MARKET REPORT
SHORT READ PART 1
2023 JANUARY QUARTERLY ISSUE
Written by : Andrew Sia
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Our report focused on the economic situation and the tension over the supply of the semiconductor. This is a very uncertain moment with the war still fighting over Ukraine by Russia which has been close to 250 days at this writing.
The U.S. has remained as the de facto currency, and its rising in exchange rate has added burden to the emerging economy.
The meddling of Russia in the OPEC+1 will add burden to this winter for the oil price. Already it is threatening the European countries for the natural gas supply.
We are not very optimistic with our next report.
Contents:
Implication of the U.S. and China Decoupling
China’s Latest Economic Situation
China is Using Robotics to Replace its Workforce
Coronation of King Charles III
Global Economy Forecast
Covid Causing Constrains on Education System
Knowledge about a Metal Called Lithium
Demand for Cargo Carriers Has Subsided
Ambition of Meta Over the Metaverse and Related Thoughts
Strong Dollar is Affecting World’s Emerging Markets
Vietnam, the Major Beneficiary for Export to the U.S. Market
U.S. is Curbing Technological Export to China
What is Happening in the Tech Supply Chains of Technology
The Wrestling Between OPEC+1 and the US
China’s Export Machine Slows Down
Implication of the U.S. and China Decoupling – FT, September 19, 2022
We have heard about the decoupling between the U.S. and China, but under the economic implication of the decoupling is getting very important for the U.S. In Trump’s administration it was tit-for-tat. It involved tariffs and sanctions. Now in Biden’s administration, it is vague and no clear policy as yet.
An executive order was signed by Biden for the Committee of Foreign Investment to apply the scrutiny of the two countries in sensitive areas, such as artificial intelligence, quantum computing and biotechnology although China was not specified.
This time the tensions between the two countries have risen to a very worrisome level particularly it is circling the Taiwan Strait. The U.S. Senate Foreign Relationships Committee has just approved a bill that would provide $6.5 billion in direct military assistance to Taiwan for the first time.
There is the concern of the island’s 92% supply of the world’s high-end semiconductors. There is no plan B as yet.
China is the key supplier of the drug ingredients to the U.S., and also the green batteries, key minerals and pharmaceuticals. There are no alternative suppliers that have been located and if the supply chains and the financial flows are disrupted, it would be a catastrophic situation for both nations.
Xi Jinping is looking forward to be appointed for his third term by the Communist Party Congress and he has already made it clear that his top priority is the national security more than the economic growth. The decouple would interrupt the trade and capital growth but the same would apply to the U.S. There would be no winner but only losers.
China’s Latest Economic Situation – WSJ, September 17, 2022
China, the world’s second-largest economy is facing economic downturns in many areas. First of all its housing price continues to decline as the consumer spending remained weak. Average new-home prices in main cities dropped 2.1% in August, accelerating from 1.7% in July. This has been going on for the 12 consecutive months despite the rate cuts and the loosening of real estate requirements across the country, it has not been able to revive the real estate market.
Its retail sales have remained weak. Its tourism spending fell 22.8% for the recent 3-day holiday from a year before. Movie box-office revenue fall by 25.9% compared with the year before, even though there are more new movie releases.
Industrial production is steady, although there are power shortages caused by extreme heat and drought across the country. Its joblessness improved to 5.3% from 5.4% the previous month. The youth unemployment improved to 18.7% from a record 19.9% in July.
The improvements were being boosted by the government to extend hundreds of billions of yuan in credit to support infrastructure projects and the power and agricultural sectors. Its central bank also cut two key interest rate in mid-August.
But its zero-Covid policy is still remaining as the country’s concern. Its restriction is restricting the country’s demand and the recent week’s stepping up against potential outbreaks is more of a political measure as before the Communist Party Congress meeting started on October 16, this measure would not be relaxed. Again this is national security over its economic growth.
China is Using Robotics to Replace its Workforce – WSJ, September 19, 2022
China installed almost as many robots in its factories last year than the whole world put together. It is using the robots to automate and to consolidate its manufacturing dominance as its working-age population shrinks.
China accounted for just under half of all installations of heavy-duty industrial robots last year. It is used to offset its supply of cheap labor and the wage increase.
The United Nations predicted that soon India will surpass China as the world’s most populous country as soon as next year. The population of its workforce, in the age between 20 to 64, could have already peaked and after 2030 it will fall steeply. And since China can’t continue to expand its workforce to drive economic growth, automation may help it to achieve its goal.
From the data showing an hour of the worker’s output in 2021 was a quarter of the average of the Group of Seven advanced economy and a fifth of the level in the U.S. Its productivity growth after the rise of 9% between 2000 and 2010, it slowed down to a rise of 7.4% in the last decade.
The recent trade tension with the U.S. and the rest of the world has put the Western country to reduce their over reliance on China’s manufacturing goods. China is still the world’s factory as it represents 29% of the global manufacturing.
There is also the shifting from manufacturing the servicing sector in China. In 2021 there were around 147 million people employed in the manufacturing sector compare with 169 million in 2012. But over the same period the service sector increased the employment by 32% to an estimated 365 million according to the International Labor Organization. This also shows the young workers are moving away from manufacturing sector to servicing sector which are more flexible and accommodating.
Using of the robots can help the factories more focus on higher-end and precise manufacturing operations. The International Federation of Robotics which is a robotic industry trade group, shows its data that the robotic installation worldwide rose 27% in 2021 from 2020, to 486,800 installations. Not only it is used in electronics, although the demand is the largest, robotics are used in auto makers, manufacturers in plastic, rubber, metal and machinery are also commonly used.
In China, robotic takes almost 90% in the automotive sector. It is replacing the labor from the tedious work in the assembling lines.
Coronation of King Charles III – New York Times, October 13, 2022
Scandal of the King Charles family with the departure of Prince Harry and his wife, Megan, the internal exile of Prince Andrew, Charles younger brother, who has banished from public life because of his links to the disgraced financier and convicted sex offender, Jeffrey Epstein.
He streamlined the royal family by reducing the number of workers for the royal families.
He kept a very low profile since the Queen’s funeral partly because of the extended mourning period after the Queen was buried at Windsor Castle.
He also decided not to attend the COP27, an international climate-change summit in Egypt in November following the advice from Prime Minister Liz Truss. Although he is an impassioned environmentalist, he acknowledged after acceding to the throne he should withdraw from political issues in his new role, and pass those duties to other relatives, like to his eldest son and heir to the throne, Prince William.
King Charles III will be crowned on May 6, 2023, at Westminster Abbey, Buckingham Palace as announced on October 11, 2022. It will be the first coronation in Britain in seven decades. Its extravagant will be pared back considerably from Queen Elizabeth II in 1953.
The coronation will be presided by the Archbishop of Canterbury. And will scale back its length of time, unlike the four hours of coronation during Queen Elizabeth’s time.
Global Economy Forecast – WSJ, October 12, 2022
Global economy upheavals have been caused by Covid-19 and the war in Ukraine.
World Economic Outlook stating that the world economy is heading for recession if our policymakers mishandled the fight against inflation. This is all caused by the Russian’s war in Ukraine that led to the rise of energy and food cost. Higher interest rate will cool off economy. Cost of money will suppress inflation by slow down consumer spending and business investment. This will cause recession.
Covid-19 is still causing havoc as there are countries whose policies have not evolved around the pandemic sensibly, and China is a typical example.
This year’s global economy growth was projected at 4.4% at the beginning of the year and it is dropping now to 3.2%. For the global forecast for economy growth of 2023 was 3.8% and it would now be adjusted to 2.7%.
But Bloomberg was predicting more dim for this year at 2.9% and next year at 2.5%.
Covid Causing Constrains on Education System – FT, September 3, 2022
Schools across Europe are facing a staff crisis and in five countries alone—Germany, Hungary, Poland, Austria and France—there are a shortage of 80,000 teaching positions need to be filled. Authorities are cutting learning hours, increasing class sizes and lowering recruitment standards as it has already been a struggle to fill up those posts at the beginning of the new academic year.
Teaching unions are pointing out the low pay and the burnout caused by this time during the Covid with the government’s oversight. Both have caused the teachers to look for early retirement or quit. On the other hand, the profession is struggling to attract new entrants.
In France there are more than 4,000 of 27,300 new posts remained unfilled. Its starting salary for primary school teachers ranked 20th across the 38-member Organization for Economic Cooperation and Development (OECD) club of industrialized nations. President Macron pledged a 10% pay increase, an entry-level net salary of €2,000 a month but wait for parliamentary approval.
In Germany there are the shortage of 40,000 teachers in a total of 800,000 workforce. There are vacancies filled with not fully trained staff. Lessons have been cut by an hour a day in all primary schools due to staff shortages.
In Italy announced the hiring of 94,000 teachers over the summer, but only half have been recruited.
In Austria there is the shortage of 1,500 teachers.
Finland has been considered as one of the best-performing school system by OECD, is experiencing shortage.
In Ireland, the housing shortage has driven a lot of young teachers to move abroad.
Hungary has the lowest salary within EU, and a vacancy of 16,000 in the country’s 117,000 workforce.
Poland has a shortfall of 20,000 teachers but the increase of students caused by the Ukrainian refugees.
The U.K. National Association of Headteachers showed a survey that 30% of England’s teachers planned to quit within five years of starting their careers. The country’s recruitment has shown a shortage, and only 22,580 teachers had been recruited against a target of 32,600.
Impact of the pandemic, crushing workload, growing accountability are all the cause of this situation across the education system.
In order to address a crippling labor shortage in country like Australia, the ease of taking immigrants to fill up those vacancies, especially the low-paid jobs. We saw the unemployment rate came down in many countries. An acute labor shortage has left many businesses unable to find qualified staff especially in nursing, engineering and technology.
The mismatch situation is still serious.
Knowledge About a Metal Called Lithium – New York Times, September 20, 2022
Lithium, an indispensable ingredient in electric car batteries that is in short supply because of the demand for the electric vehicles. But China has a dominance of the battery supply chain which will be soon reduced if the lithium mine outside Montreal can open on schedule early next year. Once it is in operation it will be the second North American source of lithium and can be extracted and refined close to the Canadian, the U.S. and Mexican auto factories.
The price of lithium has soared fivefold since mid-2021 and this has pushed the cost of electric vehicles so high that they are out of reach of many car owners. The average new electric car in the United States costs about $66,000 which makes it out of reach from the median household income.
The mine outside La Corne near to Montreal is operated by an Australian company known as Sayona Mining. The mine has changed hands several times as the previous ventures were unsuccessful. Although the demand has been continuing, being a lithium supplier is also a risky and volatile business. Investors have to deal with ores that may have insufficient concentrations of lithium to make it profitable. Not to forget that the project may become the target of the environmental groups and nearly residents who can object the projects.
Lithium is the lightest known metal and the lithium deposits embedded in other metals and minerals. Extracting it require special expertise. Using brine, a liquid found beneath the ground. Normally the lighter rock is said to contain lithium. After the rock has been blasted loose and crushed, the rock has to go through several stages to remove waste materials. The use of jets of compressed air to separate the light-colored lithium ore. Going through water and detergent the lithium tends to float to the surface and it is skimmed away. The end-product looks like fine white sand but it is still only about 6% lithium, and the rest contains aluminum, silicon and other substances.
The material is sent to refineries to be further purified. Most of the refineries are found in China. The need of building refineries in North America is becoming desperate.
The operation in La Corne is getting its electricity from hydropower plants, and the use of only recycled water in the separation process helps to put the environmental activists at ease. La Corne is known for its mining industry and it is 350 miles northwest of Montreal. The area around La Corne with people whose livelihood depend on extraction of iron, nickel, copper, zinc and other metals. Nearby, there is a goldmine.
The Inflation Reduction Act signed by President Biden can only be beneficial to car buyers that are buying electric vehicle worth a total of $10,000 with battery makers who are using materials from North America or a country with which the United States has a trade agreement.
Without question lithium is the key to the future of electric vehicles.
Demand for Cargo Carriers Has Subsided – WSJ, October 3, 2022
This is a bad sign as ocean carriers have started to cancel sailings on the world’s busiest sea routes during what is normally considered as their peak season. This is the latest sign of the economy as inflation is affecting global trade and consumer spending.
Just a few months ago, scarce shipping space pushed freight rate higher, and the ocean carriers were recording profits to a recorded level. It was only last year when we read companies like Walmart and Home Depot were chartering their ships to get around the bottlenecks at ports to assure their imports of goods were not disrupted.
Trans-Pacific shipping rates have plummeted roughly 75% from a year ago. Big retailers are cutting inventories and canceling orders to deal with the weak demand. Company like Nike announced that they are sitting on 65% more inventory in North America than a year earlier and would have to do markdowns.
Our global economy is hit both by the war in Ukraine and the shutdown of China with their zero-Covid policy. Already the International Monetary Fund has cut its forecast for global growth. Consumer prices are rising in the U.S., countries in Europe and other parts of the world.
Just for information that the daily freight rates average $3,900 to ship a container across the Pacific, compared with $14,500 at the beginning of the year and more than $19,000 in 2021.
Ambition of Meta Over the Metaverse and Related Thoughts – FT, October 14, 2022
The digital overlords, led by Facebook, and joined by Amazon, Apple, Google, Microsoft, Nvidia and Tencent are fighting over a technology—metaverse—that does not yet exist. Facebook’s founder, Mark Zuckerberg, even took one step ahead to rebrand the company as Meta and bet money on the idea.
Ordinary people in the street don’t know what metaverse is all about. But Facebook’s founder, Mark Zuckerberg, took a further step to bet his business on the idea. Already the critics are saying that this strategy should better fit those high-risk capital firms than public-listed companies who have the common people as investors. Meta has operating loss of $27 billion in the company’s metaverse division over the past three years, although its conception remains ambiguous and hypothetical.
No doubt that metaverse will be the fourth-era of computing and networking. But it will take a while to become more specific, and perhaps more predictable to tell us where it is leading us to. We are talking about virtual reality—VR—but we don’t know where it is taking us.
Furthermore, Facebook’s Mark Zuckerberg has been a person who has always been caught with controversies. We have already found that the government regulators are no fans to his company after the mistakes they have made with the Facebook’s influence on our culture. They would be very skeptical in allowing him to build the metaverse.
We are not here to accuse Facebook over issues like the Cambridge Analytica scandal, political manipulation and even mass manipulations over contents such as fake news, conspiracy theories, copyright infringement and hate speech. Using of the bots to exaggerate its numbers of users to appeal to advertisers. We feel that we have said enough.
But we have to ask ourselves if the builders of the metaverse can come out with something more decentralized and democratized for our future virtual world? To rely on those digital overlords to build something taking in all these governance structure in consideration—intellectual property rights, taxation, cyber freedom, and no disinformation—can be wishful thinking.
Commercial opportunities in the metaverse are attractive. Already the conglomerates such as Microsoft won an order to deliver 120,000 augmented headsets to the U.S. army; the consulting firm Accenture bought 60,000 VR headsets to train its latest recruits and New York University has just launched a Metaverse Collaboration, responding to its students, city mayors and industry partners to get ready for the virtual future.
This has brought us to compare the practices between the U.S. and its allies in the West, and China in term of their approach in technology.
The West, relies on a more diffuse network of universities, non-profit and private businesses that have more freedom in setting up their priorities. In 2020, the U.S. as the whole spent $800 billion, or 3.8% of its GDP in 2020 from corporate spending on R&D, venture-capital investment, direct government funding, and implicit funding through subsidies on advanced technologies. It is worth to mention that U.S. is focusing on AI, semiconductors, biotech, energy and quantum computing.
China’s investments are coordinated by country’s expenditure on innovation, and they are more in favor for state-owned enterprises and industrial subsidies that are initiated from the state government. It sets aside “guidance funds” in order the state can invest alongside private capital. The government is steering the industry in line with the government directives. Right now, China is focusing on semiconductors and has made it their first priority.
For the metaverse, we hope to see the self-governing virtual communities from non-profit supervisory board to take us to the fourth generation of computing and networking. Meanwhile we have found that Meta launched a new Quest Pro headset priced at $1,500 which is a joint venture with Microsoft. It is receiving its pre-order now and it is still very much at its primitive stage before it can get ins traction.
You can go online to meta.com/quest/quest-pro.com
Strong Dollar is Affecting World’s Emerging Markets – New York Times, October 7, 2022
Compared with the other currencies, the U.S. dollars is the strongest because the Federal Reserve has increased interest rates sharply to combat inflation and also due to America’s economic health is better than most. Having said that, most economies in Europe are under the siege of the Russian’s
invasion in Ukraine has jacked up the gas price, the agricultural harvests have been affected by the situation in Ukraine and the worse climate in this summer all over the world, China’s zero-Covid policy and other factors, have made the U.S. economy appeared to be the best among all. And all these factors have attracted investors around the world to buy dollars and the U.S. government bonds and all these have helped to push the dollar up. The dollar is becoming the de facto currency of global trade, and it is squeezing the lower-income countries to borrow the dollars for their need of imported food and oil.
Already some emerging countries are in default with their payment of debts and interest. The recovering from the pandemic and now with the burden created by their debts have increased their financial stress.
Four emerging markets have defaulted on their debts this year—Russia, Sri Lanka, Belarus and Ukraine—in according to S&P Global Ratings. Ten countries that are in severe distress—Argentina, Lebanon, Ghana, Suriname, Zambia, Ethiopia, Burkina Faso, the Republic of Congo, Mozambique and El Salvador.
Of the 94 emerging market sovereign debt funds, over a quarter rank as B-minus or lower, which is a lower-quality rating indicative of a high-risk investment. This is a situation orchestrated by the collateral damage from Russia’s war in Ukraine, and the Federal Reserve’s fight against inflation, that has pushed the world to the brink.
The war in Russia and Ukraine has caused the two of the world’s largest exporters of food and energy and led to the increase that affected countries like Ghana and Egypt to suffer an increase of 30% of the consumer prices from January to June. Their inflation can reach 60% or more for the whole year.
For countries like Ghana, Pakistan, Nigeria and Sri Lanka, where interest payments alone accounted for more than half of the government’s revenues. On top of this once-in-a century pandemic, this is like pouring oil over fire.
In May, Sri Lanka defaulted on its government debt for the first time in the history of the country. In September, government of Egypt, Pakistan and Ghana called out to International Monetary Fund for a bail out to meet their debts.
This is by far the worst year for the emerging market and the challenge will remain until there can be any sign of settling of all the crisis as mentioned.
Vietnam, the Major Beneficiary for Export to the U.S. Market – WSJ, October 7, 2022
Vietnam’s high-tech exports from $3.01 billion in 2008 have increased to $101.53 billion in 2022 according to World Bank data. The country’s economy expanded 13.7% over year in the third quarter, and all this is built on the strong exports to the U.S.
This is all because of tensions between Beijing and Washington, China’s zero-Covid policy and Russia’s war in Ukraine have highlighted the risk of overly concentrated manufacturing chain. Vietnam has been a major beneficiary and has the opportunity to move further up the supply chain.
China has declined 10% since 2017 but Vietnam gained 6% over the same period due to big investments by Korean’s electronic giant, Samsung. Vietnam currently is hosting Samsung, Intel, Foxconn, LG and Apple.
But for the country to move from assembling to become the location for production of advanced components, it will need a better-educated, healthier workforce and significant new infrastructure investment. It has to upgrade its export to continue the growth.
U.S. is Curbing Technological Export to China – FT, October 8, 2022
U.S. is preventing exports to China for their development of cutting-edge technologies with military applications and the restrictions for allowing China to obtain advanced computer chips will slow their progress in artificial intelligence. The control to make it more difficult for China to develop supercomputers with military applications that range from remodeling their nuclear weapons and development of hypersonic weapons.
This is an act to decouple China from the U.S. in cutting-edge technologies. The control went further to bar the U.S. companies from exporting critical computer chip manufacturing tools to China, they would prohibit any U.S. citizens and companies from providing any kind of direct and indirect support for semiconductor plants in China.
The U.S. has put Yangtze Memory Technology Corporation (YMTC) and thirty other Chinese entities on a list of “unverified” companies and getting ready for possible inclusion on a separate blacklist known as the “entity list” that would stop any transaction from the U.S. companies from supplying them technology.
If this is successful, it will make it harder for China to develop and maintain supercomputer and AI technology.
What is Happening in the Tech Supply Chains of Technology – FT, October 8, 2022
It has been five years since the intensified US-China tension over technology, especially with semiconductors has shifted electronics supply chains in slow but significant ways. It began with Foxconn’s Wisconsin facility in 2018 with its groundbreaking of a new electronic factory and today Foxconn’s Wisconsin facility is far smaller than initially planned. But another company, Taiwan Semiconductor Manufacturing Company (TSMC), and the world’s biggest producer of processor chips, Intel, will open a new facility in Arizona.
Previously, almost all of TSMC investments were in Taiwan or China, now it is diversifying its footprint, including a new chip facility in Japan, and exploring another one in Singapore. It has felt the political pressure along the Taiwan Strait where China is beating the war drum.
Europe, Japan and India are giving subsidies for semiconductor for their security purpose. But no one can match the subsidy program from China as it is top down by its national government, as well as the provincial and local authorities, continue to pour funds into the chip industry.
Already the low-end processor chips is about to come online, and once it is in full force, it will depress price in this segment. But China’s YMTC has been able to produce Nano-size chips and Apple has expressed interest to use in their iPhone. But Apple will need to declare “China” and “Non-China” iPhones if they are going to use YMTC’s chips as is has to be strictly observed in the definition of decoupling.
The Wrestling Between OPEC+1 and the US – FT, October 8, 2022
On October 5, Wednesday, the Jewish holy day of Yom Kippur, Saudi Arabia and its oil allies, this time included Russia in the OPEC+1 moved to upend the order of the world’s energy again. They moved ahead and slashed two million barrels of oil a day, which is 2% of the world’s supply. This behavior pushed the Brent crude oil to $90 per barrel. It is a threat to the global economy which is already threatened by inflation and the shortage of oil and natural gas caused by the Russian war in Ukraine. It is posting a challenge between the countries led by the U.S. and Saudi Arabia.
This cut in the oil supply marked the weaponization of oil and the timing is deliberated to make trouble with Biden administration in the November’s mid-term election plus other threats. Knowing that Russia is under the U.S. sanctions, and tightening oil supply heading into a winter in which Russia has already weaponized its gas export to Europe is a very clear message from Saudi Arabia.
Saudi Arabia seek for the U.S. military support as part of the energy-for-security alliance that has endured two wars in the Gulf and the 911 attacks. And this relationship has now been put on trial, especially Saudi Arabia is found aligned with Russia. Allied with Russia in the OPEC+1 since 2016 the recent murder of Jamal Khashoggi has pushed the relationship between the two countries to the hype. A battle for control over the oil market, and the future of the energy industry is now in plain sight.
In fact, OPEC and oil importing countries have been destined for a collision over global warming that promoted governments worldwide to curb the use of fossil oil. OPEC countries have been forced to look into “clean energy” knowing that their livelihood stay with the fossil oil which is going out of fashion sooner or later.
Last year when Biden administration decided to release the oil reserve from its emergency oil stockpile to ease the oil prices. This was seen by OPEC as an interference to their market.
At this time the U.S. plan to impose a price cap on Russian crude oil exports to cut their income from oil. The Western countries are happy to see the shrinking of funds the Russian can get for their warfare in Ukraine.
But what we face now is the energy crisis and Saudi Arabia and UAE are setting the orders without considering the U.S. as the partner in the region. The unpredictable U.S. policy towards it arch-rival Iran, has provided less confidence despite decades of the U.S. weaponry sales.
The Saudis argued that this time they are pursuing their own interest and not acting on Russian’s call. Their priority is to modernize their oil industry which would cost them hundreds of billions. To the U.S., Russia will benefit from OPEC+1 and this is the intolerable part.
China’s Export Machine Slows Down – WSJ, October 3, 2022
China released its September official purchasing managers indexes which shown 50.1, edging about the 50-point mark. But the service-sector index fell into contraction for the first time since May when Shanghai’s lockdown was at its height.
Caixin’s PMI, a manufacturing index focuses on private and export-oriented firms, shown declines as new export orders weakening.
Both the service and the export sectors have shown concern as they have been one of the more important spots for China over the years. This is the downtrend in both Europe and the U.S. as inflation rate has been high in both parts of the world.
China has been going for its self-reliance but its housing market and service sector growth have shriveled. The domestic economy is struggling.