A Bridge Too Far

China has embarked upon its grand ‘Belt and Road Initiative’ (BRI) to build road, rail and sea links to the rest of Asia, Africa and further beyond. Under President Xi’s BRI strategy, overseas investment and construction contracts are estimated to have ballooned to $730 billion in over 112 countries.

By way of example, in the Indian Ocean, this has included investment in infrastructure projects in the Maldives and Sri Lanka. The new government in the Maldives has been looking at the nation’s finances and has discovered it owes China over $3bn for infrastructure schemes including the China-Maldives Friendship Bridge. China claims the debt is only $1.4bn, but even this figure would be approaching 30% of the Maldives GDP. Maldivian officials are now concerned that if they default on the loan, that they could end up in a similar position to their neighbour Sri Lanka.

In 2010, Sri Lanka invested $1.5bn in building a port in Hambantota with support from China. Within a few years the port proved to be unviable and the country defaulted on its loan. After the debt was restructured, a Chinese state-run enterprise acquired a 70% stake in the port on a 99 -year lease in 2017 and Sri Lanka had to also provide 15,000 acres around the port for China to build an enterprise zone.

Similarly, China has been increasing its presence in Africa and has now emerged as the continent’s largest single creditor. Around 20% of all Africa debt is owed to China. African governments and state-owned enterprises owe China more than $150 billion and Covid-19 is limiting their ability to repay.

Last year, US Secretary of State Mike Pompeo hit out at China for what he called ‘corrupt infrastructure deals in exchange for political influence and using bribe-fuelled debt trap diplomacy’.

Mind you, given our history, can we criticise? Britain brokered a 99-year lease on Hong Kong after China lost a series of wars fought over the trade in opium from India! Did the Chinese learn from this?

What have we been watching?

Markets started last week with a sell-off on fears of more Covid-19 lockdown measures with more countries tightening restrictions which will weigh on economic recovery which is now beginning to lose pace. Governments want to avoid national lockdowns. In the UK, the latest lockdown measures were not as bad as had been feared but localised restrictions are increasing. President Trump said the US will not lock down again. US investors continued to rotate out of technology stocks while the Federal Reserve called for more fiscal support for the economy. US investors are still hoping that some fiscal stimulus can be agreed by US politicians before the Presidential election.

Markets were helped by news that Johnson & Johnson is the fourth company to start a phase III trial of its Covid-19 vaccine. However, the US Food & Drug Administration is expected to announce more stringent standards for emergency authorisation of a vaccine lowering the chances of one being approved before the US presidential election.

The US presidential election race also added to the uncertainty as President Trump suggested that he would not commit to a peaceful transfer of power should he lose! President Trump, is currently trailing Democrat Joe Biden in the polls and the pair have the first of their three televised debates tomorrow. Meanwhile, Trump has nominated conservative Judge Amy Coney Barrett to replace the late Ruth Bader Ginsburg while the New York Times has alleged the billionaire president paid just $750 federal income taxes in 2016. Trump immediately dismissed the accusations as ‘totally fake news’.

President Trump used a video address at the 75^th United Nations General assembly to attack Beijing for not stopping the spread of what he called the ‘China virus’. Speaking soon after the US leader, President Xi warned of the risks of a ‘clash of civilisations.’ Meanwhile, the House of Representatives voted overwhelmingly to ban imports from China’s Xinjiang region in reaction to treatment of the Uighur community. Washington has also ordered US companies to seek permission before selling their technologies to Chinese semiconductor giant SMIC.

Truck drivers will need a permit to enter Kent after the Brexit transition period. The government’s worst-case scenario is that between 30%-60% of HGVs might not have the right paperwork for the goods on board and would be turned back by the French border authorities clogging the Dover to Calais crossing. A recent meeting between the UK haulage industry and government was described as a ‘washout’. Cabinet Minister Michael Gove is heading to Brussels for crunch Brexit talks. The deadline for current negotiations is two and a half weeks away and if both sides fail to reach a deal by the end of the year, the UK would trade with the EU on World Trade Organisation (WTO) rules.

The UK was caught up in the global sell off at the start of the week with investors worried about the imposition of another national lockdown. After the scare tactics, the UK has ended up with a version of ‘lockdown light’ with measures varying across the four devolved regions. In yet another U-turn, after saying go out and eat all you can, pubs and restaurants are now to close at 10pm while having encouraged workers back to the office, its back to working from home if able and this could be for up to another six months. Don’t expect to attend any live sports events either! What does this mean? Businesses that benefited from lockdown before will benefit again. Likewise, travel, hospitality and services businesses linked to city centre commuting will suffer. Will the actions gain the government some authority and help compliance by the public? Given how complicated the rules are some further tightening would seem inevitable.

In the UK, the Autumn Budget has been cancelled in view of the Covid-19 situation. However, Chancellor Rishi Sunak announced a new job protection scheme which is estimated to cost around £400million a month but this looks trivial in scale compared to his prior efforts. This comes as more companies, particularly those in the hospitality sector warn of job losses when the current furlough scheme ends in October. For example, Whitbread, which owns Premier Inns warned that 6,000 staff could lose their jobs. The ONS believes that as at 6^th September that 1 in 8 UK workers were still on furlough and 84% of businesses were trading.

The new job support scheme will be for 6 months from 1^st November 2020. To be eligible employees work a minimum of 33% of their hours. For remaining hours not worked, the government and employer pay 1/3^rd of the wages each. So, employees working 33% of their hours will receive at least 77% of their pay.

The CBI Industrial Trends survey bucked the trend of improving sentiment news with the headline order book slipping back slightly in September. The ‘flash’ September PMI manufacturing activity indicator also dipped slightly but remained in expansion territory.

In Europe, the ‘flash’ September PMI manufacturing activity indicator for the Eurozone continued to expand with Germany particularly strong reflecting the pick-up in car production and recovery in China -one of its main export markets.

In the US, Jerome Powell, Chair of the Federal Reserve re-iterated that further fiscal stimulus is needed if the US economic recovery is to continue.

Finally, its not just president Trump playing the Covid-19 blame game. Four civil lawsuits have been filed against Austria’s government on behalf of individuals who are seeking damages of €100,000 each, claiming they caught Covid-19 from visiting Ischgl ski village in March. The Tyrol resort was subsequently linked to infections in 45 countries after skiers brought the virus home with them. The lawsuit claims the Austrian authorities were aware of cases in early February.

Read Last Week’s Alpha Bites – Battlezone

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A Bridge Too Far

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