The Lex Newsletter: China’s pandemic pandemonium threatens western business

Before getting started, a quick plug for Lex Populi our new column in FT Money. Targeted at private investors, it aims to demystify, inform and entertain. I hope you enjoy it.

Dear reader,

As a Brit, I do enjoy a good moan. But I know better than to indulge in self-pity within earshot of longstanding colleague Pan Kwan Yuk who always ripostes: “In life, one must be able to eat bitterness!”

The Chinese saying underlines the need for personal resilience. No wonder. China’s modern history has encompassed colonial oppression, civil war, forced collectivisation, famine and breakneck industrialisation. The latest test is a coronavirus pandemic that is putting further pressure on already strained trade links with the west.

Workers who assemble devices for Apple clashed this week with police at Foxconn’s city-sized campus in Zhengzhou. They were protesting over harsh lockdown conditions. The response? The contract manufacturer, listed in Taiwan as Hon Hai, offered bonuses of $1,400 each to voluntary leavers.

Lex reckons Apple will therefore suffer fresh supply problems. Foxconn will, meanwhile, see slim margins erode further as a result of rising labour costs. It is paying the price for funnelling cash flow into such side hustles as electric vehicles rather than spending the money on automating more core processes.

To comment on this, or any other aspect of our coverage, please email us at [email protected].

The broader problem is that China’s locally produced Sinovac vaccine works less well than western mRNA shots. Beijing is too embarrassed to tacitly admit this by shipping in foreign jabs. Instead, it is imposing crushing lockdowns that enrage long-suffering workers and damage wobbly supply chains.

The scale of restrictions is dismaying. They encompass 40 cities and affect about one-fifth of manufacturing output.

Contagion of the financial kind spread to some US businesses this week, notably Tesla, whose shares dropped 7 per cent on Monday. The US electric vehicle maker has done much better in China than its rivals. But flamboyant boss Elon Musk will need to manage relationships there carefully.

The medium-term outlook for the EV product category globally is good. We feel measured optimism towards Lygend Resources, a Chinese trader and miner of nickel, a material essential for EV batteries. Be prepared for volatility, however, in the price of the metal and the Hong Kong-listed shares.

Volatility is also a feature of China’s trade relations with the west. US curbs on chip technology exports to China will deal a bigger blow to western manufacturing than anticipated, according to a fine Lex in Depth by Lex Asia editor June Yoon. This would be particularly acute if China retaliates by cutting off exports of the low-value chips in which it is increasingly dominant.

A choice of evils

The question “Crisis? What crisis?” was famously, though inaccurately attributed to UK prime minister James Callaghan as the UK descended into chaos in the late 1970s. These days, “Crisis? Which crisis?” is the relevant cry.

We covered at least four, by my reckoning, this week.

The biggest crisis remains the Ukraine war. Its latest consequence is an 18-year high in tanker rates. Traders are scrambling to get Russian oil into the EU before a ban begins next month. They are also sending shipments of Urals crude further afield to reach eager new customers in India and China.

Shares in Belgian shipping merger partners Euronav and Frontline have soared. Our expectation is that tanker rates will come off once sanctions are in place and, hopefully, fall again with the end of the war. They should not crash, however, because of lags in tanker building.

Turkey’s economic crisis is linked to the Ukraine war to the extent that President Recep Tayyip Erdoğan is exploiting global tensions to strengthen his hand. The authoritarian leader this week buried the hatchet with his Egyptian counterpart Abdel Fattah al-Sisi.

Saudi Arabia is planning to reward him for this show of Muslim unity with a $5bn transfer to Turkey’s beleaguered central bank. Lex believes this should increase, not reduce, wariness towards Turkish assets. The more support Erdoğan gets from the Gulf, the less he needs to rely on footloose global investors — and the more entrenched his batty economic policies will become.

By way of what an American eurobond banker of my acquaintance referred to as “chopped liver deals” (side orders), Lex also dipped into two financial sector crises. The first is the continuing agony of Credit Suisse. The bank announced net outflows in wealth management equal to a tenth of assets in six weeks. This strengthened Lex’s view that a bright future in wealth management will elude the Swiss lender.

The second crisis involves belly-up crypto business FTX. The Biden administration is planning to tighten scrutiny of non-banks amid the panic. But Lex reckons the collapse of unregulated FTX — without obvious contagion to regulated institutions — actually demonstrates intelligent economy of means in regulation.

Financial columnists typically demand that regulation should be tightened (to tame the spivs and banksters) or relaxed (to lift the jackboot of state oppression from the neck of enterprise). Lex’s radical quietism could easily get us blackballed from the commentariat club — assuming we were even members in the first place.

Error report

Errors are interesting. Understanding them should help us make better decisions next time round. Bad data are a frequent cause of bad calls. Iceland may have mispriced its sale of a tranche of Islandsbanki shares earlier this year because of spreadsheet snafus. Excel hell also contributed to JPMorgan Chase’s $6.2bn “London Whale” trading loss in 2012.

Category errors involve pigeonholing dissimilar things together. Lex thinks the “E”, “S” and “G” of the ESG investment movement illustrate the problem. Even within environmental investment, categories can be deceptive. Fund managers such as Amundi have been anxiously relabelling green funds, lest green hype invites regulator scrutiny.

Errors in personal finance are often the result of ignorance. The proportion of Britons that cannot calculate percentages or fractions is about 20 per cent, or three-eighths (sorry, couldn’t resist).

The Financial Industry Regulatory Authority reckons only one-half of Americans can get three out of five easy financial literacy questions right. Basic financial knowledge will be needed more than ever through the downturn. So please consider donating to the FT’s Financial Literacy & Inclusion Campaign this festive season.

Things I enjoyed this week

• This funny BBC website article by Marco Silva on the great online toaster hoax. For nine years, Scottish-Japanese aerospace engineer Alan MacMasters was celebrated as the Victorian inventor of the electric toaster in a Wikipedia entry concocted by one of his mates. The prank was so successful that the Brand Scotland website listed the toaster as epitomising the nation’s “inventive spirit”. Toasters were, in fact, invented in the US by General Electric’s Frank Shailor in 1909.

• The Netflix movie All Quiet on the Western Front, which tells the grim story of the first world war from the defeated Germans’ point of view.

• Watching a peregrine falcon escaping an angry crow with the casual turn of speed of a Ferrari outpacing a black cab. I have seen these formidable predators over Manhattan but never from the City of London before.

Have a pleasant weekend,

Jonathan Guthrie
Head of Lex