, and a smaller chance of the long-feared Chinese debt crisis. Corporate debt, which is largely in the state-owned sector, ticked down as a percentage of GDP in the second quarter, according to J.P. Morgan—the first decline since 2011. The trade-off is slower Chinese growth. Chinese banks, whose shares are currently on a tear, will need to keep subsidizing bloated state enterprises. And those enterprises’ need for a deep pool of capital inside China means a free-floating yuan will remain a distant dream.”
“For investors, the tilt back toward the state means that innovative privately owned tech and consumer companies may continue to outperform—but probably less so than in the past. Hulking state-owned titans, enjoying newly privileged market positions, may reward investors more reliably: The state-dominated Shanghai stock market has roundly outperformed the technology-and-consumer-focused Shenzhen market this year.”
“Deng Xiaoping, the grandfather of China’s economic reforms, famously said that it was acceptable to let ‘some people get rich first.’ The people are far richer than they were three decades ago. Now it’s the state’s turn once again.”
“Airbnb is stepping up its challenge to traditional hotel operators, launching branded, purpose-built apartments in Florida in a tie-up with a US real estate developer.”
“The partnership with Newgard Development Group marks the first time the San Francisco-based home-sharing group has worked with a property developer. It underscores how Airbnb is expanding beyond simply booking accommodation, its core service that has already hit hotel operators in cities across the world.”
“The 300-unit rental complex in Kissimmee, Florida, near Orlando, will be built and owned by Newgard but carry a new brand: ‘Niido powered by Airbnb’.”
“Harvey Hernandez, chief executive of Miami-based Newgard, said the company planned to build 2,000 Airbnb-branded units in the next two years. Tenants who rent the apartments can choose to sublet them through Airbnb for up to 180 days a year.”
“The Kissimmee apartment building, due to open early next year, includes features such as keyless doors and secure storage that will make it easier for long-term tenants to rent out their rooms when they are away. Through an app, tenant hosts can manage their Airbnb guests’ stay and even co-ordinate services such as changing bedsheets.”
“It will have human touches as well. A ‘master host’ will be on site, and all apartments will have a mandatory cleaning service, in the style of a serviced apartment.”
“’The demographic that we are targeting are travelling more than ever before,’ said Mr Hernandez. ‘So when that property is empty, they can be making money with it.’”
“Newgard, Airbnb and the tenant will all derive revenue from the short-term rentals, with Newgard taking 25% of the nightly room rate, Airbnb taking 3% (the same commission it charges hosts anywhere), and the tenant receiving the remainder.”
“Marriott operates serviced apartments whereby it does not own the property but the building carries its branding and Marriott provides hospitality services. Unlike Marriott, Airbnb will not operate the hospitality services and nor is it charging Newgard for the use of its brand.”
“The US has been shipping its shale oil riches to different parts of the world, including Canada and India, inspiring White House officials to muse about American ‘energy dominance’. But one place that is buying very little of this crude is the officials’ backyard.”
“Last week as the US reported a record 2m barrels a day in crude oil exports, refineries located up the highway from Washington on the east coast imported about 900,000 b/d, mainly from Africa.”
“A big reason is the Jones Act, a 97-year-old US law that requires all ships starting and ending their voyages on US coasts to be American-flagged, built and crewed.”
“What animates critics in the oil market about the Jones Act is that it increases the cost of shipping crude from the Gulf coast to the east coast above the rate charged by foreign-flagged carriers. That helps incentivize exports from Texas oilfields and imports by refiners in the east. The reliance on shipping reflects the fact that no crude oil pipelines link the oilfields of the central US to the east coast.”
“’It’s basically a constraint on the efficient operation of the oil market,’ says Sandy Fielden, director of research for commodities and energy at Morningstar.”
“US lawmakers liberalized trade in crude oil in December 2015, allowing unfettered exports after years of tight restrictions for every destination but Canada. They let the Jones Act stand, though they gave some refiners temporary tax relief related to oil transport costs.”
“The effects are plain to see. In 2015, tankers laden with crude oil from the US gulf coast delivered an average of 50,000 b/d to ports on the US east coast, according to ClipperData, a vessel tracking service. The volumes nearly halved in 2016 and have halved again this year, the data show.”
“Ending the export ban has caused shipments to soar to countries previously blocked from buying US oil, including long hauls to Asia. Crude oil exports to countries other than Canada are averaging about 325,000 b/d this year, ClipperData’s records show, more than treble the levels of 2015.”
“Meanwhile, US east coast refineries near Philadelphia and New York have been importing nearly 1m b/d from countries such as Nigeria and Angola, about 50% higher than two years ago.”
“The increased imports to the east coast come despite falling rates to hire a Jones Act tanker as the industry struggles with a surplus of ships built before the export ban was lifted. The US fleet of Jones Act tankers and tugboat-barge units totals 94 vessels, according to Overseas Shipholding Group, one of the biggest operators in the sector.”
“Sam Norton, chief executive of OSG, estimates the cost of hiring one for crude service is about three to four times higher than using a foreign-flagged vessel. Some shipping consultants say it is even higher.”
“The Jones Act is unlikely to abolished, despite the longstanding efforts of politicians such as Senator John McCain of Arizona.”
“’Since people have been living with it for so long, it’s difficult to say what it would be like if they changed it or if it were repealed,’ says Mr Fielden of Morningstar.”
“With Tropical Storm Ophelia’s transition to Hurricane Ophelia on Wednesday, 2017 became the first year in more than a century — and only the fourth on record — in which 10 Atlantic storms in a row reached hurricane strength.”
“Troubled by huge debts run up by big state companies and politically connected local governments, China is taking steps instead to go after the little guys.”
“Chinese officials have ordered provincial governments to establish online platforms naming those who do not pay their obligations, official media reported this week. The lists should be maintained by local news organizations as well as courts and regulators, the report said, with an aim of exposing deadbeats and pressuring them to pay up.”
“The new effort is unlikely to affect big borrowers, like major state-owned companies and other big firms, whose debts are almost never called in. But it could intensify and centralize officials’ broader moves to assign ratings to individuals based on creditworthiness and other criteria; practices like credit scoring are only just now taking off in the country.”
Japan
WSJ – Daily Shot: BOJ asset purchases and pace of purchase 10/12
“The BoJ is quietly slowing its securities purchases (as part of ‘yield targeting’).”
“First it put the squeeze on ideologically impure academics. Then it tried to censor foreign publishers such as Cambridge University Press. Now President Xi Jinping’s government is intensifying its drive to rewrite Chinese history by amending the archival record itself.”
“New research by a legal scholar reveals that Chinese authorities have been taking advantage of the digitalization of historical documents by systematically deleting Chinese journal articles from the 1950s that challenge the orthodoxy promoted by Mr. Xi.”
“In the past if someone wanted to censor, they had to go to the bookshelves and remove copies or pages but today, with a few keystrokes, you can wipe out content everywhere instantaneously.” – Glenn Tiffert, University of Michigan
“Mr. Tiffert said that digitalization has become an enabling tool for authoritarian regimes such as China, which has taken the lesson from the collapse of the Soviet Union that Communist governments ‘may not survive critical scrutiny’.”
“Although the Communist party has always tried to keep a tight grip on the historical narrative, Zhang Qianfan, a professor of constitutional law at Peking University, said it was getting worse, making ‘society and particularly the younger generations more ignorant about modern history’.”
Perspective
WSJ – Daily Shot: Business Insider – 17 US Companies with Biggest Cash Piles 9/4
WSJ – Daily Shot: recode – Tech companies lead in R&D spending 9/4
“Founded (the National Flood Insurance Program – NFIP) in 1968 to make sure homeowners in flood-prone areas could get affordable insurance, the program ends up paying most residential flood insurance claims in the U.S. Partly as a result, development along coasts and riverbanks and in flood plains has exploded over the past 50 years. So have claims for flood damages. The NFIP is now about $25 billion in debt.”
“The issues surrounding the NFIP go beyond just insurance and straight to the costs of climate change—specifically, whether the government will concede that the most vulnerable places simply can’t be protected. While hurricanes contribute greatly to costs, putting a sudden spotlight on the insurance issue, it’s the chronic flooding that happens away from the public eye, in places such as Dauphin Island (Alabama), that slowly drains the NFIP. The island has one of the country’s highest concentrations of houses that the Federal Emergency Management Agency calls ‘severe repetitive loss’—those that flood most often. The owners of those 84 properties have gotten almost $17 million since 1978, an average of $199,244 each.”
Of course, they’re not alone. “Last year the Natural Resources Defense Council won a lawsuit seeking to uncover how many homes FEMA has designated severe repetitive loss. The data the agency was forced to release showed that about 30,000 properties had cost taxpayers $5.5 billion since 1978.”
“The psychological bias to expect a return to ‘normality’ will remain strong. But the drivers of post-crisis economic performance are so deep that no return to normality is likely any time soon.”
Real Estate
WSJ – Daily Shot: FRED – Total Private Construction Spending – Office 9/4
“The declaration Monday by China’s central bank that initial coin offerings are illegal and should be halted immediately shouldn’t come as any surprise.”
“Beijing had been mulling a plan for controlling this year’s boom in cryptocurrencies, with QQ.com reporting last week that authorities met with the chief securities and banking watchdogs. The state-endorsed National Internet Finance Association had also warned that ICOs pose a financial risk and may disrupt social economic order.”
“More than $1.8 billion has been raised through the 135 initial coin offerings listed at CoinSchedule this year.”
“After months of unprecedented appreciation, almost every digital currency is seeing double digit losses over the last 48 hours.”
“The cryptocurrency market as a whole has lost 20% in just two days as it fell to $142 billion, down from a total market cap of about $180 billion on Saturday.”
“Of course it’s important to put things into context – this ‘crash’ still leaves Bitcoin at double the price it was just four months ago. But it shows why ‘investing’ in cryptocurrencies isn’t for the faint of heart.”
“So why did cryptocurrency crash this weekend? A few reasons:”
“This morning China outlawed ICOs, saying they have ‘seriously disrupted the economic and financial order.’ Whenever a government sanctions bitcoin or cryptocurrencies the market always takes a hit, especially right after the SEC warned against the legality of some ICOs.”
“Another possibility – the market was simply overheated. This crash started right around the time Bitcoin hit an all-time high of a few dollars under $5,000. In other words this may be a natural cool down – if you look at Bitcoin’s history periods of rapid growth are always followed by some type of downturn – the same thing happens when traditional equities rapidly appreciate.”
“Li Hejun, the entrepreneur and founder of solar energy group Hanergy who was briefly China’s richest man, has been disqualified from the management of any corporation in Hong Kong for eight years.”
“In a series of investigative reports into Hanergy in 2015, the Financial Times detailed creative use by its Hong Kong listed subsidiary Hanergy Thin Film Power of unpaid receivables from its parent to book profits, its reliance on China’s shadow banking market for funding and the tendency of its shares to book all their gains in the last 10 trading minutes of each day.”
“The Hanergy investigation drew attention to the role of shell companies in Hong Kong small-caps and the conflicts of interest between Hong Kong-listed businesses and the mainland Chinese parent companies that draw financing from the Hong Kong market without being subject to its disclosure rules.”
