The status quo wins in Hong Kong

Good take from Bloomberg:

Hong Kong protesters have won a stunning victory. Saturday’s suspension of an extradition bill that would allow criminal suspects to be sent to mainland China followed a day of violent clashes on Wednesday that saw the police use tear gas, pepper spray and baton charges. In 2014, the police also used tear gas against demonstrators, prompting an occupation that paralyzed the central business district for more than two months. Yet the government refused to budge, and the protest was eventually cleared by force. It’s worth asking what was different this time.

The most obvious answer is the role of business. Occupy Central had limited support from companies, and what sympathy there was clearly waned as the weeks wore on and the costs to business mounted. By contrast, opposition to the extradition bill has united various strands of Hong Kong society, from civic and trade groups to religious organizations and the legal profession. That’s even more evident after Sunday’s monumental protest, which organizers said drew almost 2 million people.

Even HSBC and Standard Chartered supported the protests by allowing flexible working hours for their staff.

There’s a message here for the protesters – and for Beijing. It’s easier to preserve the status quo than it is to enact change. The common link between 2014 and 2019 is that the status quo has won in both cases. It was also the result in 2003 – probably the closest direct parallel with today – when a proposed security law was shelved after an estimated 500,000 marched in opposition. This means protesters have a better chance of success when fighting to preserve freedoms that already exist than when agitating for change.

Francesco Sisci, characteristically, finds Hong Kong’s lack of faith disturbing:

The core issue is that Hong Kongers don’t trust Beijing’s promises, and this kind of mistrust could take years to rebuild.

Beijing also clearly doesn’t trust Hong Kong. The bill aimed to prevent the territory from becoming a Trojan horse to smuggle revolution and subversion into China. Beijing apparently realized it was not the way and the time to do it. But the mistrust lingers on – and it is mutual.

Why, pray tell, might Hong Kongers fail to trust Beijing? A clue is offered in the second paragraph:

The Hong Kong authorities have already suspended the controversial extradition bill that could have put anybody in the territory in danger of being forcibly brought under the clutches of the Beijing’s opaque judicial system, according to Western lawyers.

I see what you did there. Note the careful choice of words: the worst Sisci can say about China’s judicial system, typified by things like arbitrary, secret detention and torture, is that it is “opaque.” And the suggestion that only “Western lawyers” have concerns about this bill is – I see no reason to be diplomatic here – a shameless lie. After all, there is a reason Hong Kong has refused to sign an extradition agreement with mainland China in the 22 years since the territory’s return to the motherland.

Just ask these guys:

Hong Kong lawyers protest

Source: Fox News

Thousands of Hong Kong’s legal professionals, including top lawyers, took to the streets on Thursday in a silent protest against the government’s controversial extradition bill, ramping up pressure on officials to avoid rushing it through the legislature.

The march, which organisers claimed hit a record high of 3,000 people, was the fifth by the legal sector since Hong Kong’s return to Chinese rule in 1997. It was also the first time lawyers had spoken out against a government proposal not directly involving judicial proceedings or a constitutional interpretation from Beijing.

A giant, flaming pile of fraud

Reading the blogger Deep Throat IPO’s commentary on the matter, one gets the impression that Alibaba is the dark heart of the dysfunctional global economy. Bear in mind that the Chinese e-commerce firm is listed on the New York Stock Exchange and that the author is commenting on the company’s own SEC filing and earnings call, i.e. all of this information is out in the open:

Alibaba management (Joe, Daniel, Maggie and Robert) and their “analysts” spent much of the hour collectively congratulating themselves on the greatness of their fake 51% revenue growth and their unverifiable, fake, GMV [gross merchandise volume], which has now ballooned to US$853 Billion. This “ecosystem” GMV, due to these phenomenal, dubious growth rates, is now roughly the same size as the Global GMV of both Amazon ($277 Billion) and Walmart ($625 Billion including estimated Third Party GMV) combined. Alibaba GMV has increased roughly ten fold since 2012. They are on pace to Reach $1 Trillion by next year. Alibaba’s GMV sold, according to management, has quickly grown to roughly the same as Switzerland’s GDP, with about the same level of opacity. Miraculous…..perhaps even unbelievable, to say the least. […]

2.) Speaking of “earnings” there was not one question, comment or slide in the deck that mentioned earnings. NOT ONE….an entire hour of fluff….. and “earnings” wasn’t discussed, described, commented on or mentioned. This is odd for an “earnings” call….don’t you think? When we look at the press release, we can understand why. On page 40 there is a $2.974 Billion accounting “Gain on the revaluation of assets” which was roughly equal to net income for the quarter. i.e.) If we exclude this gain, the business had no earnings from operations. […]

They’ve gained 36,000 employees since last year, a 55% growth rate. Perhaps they are getting away from that “asset/people light” business model.

To put this in perspective, Alibaba’s e-commerce rival, JD.com, announced in March it would hire 10,000 people for its JD Logistics arm “as couriers, warehouse staff, and entry-level managers.” Alibaba claims to have hired 4 times that amount of people in a year. STO Express, the logistics giant in which Alibaba proposed to take a 14% stake in March, has over 14,000 employees, so Alibaba’s employee growth in one year would be roughly 2.5 times the entire headcount of STO Express. Does this make any sense?

[Ed: I would also note that Lazada, the Singapore-based e-commerce firm in which Alibaba bought a controlling stake in 2016, has an estimated 8,000 employees according to Wikipedia.]

The other ratio I find fascinating is GMV per employee. Walmart’s GMV per employee is $284,000. Amazon’s is $428,000. Alibaba’s is $8,366,000 per employee. They are truly masters at doing more with less.

The author doesn’t mince words in his conclusion:

My crystal clear message to the analysts who were on the call is, when this eventually blows up, and there’s no question that it will, you have to understand that the “Sorry I’m just a dumb-ass” defense won’t work anymore. The times, they are a changin’.

You analysts (yes I’m speaking directly to you now) are all highly educated, smart, professional people. You are experts, or at least you are supposed to be, and you, and your respective employers are held to a much higher standard than the rest of the investing world and blogosphere. It’s assumed by naive American Investors that you know exactly what you are doing. Your endorsement means everything. Unfortunately, in this particular case, and many others, it looks like you are accepting a nice paycheck to do exactly what you are told by the Chinese Communist Party. You are also committing, aiding and abetting securities fraud. When you see the accounting travesties and inconsistencies described above, your job is to investigate them, ask tough questions, and if you find the explanations provided by management to be unsatisfactory, you must resign from the account. Your inaction, congratulatory “we” tone and your tacit endorsement of this charade makes you an accessory, not an unwitting pawn. You and your employers have significant legal and political liability for what’s about to happen. There will be no escaping it this time.

A reckoning is coming. Where is the American business press on this? You’d think this would be a top story.

Japan’s Belt and Road

Abe and Modi in 2016

In light of a certain state visit ongoing in Tokyo, I nominate this as the fact of the day (emphasis mine):

While Japan’s “lost decades” and China’s rise have led most observers to overlook Japan’s role in Southeast and South Asia, the country has remained an important source of development assistance, public lending, and private investment across the region, particularly as Japanese companies have extended their supply chains deeper into Asia. At the end of 2016, Japan’s stock of foreign direct investment in major Asian economies (excluding China and Hong Kong) was nearly $260 billion, exceeding China’s $58.3 billion. It is undeniable that Japan has increasingly had to jockey with China for high-profile projects as China’s footprint across Southeast and South Asia has grown. But Japan’s longstanding relationships and its long record of private and public investment across the region make it a worthy competitor with China.

Japan’s Belt and Road, particularly with US backing, could give China’s massive trade and infrastructure strategy a serious run for its money. And Japan is still the world’s third-largest economy…

That was close

Didn’t think it would end like this

I’m certainly no fan of media scare-mongering, but I feel like this should have been a bigger story than it was – after all, the Smithsonian Astrophysical Observatory’s Minor Planet Center classified the asteroid as a “potentially hazardous object”:

Asteroid 1999 KW4, measuring more than a mile in diameter and boasting its own moon, will fly by Earth on Saturday. Thankfully, the massive space rock will make its pass at a safe distance.

“The asteroid will approach from the south, and the first day of visibility also coincides with the closest approach,” NASA reported.

The asteroid will be visible through June 7.

While the near-Earth object is classified as a potentially hazardous asteroid, there will be a cushy 3.2 million miles between Earth and the walnut-shaped space rock during its closest approach.

That distance, I would note, is roughly 1/29 of the sun’s distance from the earth.

Wouldn’t want the sheeple to panic! In any case, it’s Sunday so I guess the asteroid has safely completed its fly-by?

Good news: Rare earths ain’t so rare

Well, this is an actual relief. Rare earths may not, in fact, be America’s Achilles heel (as China appears to think and as I previously thought):

Experts in the field, though, are much less concerned about such a chilling scenario. They say that while a restriction on rare earth exports would have some immediate adverse effects, the US and the rest of the world would adapt in the long run. “If China really cuts off supply entirely then there are short term problems,” Tim Worstall, a former rare earth trader and commodities blogger tells The Verge. “But they’re solvable.”

Far from being an ace in the hole, it turns out rare earths are more of a busted flush.

The reasons for this are numerous, and span geography, chemistry, and history. But the most important factor is also the simplest to explain: rare earths just aren’t that rare.

They can be mined in other places, like Australia, India, Brazil, Canada, and the U.S. China only mines about 80% of the global supply (not the 95% we often hear about). The Mountain Pass mine in California is apparently up and running again. And all is right in the world.

The Huawei juggernaut

Huawei’s European Research Center in Munich (Source)

Disturbing article (depending on your perspective) about the growing superiority of telecom giant Huawei:

Huawei Technologies, the spearhead of China’s trillion-dollar Belt and Road Initiative (BRI), isn’t a Chinese company, but an imperial juggernaut that crushes its competition and employs their intellectual resources. By 2013 it employed 40,000 foreigners–mostly in R&D– out of a workforce of 150,000. I think it foolish to think that the Chinese can’t innovate, but it doesn’t matter whether they can or not, any more than the siege skills of Mongol horsemen mattered in 1258.

A minor but telling example of Huawei’s imperial reach is the announcement this month that Huawei will build a 400-person chip design facility in Cambridge. It will compete with ARM Holdings, the chip design firm sold in 2016 to Japan’s Softbank. Softbank is a major shareholder in China’s e-commerce giant Alibaba, another spearhead of BRI. The combination of mobile broadband and e-commerce allows China to “Sino-form” economies of the Global South, turning them into Chinese dependencies […]

The fact is that Huawei’s equipment is years a head of its competition’s. It spends $20 billion a year on R&D, double the combined spend of its largest competitors Ericsson and Nokia. A dirty little secret is that Ericsson and Nokia make most of their hardware in China, so that if the Chinese wanted to implant “back door” spy chips, they could do as easily for the Scandinavians as for Huawei.

The world order seems to be cracking up and dividing into different spheres of influence. Maybe we can refer to these emergent geopolitical regions as “the U.S.” and “Huawei-land.”

Luckin as tech startup

Tim Culpan of Bloomberg notices an oddity about Luckin Coffee, China’s answer to Starbucks:

The pending Nasdaq debut of China’s Luckin Coffee Inc. begs the question of whether it’s a purveyor of beverages, or a technology company.

As I pore through its 286-page IPO filing, I find myself struggling to decide. It’s kind of like Starbucks Corp., I guess, but also a lot like food-delivery giant Meituan Dianping and ride-hailing pioneer Uber Technologies Inc. […]

Luckin posted 841 million yuan ($125 million) in revenue last year, exploding from 250,000 yuan the year prior. But its operating expenses were three times higher than sales at 2.4 billion yuan. And it wasn’t even materials, store rentals or admin expenses that blew out the bottom line.

Marketing costs were 746 million yuan last year. To make every 100 yuan from selling coffee, Luckin spent 152 yuan to produce and market that cup – not including rent and general expenses.

Spending three times more than revenue makes Luckin a tech startup, not an F&B company.

Is it also part of the Belt and Road?

I previously wrote about Luckin here.

The weight of the Milky Way

It’s heavy:

Measuring the total mass of our home galaxy is a tough puzzle. It’s difficult to see it all at once, buried as we are within one of its spiral arms. And there’s a huge portion of the Milky Way we can never see, since it’s made up of dark matter, which doesn’t emit light at all. So to get an accurate number, researchers need to weigh both the visible and invisible material that makes up the galaxy.

Now scientists have done just that, using new data from the Hubble Space Telescope combined with the Gaia spacecraft. This latest mass measurement of the Milky Way weighs in at 1.5 trillion times heavier than our sun.

Now, how heavy is the universe? Assuming the Milky Way is an average galaxy, and there are 200 billion galaxies in the universe, then all galaxies combined would weigh 300 sextillion (300,000,000,000,000,000,000,000) times the mass of the sun, and that’s not counting all the stuff drifting around between galaxies.

Hardening the US against an EMP attack

The Executive Order on Coordinating National Resilience to Electromagnetic Pulses, issued on Tuesday, is a step in the right direction:

Section 1. Purpose. An electromagnetic pulse (EMP) has the potential to disrupt, degrade, and damage technology and critical infrastructure systems. Human-made or naturally occurring EMPs can affect large geographic areas, disrupting elements critical to the Nation’s security and economic prosperity, and could adversely affect global commerce and stability. The Federal Government must foster sustainable, efficient, and cost-effective approaches to improving the Nation’s resilience to the effects of EMPs.

This is a genuine threat. EMPs are not science fiction. The Soviet Union kept a reserve of steam-powered trains in case an EMP from a nuclear blast wiped out their electrical systems.

I wrote about EMPs in the context of North Korea back in 2017:

The North said in its statement Sunday that its H-bomb “is a multi-functional thermonuclear nuke with great destructive power which can be detonated even at high altitudes for super-powerful EMP (electromagnetic pulse) attack according to strategic goals.”

China’s shrinking cities

Hegang, China in 2012

Hegang, China in 2012

China has almost 1,000 cities that are losing people:

The perception that China’s urbanisation is still in full swing is untrue for nearly one-third of Chinese cities, whose populations are shrinking, according to new findings by a Chinese university.

A research team from Tsinghua University used satellite imagery to monitor the intensity of night lights in more than 3,300 cities and towns between 2013 and 2016. In 28 per cent of cases, the lights had dimmed.

China now has 938 shrinking cities, according to Long Ying, an urban planning expert at China’s Tsinghua University, who founded and led the research group, Beijing City Lab. This is more than any other nation on Earth.

The urban shrinkage is related to China’s declining population.

The Chinese cities under the greatest pressure of shrinking include those heavily dependent on natural resources, such as the coal mining town of Hegang in Heilongjiang province.

Also diminishing are cities “in the process of transformation”, such as Yiwu in Zhejiang province, once christened the “largest small commodity wholesale market in the world” and famous for its sprawling networks of stalls selling counterfeit goods.

More about Yiwu here.

Most Chinese city planning is detached from the reality of today, Long said after his team reviewed ambitious urban development plans for more than 60 cities. The plans usually include key infrastructure projects, as well as industrial, commercial and residential developments that may diverge significantly from the demographic trends.

The best-laid plans of mice and men. Anything is possible in China, but Herculean development plans (such as the Greater Bay Area “blueprint”) need to be taken with a grain of salt.

Huge apartment buildings dominate the skylines in most Chinese urban areas. These buildings would be much more costly to tear down should they be vacant than the standard smaller houses in shrinking cities in the US, for example.

These large buildings may also be sparsely occupied – it could be difficult to survey how many homes are empty, Long said. Furthermore, no official wants to face a decision over whether to tear down a building that might just have a few occupants.

Chinese academic Gan Li calculates that some 22% of the nation’s housing stock is vacant, or more than 50 million homes.

However, the desolation that haunts many of America’s decaying post-industrial towns could be replicated in China, if the situation is not managed properly, Long said.

“Although shrinking cities in the US and China are different on many levels, many landscapes in the US rust belt could be the future of some of China’s shrinking cities,” he warned.