If you thought a fine of up to £3,200 for not wearing a face covering on public transport in the UK was steep, eight people in Indonesia caught flouting the rules have been made to dig graves for people who died of Covid-19. One official on the island of Java said, “there are only three available grave diggers at the moment, so I thought I might as well put these people to work for them”.
Traders in developed markets will have been covering their faces after last week’s sessions as their Asian peers significantly outperformed. Asset class returns are below; developed markets came under pressure last week and ended the week flat or marginally down as Covid-19 case numbers continued to rise across Western Europe.
Figure 1: Asset class total returns, local currency
Source: Bloomberg, EQ Investors
Figure 2: Asset class total returns, GBP currency
Source: Bloomberg, EQ Investors
While the implications for capital markets may be less obvious, one key theme from last week was the US President agreeing in principle to a deal that would let TikTok, the Chinese-owned social media company, continue operating in the US. The proposed deal would mean TikTok’s global operations would be spun out into a US-based company with a view to then displaying independence from its Chinese parent ByteDance.
The video-sharing app, whose meteoric rise has seen it become one of the most popular platforms in recent months, has come under the scrutiny of President Trump in the latest spat between the world’s two largest economies. This US clamp down on Chinese technology companies is based on claims they are a risk to national security, with accusations emerging from the US Department of Commerce that Chinese apps are participating in the “malicious collection of American citizens’ personal data”.
While TikTok isn’t the only Chinese-made app being targeted, it is the most high-profile given its userbase consists of 90 million monthly active users in the United States alone. Another high profile app being targeted by the US is Tencent’s instant messaging service, WeChat, for which the US President signed an executive order requiring its removal from Apple and Google’s app stores in the US.
|Figure 3: TikTok’s popularity has accelerated in recent quarters, and has delivered impressive growth since its release in early 2017
|Source: Sensor Tower Store Intelligence
Commentary around this issue has been particularly interesting with some believing that the US has been pulling its punches. The bans proposed by the US Department of Commerce, for example, will only apply within the US and will not stop individuals from using apps if they’ve already been downloaded. Nevertheless, the Trump administration’s actions are a clear escalation in the ongoing trade war with China despite being far better than the worst case scenario.
Until now, China’s retaliation has been relatively muted though it still needs to approve the proposed TikTok deal. However, China’s government has begun to flex some muscle by unveiling a legal process by which the Chinese government can impose sanctions on foreign companies through a new “Unreliable Entity List”. Some commentators are sceptical as to what extent China will use such powers given the risk of putting off foreign direct investment. Other commentators go further and suggest that China will actively avoid placing any further stress on US-Chinese relations ahead of the US election. What most agree on, though, is that each new measure introduced by the US will increase the pressure on Beijing to respond.
It’s difficult to predict where the fractious relationship between the world’s two largest economies will go next. However, there are signs that the Trump administration is not done targeting large Chinese technology companies as the White House has asked a number of US gaming companies where Tencent is a major shareholder to provide information about their data-security protocols. This has serious implications as the Committee on Foreign Investment in the United States has the power to unwind historic transactions and block future deals. In addition, it is not outside the realms of possibility that the US could add Chinese semiconductor manufacturers to its own “Entity List” which requires US exports to have special license requirements in order to do business with. As such, we think it is perfectly possible that the ever intensifying US-China trade war can continue to escalate even if the TikTok deal does provide a moment for investors to take breath.
STAT OF THE WEEK: 50% – the proportion of the world’s habitable land used for agriculture (Our World in Data).
DATA CORRECT AS AT: 18/09/2020
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