MARKET REPORT
SHORT READ PART 1
2022 APRIL QUARTERLY ISSUE
Written by : Andrew Sia
About a third of the global manufacturing companies are struggling with the rising prices for the raw materials and the shipping cost. And already the delivery time for products shipping from Chinese factories to the West Coast of the United States have stretched from less than 50 days at the beginning of 2019 to a record high of 113 days in this January.
Most of the shipments are suffering from serious delays and the shortage of materials have becoming very obvious.
Car manufacturers are lacking of the chips, companies like Volkswagen and Toyota are closing their plants at this critical moment.
This new disruptions can depress consumer confidence and exacerbate inflation which is already at a 40-year high, posing challenges for the Biden administration and the Federal Reserve.
Contents:
China’s Lockdown is Putting Stress on Global Supply Chain
No 5G Services in the Major U.S. Airports
Gloominess is Overcasting China’s Tech Industry
The Great Resignation In the U.S.
Hong Kong is Following Beijing’s Zero-Policy for Covid
Supply Chain is Under Siege of China’s Zero-Covid Policy
High Price and Short Supply are Slowing the Use of Recycled Plastic
Supply Chain Challenges
The Slowing of China Economy
China’s Trade Surplus Reached Record High
The Latest Situation of Hong Kong
Latest of the Pandemic
How the Europeans Are Doing in this Omicron Wave
Ukraine Under the Threat of Russia
China’s Zero-Covid Policy is Threatening the Lives of the Fruit Farmers in the Southeast Asia
China’s Lockdown is Putting Stress on Global Supply Chain – New York Times, January 17, 2022
To achieve its net-zero covid cases, China is imposing lockdowns, contact tracing and quarantines to halt the spread of the coronavirus for the past two years. We have seen tens of millions of people confined to their homes in several Chinese cities. We have also seen flights being suspended for the coming weeks if not months. This policy has extended to Hong Kong, the city who used to have its own jurisdiction, is following China’s net-zero policy ardently.
This is disrupting to the global supply chain knowing that it is also about a third of the global manufacturing. Its companies are struggling with the rising prices for the raw materials and the shipping cost, and this will further extend the delivery time to the importing countries.
Already four of the China’s largest port cities—Shanghai, Dalian, Tianjin and Shenzhen, have imposed the targeted lockdowns to control even the smallest outbreak of the Omicron variant.
It has already shown that the delivery time for products shipped from Chinese factories to the West Coast of the United States have stretched from less than 50 days at the beginning of 2019 to a record high of 113 days in this January.
It is found that new disruptions can depress consumer confidence and exacerbate inflation which is already at a 40-year high, posing challenges for the Biden administration and the Federal Reserve.
No 5G Services in the Major U.S. Airports – WSJ, January 22, 2022
It was raised by the Federal Aviation Administration (FAA) that the new cellular signals from 5G could disrupt the decade-old aviation equipment. This concern was expressed since 2015 for its flight safety. And at the last minute, both AT&T and Verizon Communications Inc. agreed to limit 5G signals near major airports.
On the other end, telecom companies are counting on fifth-generation wireless standards to keep up with growing demand by customers for streaming videos, mobile games and apps, as well as developing new revenue streams.
The two key players—AT&T and Verizon invested more than $81 billion to secure air rights for the new high-speed wireless service on advertising, personnel and equipment. Their view is that aircrafts are safe from any 5G-related disruptions. This is backed by the Federal Communications Commission (FCC), which controls commercial airwaves.
We have seen the two different opinions here and no one has come out as a winner but to hold back the airwaves for the 5G near the major airports, there are 50 airports of concern to major airlines in the U.S. until tests have been made to clear the safety concerns.
Gloominess is Overcasting China’s Tech Industry – New York Times, January 8, 2022
Under the direction of China’s paramount leader, Xi Jinping, China’s once vibrant internet industry is hit by a harsh and capricious regulatory crackdown. In place of the pride and ambition that dominated a few years ago, fear and gloom now rule as many tech companies lower their growth targets and lay off young, well-educated workers. The hyper-political approach shows that it is the communist party taking control the industry to limit the power and to mitigate systemic risks. This crackdown is killing innovation, creativity and entrepreneurial spirit that made China a tech power in the past decade. It has destroyed companies, their profits and jobs that used to attract China’s best and brightest students.
Already damages have been created and some internet companies have been forced to close down, while others are suffering huger losses and disappointing earnings caused the share prices fall by half.
In the third quarter of 2021, Chinese’s largest internet company, Tencent, posted its slowest revenue growth since its public listing in 2004. Same for Alibaba, the largest e-commerce giant, declined its profitability by 38% compared to the year before.
Didi was once the most valuable start-up reported an opening loss of $6.3 billion for its first nine months of operation. It was the result of the Chinese authority’s order to stop signing any new users and removed their apps and pended for the cybersecurity investigation.
What followed with the online-education and tutoring, pulling of the popular contents and influencers from the online social media entertainment platforms, all leads to Beijing’s intention to control the cyberspace as its tool for governance and national rejuvenation. And in mid-December its internet regulator said that it had ordered platforms to shut down more than 20,000 accounts of top influencers in 2021. This resulted hundreds of thousands, if not millions, have lost their jobs.
The crackdowns are having a chilling effect on the job market. This year there will be 10 million college graduates in China and about 4.5 million have applied to graduate schools, up 800,000 from the year before. More than two millions have applied to take civil servant examinations, up half a million. Many young Chinese are looking for the public sector for more stable positions although they tend to pay a lot less.
Gloominess is overcasting China’s tech industry and it is uncommon to hear the youngsters are “tǎng píng” which in Chinese is “lay-flat”. It is pessimistic, but under this circumstance what is out there for them?
The Great Resignation In the U.S.
It was mentioned that more than 4.5 million Americans voluntarily quitted their jobs in November alone, the highest figure for one month on record. Most of the turnover has been from the hospitality, retail and other low-wage jobs that have been particularly challenging during the pandemic.
Normally switching jobs is usually a way to secure a better pay, more rewarding work, and an improve work-life equilibrium, but this time there seemed no better solution except perhaps frustrations and anxieties during the lockdown damaged the people’s morale. When the person is being pushed to the breaking point and the behavior can’t be rationale.
Hong Kong is Following Beijing’s Zero-Policy for Covid – New York Times, January 22, 2022
Hong Kong is known as the Asia’s World City is cutting itself off from the outside world. Its government is chasing the same dogged virus strategy as China and hoping that the effort can strengthen its ties to Beijing and declare its victory over Covid-19. This has turned the metropolitan hub into another isolated Chinese city.
Its restaurants and bars have closed past 6:00 pm. Flights from eight cities were suspended. The city has been relying on international trade and its global supply chain has already been strained with problems along its path. This acts as the last nail to its coffin.
Those Hong Kong officials have become obsessed with Beijing’s zero-tolerance of the Covid-19 and their top priority is to reopen its border to China. They want to turn Hong Kong into another mainland city at all cost.
It is already taking the effect on the restaurant operators and many have closed for good even before this policy comes into force. With the distressed supply chain, goods are strained to find their way to Hong Kong. The delay can be as long as four months for a pallet of tomato sauce to arrive from Naples for example and already the pizzerias are running out of tomato sauce.
A container of hops used to cost around €2,000 which is now €15,500 or $17,500 for example.
The city’s 21-day quarantine to stop Omicron will result the running out of food and to watch the price going up by 30% to 40% is expected.
No one is keen to dine out as for any outbreak will result for lockdown immediately and no one would like to take the risk of being put into mandatory quarantine until he or she can prove to be covid-negative.
Already the economists at Wall Street have lowered their estimates of the city’s economic growth. Fitch, the rating agency, warned the ban on foreign travel would severely threaten Hong Kong’s future economy.
Hong Kong is still hemorrhage from its 2019 pro-democracy protests that resulted from being ruled under the national security law of China. It is sad to see the city being wasted away by its government who is applying the strong hand like Beijing. But many of the people doubted if it was Beijing’s intention or it is its city’s chief executive, Carrie Lam’s own thinking.
Supply Chain is Under Siege of China’s Zero-Covid Policy – FT, January 17, 2022
Already the global suppliers of goods ranging from smartphones and furniture are under the stress as China has imposed more lockdowns to stop the spread of the Omicron variant.
Lockdown of Xi’an, a city of 13 million has entered into its third week. Stern restrictions and mandatory testing have been imposed in Tianjin, a city of 14 million and 100 kilometers south of Beijing. The measures are a test for the multinational companies if they are equipped to deal with another wave of disruption which is more political than the pandemic.
With the Omicron, which is highly contagious, the Lunar New Year holiday and the Beijing Olympic all happening at the same time is putting the supply chain under a situation that has never happened before. In fact this is worse when the Wuhan virus broke out in 2020, as now the supply chains around the world are already very tense. Most of the shipments are suffering from serious delays and the shortage of materials have becoming very obvious.
Already the car manufacturers are lacking of the chips, companies like Volkswagen and Toyota are closing their plants at this critical moment.
The other countries are not doing any better due to the infestation of the Omicron and that have increased many countries’ dependence on China for the supply. To build another factory elsewhere for the geographical diversification is not going to happen in another three to five years.
High Price and Short Supply are Slowing the Use of Recycled Plastic – FT, January 17, 2022
The cost recycled PET overtook the virgin equivalent as demand overtook and the awareness of the impact of plastic pollution. Soft drink groups like Coca-Cola, PepsiCo, Nestlé, Keurig Dr Pepper are all aiming to use recycle plastic for at least 25% of their packaging by 2025.
The non-alcohol bottlers are fighting with the other sectors, including clothing, to have access to recycled bottles ahead of all sectors.
Supply Chain Challenges – FT, January 22, 2022
The availability of bulk-cargo carriers and the shipment cost has eased off. For shipments of commodities like iron ore and coal due to the weak demand. The Baltic Dry Index of bulk-cargo shipping prices have continued to drop from a high of 5,000 at the beginning of October 2021 to January 2022.
But most of the end-products and parts that come in through containers are still delayed in transit. One of the reasons is the wide spread of the Omicron that caused the skillful labor shortages.
Although the ships are still waiting to unload their containers at the container ports, the land transportation is being held up because of the absence of truck drivers. One thing that has brought out for attention is the truck chassis and in May 2021 it was approved for the punitive tariffs of 221% by the Trump administration. This is a very low-tech assembling work and in the U.S. it is turning out 2,000 to 3,000 chassis per month, but the shortage is 500,000 chassis and it is quite impossible to catch up.
One of the problems is that the containers are sitting of the chassis and left at the parking lots. Not only that it is not freeing up the containers but also occupying the chassis unnecessary if the shipments can be cleared by the importers. Part of the problems is the lack of truck drivers, and hopefully the situation will improve in February and the workers will return to work from their sick leaves.
Europe is not without its problem, with the paperwork from the Brexit and immigration restrictions, worsening of staff shortage are all causing delays.
With China adding its “zero tolerance” for its covid policy, its ports are strangled.
All these are adding to the deficiency of the logistic and improvements are needed.
The Slowing of China Economy – New York Times, January 18, 2022
The world’s demand for consumer’s electronics, furniture and other home furnishing products during the pandemic has produced such a high demand that it set the record for China’s export. The overall economic output for China was 8.1% higher than it was in 2020 but much of the growth was in the first half of last year.
In the second half of 2021, China’s stringent regulations on everything from internet businesses to after school tutoring, limiting real estate speculation led to slump of construction and property sales, addressing income inequality, and all these slowed China’s domestic economy to a new low level.
China’s National Bureau of Statistics mentioned that economic output from October through December was only 4%, compared to its third quarter where it was 4.9%.
We saw the closures of smaller businesses, a wave of layoffs from the high-tech companies and the local governments resulted in cutting the pay of civil servants.
But all these were the measures of Xi Jinping’s reining in of companies to protect the economy and national security in view of his seeking for a third five-year term at the Communist Party Congress in the fall.
To control the Omicron, China’s lockdown of cities have hurt the local economy as consumers are not spending that lead to the closure of private businesses. This is the backbone of Chinese economy accounting for three-fifths of output and four-fifths of urban employment.
The slowdown in the housing market has an effect on local governments who have relied on land sales as their key source of revenue. The central government’s curb on the speculation and deflated a bubble resulted a starving of revenue as the local governments can’t raise money equivalent to 7% of the country’s annual economic output. The civil servants are the first to be affected for their cut of their pay-checks and bonuses.
This situation will remain challenging for the first half of the year 2022. But the second half will see a rebound and it will make way for the Communist Party Congress in the fall.
China’s Trade Surplus Reached Record High – FT, January 15, 2022
China released that the country’s trade surplus for 2021 was $676 billion, it was 26% higher than the previous year. The country’s export was $3.36 trillion for the full year, and with December’s year-on-year growth of 21%, adding to a double-digit gains in every single month in 2021.
The trade surplus came ahead of its release of the fourth-quarter gross domestic product figures. Knowing that the country’s economy was struggling with its weakness in consumption, the property slowdown and its strict measures to contain the virus, China has to look for export to paint a rosy picture.
It is without question that China is still dominance the global trade even under the coronavirus era. Exports continued to climb through 2021 even the global supply chain suffered from widespread of delays and blockages.
But we would want to point out that China’s export numbers also included its exports to Hong Kong for the same period for almost $340 billion.
The Latest Situation of Hong Kong
Hong Kong is going through a slow death.
It announced that it has no definitive timeline to lift its restrictions on international borders this year, despite earlier on that it said that the restrictions would lift by June 2020.
Its 21-day quarantine which has shortened to 14 days now is still found difficult for executives to use the city as the regional hub. The city has assigned 44 designated quarantine hotels with 12,500 rooms across Hong Kong for anyone arriving in the city.
Passenger flights to eight countries, including the U.S. and U.K. have been banned and air freight services reduced. Also transit flights from 150 countries have been banned as they were categorized as “high risk”. This has now been extended to February 18 and the government will decide upon the situation of the pandemic in Hong Kong by then.
With very few cases of the coronavirus and the deaths are insignificant comparing to all the other countries, Hong Kong has chosen this policy to be in line with China’s net-zero strategy. This policy has cut off Hong Kong from the world and the business executives have started their evacuation.
On top of this, Hong Kong has lost 88,800 who have sought for a program to apply for the British National (Overseas) program in UK the first half of 2021. In another word that they have migrated there.
It is clear that the net-zero policy is tied to the net-zero strategy of China and the purpose is to reopen its border with Mainland China. Hong Kong is placing China ahead of the world today.
Once the global financial center has lost its luster with the long quarantines and travel bans from other cities, including the U.S. and U.K., plus its citizens’ civil rights and freedoms which are dominated by the national security law which can apply on almost everything.
A regional corporate Armageddon will expect soon to take place once the financial industry’s yearend will take place in March/April but brain drain has already taking place.
As long as Beijing continues its tight control of the flow of capital in and out of China, Hong Kong can remain a chance to strive and survive. With its low tax and a relatively stable business environment, during this time it is the U.S. politics to push out the Chinese listings, it will help for Hong Kong to host those companies in the Hong Kong Stock Exchange.
The Hang Seng Index used to be the hub for banking and property market, has changed in recent years to trade for the mainland listed companies as the place for them to draw the investments. And Hong Kong has the traders and the fund managers who are known as the seasoned traders.
We have to admit that the “one country, two systems, as the formula put together by the British and China which made Hong Kong flourished as the gateway. In the year after Dang Xiaoping established the open-door policy, in its forty years, China has become the world’s fastest-growing major economy.
As long as Xi Jinping would stick to his crackdown of the freedom and democracy in Hong Kong and leave the other system intact, and the imposition of a national security law in June 2020 was only to crush the political opposition in Hong Kong, then Hong Kong would have its survival.
For the pandemic, we can see that Beijing is imposing its “one country, one system” and unless the pandemic is going away very quickly, or otherwise it will have its impact. We believe that after the coronavirus, the world will be different, and Hong Kong will be more localized with the adding of the China element that can make it more different.
Latest of the Pandemic – The Week, February 4, 2022
It has been two long years that the world has been under the threat of this pandemic which is contagious and deathly to a certain extent. The total number of deaths in the U.S. has already exceeded 900,000 with the daily rate of 2,500 as the latest.
But people are talking about the slowing down of the pandemic and even the mentioning of a new layer of natural immunity on tens of millions of American and billions of people worldwide, through the vaccination, booster shots, and the previous bouts of infection. Meanwhile, scientists have developed effective antiviral therapies and even starting the test for variant-specific boosters.
With these developments, it is hopeful that we are entering into Covid’s “endemic” phase which means that the Covid will continue to circulate but will become a largely manageable disease.
If we remember well that in the beginning of 2020, when Covid-19 was first known as the Wuhan virus, and it started as “epidemic” until March 2020 the WHO announced that it is actually “pandemic”.
With this news, people are already talking about dropping their guards down by opening the schools and the offices, dropping the face masks and the vaccines and resume our normal life. We should take the “reality check” so to speak before making these moves as if everything can now be normalized.
We started the report by mentioning that there are death cases around us and the new Omicron new cases are still around 500,000 per day.
We may not know what is the next variant after Omicron and if we drop all precautions now and let the virus continue to spread and mutate, we don’t know what to expect for the next outbreak.
So we have to be cautious.
How the Europeans Are Doing in this Omicron Wave – WSJ, February 1, 2022
Despite the record-high cases, the U.K. and the other countries across Europe have responded to Omicron with fewer rules than the previous Covid-19 waves. One of the measures is to allow the businesses to remain open and to the business operators they have found that the situation is becoming more manageable.
We may not have seen the business growth to be significant but it has brought hope.
The eurozone economy expanded 0.3% in the fourth quarter of 2021, or 4.6% for the whole year. The U.K. economy have grown by 1.2% in the fourth quarter.
Most European economies booked for strong growth for 2021, but with the arriving of Omicron at the end of the year, it has the set back. Nevertheless, the French found their economy to grow more than any year since 1969, the Italian has their best in the last forty years, and the German grew a relatively modest 2.7% as the supply chain hit its manufacturing sector particularly hard.
Across the continent there are signs of a return to normalcy in the business world. In-person fashion shows were held in recent weeks in Paris and Milan. The Mobile World Congress, one of Europe’s biggest technology conferences, will go on in person in late February in Barcelona. Organizers are saying that they are expecting 1,500 exhibitors and attendees from 150 countries.
But the service industry is continued to suffer as the pandemic entered into its third year.
Manufacturing is doing well, but it has to face surging energy costs, supply chain bottlenecks and difficulty to procure some raw materials. It is not the problem to receive the order, but to deliver on time and make a reasonable profit with all the rising costs.
Ukraine Under the Threat of Russia – New York Times, February 6, 2022
In the days of the Soviet Russia, it was known as Ukrainian Soviet Socialist Republic , which began from 1936 and lasted until 1991. It was also the end of the last Cold War, and at that time the third largest nuclear power was not Britain or France, or even China, but it was Ukraine. Geographically it was located on the easternmost provinces of Soviet Union.
At the end of the Cold War, Soviet collapsed in a slow-motion downfall that culminated in December 1991. Ukraine, newly independent, inherited 5,000 nuclear arms that Moscow stationed on its soil. There were underground silos on its military bases held long-range missiles that carried up to 10 thermal-nuclear warheads. Removal of these arsenals had been a chaotic upheaval among the government and the military.
It ended as a triumph of nuclear arms control, and diplomats and activists casted Ukraine as a model citizen in a world of nuclear powers. In Kyiv, its capital had voices that it shouldn’t declare itself as a nonnuclear-state and should retain at least some of its long-range warheads. A residual missile force would be enough to deter the Russians who have a history of bad relationships with Ukraine.
For its disarmament, an accord known as the Budapest Memorandum was signed by Russia, Ukraine, Britain and the United States. It was agreed none of the nations would use force and threats against Ukraine and respect its sovereignty and existing borders. If aggressions took place, immediate action should be sought from the United Nations Security Council. But it failed to get the kind of legally binding guarantees that would come from a formal treaty ratified by the U.S. Senate. Instead it received only the assurance from Washington.
In May 1996, Ukraine saw the last of its nuclear arms shipped back to Russia.
In early 2014, the world saw the Russian troops invaded Crimea and stepped up a proxy war in eastern Ukraine which Russia still has the influence. Russia dismissed the Budapest accord as null and void. This low-level warfare has been going for eight years.
In Ukraine, calling for rearmament and nearly 50% of the public voted the bill for arsenal reacquisition. In 2020, Ukraine said in Germany that if it cannot become a member of NATO, it will develop its nuclear arms. But there is the unwillingness of the EU to expand to the post-Soviet territories.
For the rearmament would means a challenge in many fronts—scientific, logistical, financial and geopolitical.
Today the world will need commitments to support peace loving people of Ukraine and avoid them being harassed by its neighbor, Russia, who is the tyrant.
China’s Zero-Covid Policy is Threatening the Lives of the Fruit Farmers in the Southeast Asia – New York Times, February 6, 2022
China’s zero-covid policy has locked down entire cities leaving Chinese citizens stranded with medicine or food. It has gone into great length to keep the virus out of its borders. Screened mail and tested thousands of packages of fruits and frozen food, despite little evidence that virus can travel through them.
Take for instance, Vietnam’s dragon fruit is forbidden to export to China. Myanmar’s watermelons are stopped at border as the truckdrivers are told to take 15 days’ quarantine before they can enter into China for making the delivery.
Thailand’s durian is facing the same treatment. The same has affected the fruit farmers in Cambodia and Laos.
For the past decade, the fruit farmers in Southeast Asia has been depending on China. A rising Chinese middle class has become health-conscious and created the market for these countries.
Also with a robust road and highway network that linked them with China.
This time at the Lunar New Year where the tropical fruits are served during the weeklong holiday but now the business is all gone.